Earlier this week, I wrote a piece explaining why I am skeptical on the idea of repudiating government debt owed to the Federal Reserve.  Ron Paul suggested the idea and Lew Rockwell backed it.  These two guys are libertarian heroes and I immensely respect their opinions.  I rarely disagree with Ron Paul on issues of any significance, particularly when it comes to monetary matters.  With all of that said, I am disagreeing with his suggestion to repudiate the debt owed to the Fed.

I was having this discussion with a libertarian friend of mine.  I was saying that I thought the idea was inflationary.  I pointed out Ron Paul’s position that he figures that the Fed will not withdraw this money that it has artificially created.

I think this idea is also counterproductive.  If the debt ceiling does not get raised (which I think it will), then it will force the government to cut spending drastically.  That is what I favor.  That is what the economy needs.  We need for the government to spend less so that we have more.  If this debt to the Fed is repudiated, it will give the government more room to spend money without raising the debt ceiling right now.  Why would I favor that?  I would much rather see government spending cut.

But here is the even more important point regarding this issue.  My friend and I talked through this issue and this example will really illustrate why this is a bad idea for libertarians to support.  Let’s say that the government takes this idea and repudiates most of the debt that is owed to the Federal Reserve.  Let’s say this lowers the national debt to $13 trillion.  The limit is currently just under $14.3 trillion.

Now the Congress can continue to spend money as it has been doing.  It will use current tax collections to fund spending and any difference is added to the debt.  Now the Fed comes along with QE3 and buys this government debt to fund the extra spending.  Now, in the matter of less than a year, the national debt is back up to the ceiling of around $14.3 trillion.  The Fed now owns another $1.3 trillion in government debt.  The government can just repeat the process and repudiate this debt and bring the national debt back to $13 trillion.

Are you starting to see the problem here?  The Fed can keep buying government bonds to fund the excess spending and the government can keep repudiating the debt.  It would be the same thing as the Fed just printing up a bunch of money and handing it over to Congress to spend.  It doesn’t raise the debt because it is all done through inflation.

If the government did not want to officially repudiate debt, there is another strategy that could be used (not that I’m trying to give any ideas here).  The Fed could buy other assets and turn them over to Congress.  The Fed typically buys U.S. government debt, but the rules have changed and the Fed can actually buy anything it wants.  In 2008, it bought “toxic assets” from the failing banks.

The Fed could buy some stocks, land, art, or whatever.  It would create money out of thin air to buy these things, just as it does with government debt.  Then it could take the stocks or land or whatever and “give” it to the government.  The government could then sell it back into the market and use the proceeds to fund excess spending.  No matter how it is done, it is highly inflationary.

I hope I have illustrated why this idea of repudiating government debt owed to the Fed should not be such a great idea for libertarians.  It allows the government to continue its reckless spending without raising the debt limit and it could also be highly inflationary, especially if they were to repeat the process in the future.  I might favor the idea if it goes hand in hand with abolishing the Fed.

This post has more to do with investing than libertarianism, but I thought some people might benefit from it.  I am an advocate of imitating the permanent portfolio as described by Harry Browne in his book Fail Safe Investing.  This should be your core holding, making up at least 50% of your portfolio.  I also tell people that it is ok to speculate as long as you understand the risks and that you could easily lose money.

A few years ago, I decided to speculate a little.  I bought a few shares of Apple stock when it was less than $100.  At that time, everyone I knew who owned a Mac computer loved it.  I did not have one at the time, but I own one now.  The operating system seems much better than Windows.  The only thing Apple that I owned at the time was an iPod.

I knew that Apple had something going.  They are an innovative company.  We can see that now, not just with computers, but also iPods, iPhones, and iPads.  I figured that they would start taking a substantial share of the market away from Microsoft with computers, plus all of the potential profits from the other products.  So with all of that in mind, I bought some shares for speculation.

Usually mistakes are made on the buy side of an investment.  In this case, it wasn’t.  My mistake was on the sell side.  The stock went up quickly after I bought it.  I can’t remember the exact return, but it was something close to 50%.  I sold all of my shares.  I even thought that I would buy back on another dip.

Here is the problem.  There wasn’t really another dip.  The stock has been way up for the last couple of years.  I would have about a 400% return right now if I had held it.  Of course, there was no way to know for sure.  Usually it is a wise thing to take profits.

In this case, I did not stick to my plan.  I was buying the stock for its long-term outlook.  I thought it had huge potential, not just a year into the future, but for many years.  The company has very popular products and it is constantly innovating.  I should have stuck to my plan, which when I bought the shares was to hold them for a substantial period of time.

Again, it is hard to kick myself too much for taking profits, especially when I have lost money with other speculations.  But the lost opportunity was big.  Here is what I should have done, not knowing what would happen at the time.  I should have sold off half of my shares and let the other half ride.  It is a little messy for reporting capital gains, but I should have dealt with it.

One place where investors often get into trouble is when they have an “all or nothing” attitude.  If you are not sure whether to sell stock in a particular company, then sell half.  You also don’t have to go for broke when buying something.  Just dip your toe in.  Give yourself an opportunity to make a decent profit while limiting your potential losses.

This story has little to do with Apple itself.  Whether it is a good buy now, I have know idea.  It is still a great company with a lot more potential, but maybe we will see that big dip that I’ve been waiting for.

When I write about investing, I generally try to make it applicable to a variety of people.  Everyone’s situation is different, but I like to offer advice that could potentially be helpful to anyone.  So often, I will read or listen to something on investing and it seems to apply to people with lots of money.  I really find this to be the case when the topic comes up about investing overseas.  To buy real estate outside of your country and to set up a foreign bank account, you usually need a substantial amount of money to make it worth it.

The reality is that most people do not have a lot of money.  Even the average middle class person living in the U.S. does not have a lot of money, particularly outside of real estate and retirement funds.  So for this post, I would like to offer some advice for people with a real limited amount of money.

First, although I believe that price inflation will get worse due to the government’s reckless policies of massive spending and massive debt, I think it is important to have some liquidity in the form of money.  Whether it is cash, a checking account, a savings account, or whatever, it is important to have some money available for emergency expenses.  If you don’t have at least a couple of thousand dollars to your name, there is no point on reading up on investment advice unless it is just an interesting topic to you.  Because if you don’t have much money to your name, then investing it well won’t make much of a difference.

If you have almost no money, you should not be worried about investing.  You should be worried about increasing your income, paying down debt, and spending less.

If you have a little money saved up and don’t know where to start, I have a couple of simple recommendations.  First, you could buy one-ounce silver eagle coins.  You can check with your local coin dealer or look on the internet.  You can buy these on Ebay too.  With the current price of silver, you should be able to buy a one ounce coin for just over $40.

My second recommendation, and perhaps better one, is something that I recommend for everyone to do if you can.  If you have some extra space where you live, buy things that you need that don’t spoil.  You can buy certain grocery items like bottled water and canned foods.  You can buy soap, toothpaste, shampoo, razor blades, toilet paper, kleenex, paper towels, etc.  Make a list of things that you use.  You obviously can’t stock up on milk, but there are many things that you can buy that will last for a year or more.

When you go shopping, look for those particular things that are on sale.  If it is “buy one get one free” or if there is any kind of a sale from the regular price, buy it.  Buy enough to last you at least a couple of months or more.

When it comes to storage, be creative.  Look in your closets and see if there is any room up high.  You can always add some shelving.  If you have limited space, then you might want to stock up on razor blades and toothpaste before you start buying bulkier items like paper towel.

So why do I recommend this strategy?  Because things aren’t going to get any cheaper.  The Fed has tripled the monetary base in the last three years.  There is potential for huge price inflation.  If this analysis turns out to be wrong, then the worst case scenario is that you use up the items that you bought. As long as you aren’t buying an electronic item, then there is a very good chance that the price of the product won’t be any lower one year from now.

You can start this strategy by stocking up on some 100-watt light bulbs.  Our limited, constitutional, federal government decided to ban these under the conservative presidency of George W. Bush.  The ban will go into effect in less than 6 months.

Ron Paul has suggested that one way Congress could avoid raising the debt ceiling is to repudiate the debt owed to the Federal Reserve.  Since the Fed “owns” approximately $1.6 trillion in government debt, this could simply be wiped away and it would give the federal government more breathing room without raising the debt limit.

Robert Murphy wrote an interesting analysis on this subject.  Lew Rockwell responded.  Robert Murphy then responded to these comments by Rockwell.  It is interesting to see the varying opinions from two of my favorite libertarians.  These are two of the biggest heavyweights you can get when it comes to libertarianism and Austrian economics.

It is very difficult for me to disagree with Ron Paul and Lew Rockwell because I have so much respect for them.  But with this issue, I am having a hard time being convinced.  I question my own opinion because it is not something that the mainstream media and the establishment favor, so how bad can the idea be?

I completely understand Ron Paul’s point on this.  He is saying that the Fed will not sell off this debt anyway, so why act like it is debt.  But there are a couple of reasons that I am skeptical of this plan.

First, it actually gives an “out” for the Congress and Obama.  It would essentially kick the can down the road some more.  It would give up to $1.6 trillion in breathing room without having to raise the debt limit.  Personally, I am going to sit back and enjoy the next couple of weeks.  I am hoping that they fail to raise the ceiling and that government will actually have to be cut, although I am not counting on it.

Second, I question if this strategy would be inflationary.  Regardless of whether raising the reserve requirement is “stealing” from the banks (see the discussions on the links above), it is still not the same thing as withdrawing the money.

If the Fed creates new money to buy government debt, it is still inflating even if the money goes as excess reserves to the banks.  The effects are far less because it is not being exponentially grown through the fractional reserve process.  But the money is still there and available, even if not for loans.

The best thing to happen with this $1.6 trillion would be for the Fed to sell it and reduce the money supply by that amount.  This would have a far greater effect on our economy as it would help to keep prices down and it would help liquidate all of the malinvestment.

This whole discussion just shows all of the accounting gimmicks that take place regarding monetary policy and I think that is part of Ron Paul’s point.  He is probably suggesting this just to bring attention to the issue, especially when he knows that it is not likely to happen.

With that said, I am a skeptical libertarian on this strategy.  It would let the Congress of the hook.  I would rather see no increase in the debt limit and watch the federal government be forced into making massive cuts in spending.  If we are going to suggest repudiating government debt, I would start with all of the other debt first as it would most certainly not be inflationary.

With Ron Paul announcing that he will not seek re-election to his congressional seat, some are speculating that this opens him up for a third-party run.  I am not sure what the consequences would be regarding ballot access if he changed from being a Republican to another party.

I have thought from the beginning that he should run outside of the Republican Party.  Specifically, I think he should run for the Libertarian Party’s nomination.  He would most surely get it and the party is already well established which would make it easier for ballot access.  With the vast amount of money he has already raised, getting on all of the state ballots would not be that challenging and expensive relative to what past Libertarian candidates have had to deal with.

While I think there has been a slight mood shift in the Republican Party, most Republicans outside of the Ron Paul circles are still mostly pro-war.  While many are against Libya and some have even soured on Afghanistan, it is hard not to be skeptical and think that it is mainly because Obama is in charge and not a Republican.  Because of this sentiment, I think it will be hard for Ron Paul to win the Republican nomination.  He will probably do better than many expect and he will probably change some more minds, but I am doubtful that it will be enough.

Imagine on the other hand if he runs as a Libertarian.  This wouldn’t have worked for him in 2007/2008. He was virtually unknown then, at least outside of his district and outside of the libertarian community.  Now that he has name recognition and hundreds of thousands of highly-dedicated supporters, he would still raise many millions of dollars operating outside of the Republican Party.

If someone like Mitt Romney gets the Republican nomination, it would make Paul’s run as a Libertarian offer a real choice for people.  If someone like Michele Bachmann were to get the nomination, it would make a third-party run a little harder because of her fiscally conservative rhetoric.  Even though she is a statist, it would be more challenging to paint her and Obama as being cut from the same cloth.

Now I am wondering if there is any way that Paul can participate in all of the early debates, just as he is doing, and then drop out at the last minute and announce he will seek the Libertarian Party’s nomination instead.  This would give him public exposure in the debates before seeking a third-party run.  I don’t think this is his plan at all, but it is an interesting speculation.

I like that Paul has decided not to seek re-election for Congress.  He will deserve the break, assuming he doesn’t win the presidency.  This will also allow him to focus all of his efforts on this presidential run and he can also speak freely, not that that has ever been an issue for him before.

Regardless of what he decides, it is important to support him and advocate his pro-liberty positions.  I don’t think it is necessary to elect a pro-liberty person to get real change.  The most important thing is to educate others on the benefits of liberty and that is just what Ron Paul has been doing and will continue to do.

Earlier in the week, Obama said that he cannot guarantee that Social Security checks will go out on August 3 if the issue of the debt ceiling is not resolved.  When he says “resolved”, he means having Congress agree to raising the ceiling.

Actually, if you listen to the video on the link, it is not just Social Security checks that are at issue.  As Obama said, there are other checks that the government issues.  As per his example, there are checks for veterans and checks for people on disability.  But since all of the headlines have focused on Social Security, let’s focus on this.

This statement by Obama can only backfire on him and it seems it already has with his poll numbers.  Of course, he is right not to guarantee anything, but obviously that is not his line of thinking here.  He is simply trying to scare people into supporting an increase in the debt ceiling.  He may have thought he was using a smart political tactic, but it was actually quite idiotic of him.

If he really wants to be a one-term president, the surest way to do that is to not have Social Security checks go out on August 3.  He could try to blame it on Congress, but the facts just don’t support him and I think if it did happen (even though it won’t), enough people would realize that checks could still be issued without an increase in the debt ceiling.

This goes along with the same statements we have been hearing about how the U.S. government will default if the debt ceiling is not raised.  This is false too.  The government still has over $2 trillion a year in tax collections.  It is actually about $200 billion per month right now.  This means that the federal government would still have $200 billion per month at its disposal.  This is more than enough to pay the interest on the debt and issue Social Security checks.

Of course, there would have to be drastic cuts in most other areas.  The military would be drastically cut. The wars might have to come to an end.  Many departments might have to be shut down like education, labor, housing, agriculture, etc.  The federal war on drugs might have to stop.  Foreign aid might have to stop.  This all sounds like heaven to a libertarian.

This is why the debt ceiling will be raised.  I don’t know if they will come up with more accounting gimmicks.  I don’t know if thugs like Mitch McConnell will hand over dictatorial powers to the president to raise the limit himself.  I don’t know if they will come up with some last minute plan with some phony cuts, most of which take place years down the road when it won’t matter.

The point is that politicians are not going to give up all, or even a portion of, their precious government programs.  The only way they will give them up is if the general population demands it.  There is not enough pressure right now.  The Tea Party does not want taxes raised, but the Tea Party in general does not offer significant specific cuts in government spending other than repealing Obamacare.

In conclusion, the debt ceiling will get increased at some point.  We might see some fireworks before it happens.  We could only hope for a government shutdown, but don’t count on it.  The debt ceiling will not go up because of Obama’s fear tactics of scaring senior citizens.  It will go up because politicians want to spend money and keep people dependent on government.

There has been no shortage of news regarding libertarianism, investments, and the economy this week.  I will continue to comment on some of the latest news into next week.

On Tuesday, the Fed released the minutes from its previous FOMC meeting.  It stated that some of the members said that additional monetary policy accommodation would be appropriate if inflation is low and unemployment stays high.  In other words, the Fed is hinting at a possibility of QE3 (a third round of digital money printing) and investors will start to expect it.

This news sent gold to all-time highs (in nominal terms).  As of this writing, gold is near $1,600 per ounce. It seems hard to believe that the price was around $300 just a decade ago.

The Fed is desperate and doesn’t know what to do.  The Keynesian policies of the Fed, and the federal government in general, are a total failure.  The Fed has tripled the adjusted monetary base in less than three years.  The government is running deficits of over $1.5 trillion.  This has all made the economy worse.  They refuse to allow a liquidation of the bad debts and bad investments.  They refuse to allow the market to re-allocate resources to their appropriate use.  They continue to cause a misallocation of resources that will only make the inevitable crash that much worse.

This is why we must invest a good portion of our investment portfolio in gold, gold related investments, and other commodities.  Bernanke and the Fed are determined to print their way out of this.  Bernanke is not nicknamed Helicopter Ben for nothing.  We may see him up in a helicopter dropping money before this is all over.  Right now he is dropping it on the banks, which refuse to lend.  The new money is piling up as excess reserves at the banks, waiting for a trigger.

I don’t think it is likely that the Fed will go into hyperinflation mode.  I differ with some libertarians on this point.  I don’t think the Fed is that stupid to destroy themselves.  If you truly think there is going to be hyperinflation in the United States, then you better think about leaving or becoming self sufficient.  If there is not an alternative money ready to be used, then hyperinflation means that the trucks stop running and the grocery stores and gas stations will be closed for business.  I don’t see it coming to this.

The more likely scenario is high price inflation.  This might mean 10% or 30%.  This will be good (or at least less bad on a relative basis) for people who own gold and gold related investments.  At some point, the Fed will be faced with hyperinflation and I think they will stop buying U.S. debt.  Then we will see a great depression.  The length and depth of the depression will depend on how much the government tries to interfere at that point.

Things don’t look good for the next few years.  Beyond that, it will depend on the American people.  If Americans withdraw their consent from the federal government and demand to be left alone, then liberty will prevail and things will improve quickly.  If the American people keep looking for a free lunch (like many of the Greeks), then the pain will continue.

After announcing that he will retire from Congress, Ron Paul interviewed Ben Bernanke today.  The article linked makes it sound like Paul was rude and constantly interrupting.  If you watch the video, he is polite as usual.  He was just trying to make sure he didn’t run out of time.

Congressman Paul was a little more aggressive than typical.  If this is the new Ron Paul, not caring about re-election to Congress, then I think it is a good thing.  I actually hope he is more aggressive in the presidential debates.  He is never rude, so we don’t have to worry about that.  But I think he should challenge the other candidates more at every chance he gets.  In particular, I think he should ask how the other candidates intend to balance the federal budget.  Ask for specifics.

In this exchange with Bernanke, he asks him if gold is money.  Bernanke responds “no”.  He says it is a precious metal.  I have mixed feelings about this.  In some ways, Bernanke is right on this.  Gold isn’t money in a sense.  If you go to Walmart or a gas station and try to pay the cashier in gold, they will look at you as if you are nuts.  The important thing though is that gold has all of the good qualities that make up money.  The only reason that gold isn’t used as money in today’s society is because of the government and the Federal Reserve.  If the government hadn’t monopolized money, then gold (and maybe silver) would most likely be money as determined by the free market.

The best question that Congressman Paul asks is his last one.  Paul first asks him why central banks hold gold.  Bernanke responded that it is a form of reserves.  Then Paul asked him, “why don’t they hold diamonds?”  Bernanke responded that “it’s tradition”.

The reason that it is tradition is because when central banks started holding gold as reserves, gold was actually money.  The reason that gold was money was because it had been determined by the free market.  The market decided thousands of years ago that gold had good qualities to make it useful as a form of money.

Bernanke is feeling the heat like never before.  Ron Paul is getting at him.  Blogs and other sites on the internet are having a field day with him.  He cannot get away with what past Fed chairmen have gotten away with.  To top it off, Bernanke has flooded trillions of new dollars into the economy.  They are sitting at the banks as excess reserves and waiting to unleash massive price inflation.  Bernanke is trapped between a destroyed dollar and depression.  His Keynesian policies have failed miserably.

The next year and a half should be a joy to watch.  The economy will only get worse and Bernanke will continue to feel the heat.  With Ron Paul announcing his retirement from Congress, I do not expect him to leave quietly.  He is going to have several more chances to take his shots at Bernanke and his Keynesian policies of digital money printing.

The big news today, at least to libertarians, is that Ron Paul will not run for Congress again next year.  Lew Rockwell has given some of the possible reasons for this decision.  Ron Paul himself said, “I think you have more credibility if you run for only one office at a time.”

I’m sure Ben Bernanke will be happy with his departure, although he will still have to deal with him for another year and a half.  This decision by Ron Paul does not surprise me.  He deserves a break and I’m sure he will deserve one even more after the hard campaigning he will be doing over the next year.

For personal reasons, I think it is a good decision.  But I don’t expect him to crawl into a hole either.  He has used his position in Congress, not to pass or repeal legislation, but as a platform for his views.  He has helped educate millions of people on the benefits of liberty.

Now that Ron Paul is famous (what libertarian could have predicted that 5 years ago?), he doesn’t need his seat in Congress to have a platform.  He has hundreds of thousands, or more likely millions, of supporters who will pay attention to what he says.  He should use this to advance libertarian thought.  I am saying all of this under the assumption that he will not win the presidency.

I don’t know if he has anything in particular in mind, but one thing he could do is create a home school curriculum as suggested by Gary North.  He could use Campaign for Liberty to promote this.  I’m sure it would quickly be promoted by others.  He doesn’t have to write the whole thing.  He just needs other libertarians to put it together at his direction and he can be the main salesman.  Imagine if just a hundred thousand home school children were to use it each year.  We would have a whole new generation of young libertarians with a good understanding of history and economics.

Another idea, also promoted by Gary North, is for Ron Paul to use Campaign for Liberty to specifically target local politics.  If he directed all of his supporters to start running for small local offices, then these advocates of liberty could start making a difference in their own communities.  They would gain trust locally and would have more influence than in any other way.  If liberty-oriented people lobbied their city councils like they lobby DC, then we would see a big wave of liberty from the ground up.  Gary North calls this the Dog Catcher strategy.  Washington DC is almost impossible to change right now, so why not start with something achievable?  This will lay the groundwork for changing DC later on.

Whatever Ron Paul decides to do, libertarians should be grateful for all he has done.  He has single handedly had a bigger influence on the liberty movement than any living person and perhaps anyone in history.  He has been consistent and uncompromising and he comes down on the side of liberty for all of the major issues.  We could not ask for a better spokesperson or a better role model.  Let’s enjoy the next year of seeing him get under the skin of the establishment one more time.

With the deficit being the number one issue in the national news, there is actually some talk of cutting Social Security benefits (thanks to Scott for the link).  The first plan in cutting Social Security costs is to change how the government determines the cost of living adjustment.

Many libertarians already believe that the consumer price index (CPI) is understated.  It is difficult to say because it is impossible to measure overall prices.  People consume different things in different amounts, so price inflation will vary from person to person.  In addition, it is always hard to take into account the changes in quantity and quality of a product.  Obviously a computer or television that is made today is far superior to that of 10 years ago, but how can we measure this?

The definition of inflation used to be an increase in the money supply.  This was changed by the advocates of big government.  When most people talk about inflation today, they are talking about prices.  Price increases are actually a result of inflation (an increase in the money supply).  By changing the definition, it allows the political hacks to blame other things for increasing prices.  They can blame greedy businessmen and high oil prices.

If we really want an accurate adjustment for Social Security, how about we use the adjusted monetary base for the cost of living adjustment?  Of course, that would mean that Social Security recipients would receive triple the amount that they were receiving just 3 years ago.  The government would already be bankrupt or we would have hyperinflation.

This talk of cutting Social Security does not surprise me (and yes, it would be cutting).  While I don’t want to see more monetary inflation, I think it is appropriate to start cutting these entitlement benefits.  The age to collect should also be raised and I’m sure that will be coming in the matter of a few years.

As a libertarian, I believe the whole Social Security program is a Ponzi scheme.  Why should senior citizens be living at the expense of younger people?  Yes, they were forced to pay into the program, but that still isn’t a reason to force the younger generation to pay.  If person A steals money from person B and person A is not longer around, it doesn’t make it right for person B to then steal money from person C.

Although the younger generation does not vote like their elders, the non-retirees of this country still have the numbers.  It was once politically suicidal to speak anything of cutting entitlement benefits for senior citizens.  It is no longer taboo.  As the debt gets worse and the dollar loses more value, the government will have to start cutting its spending.  If the younger generation has a choice between longer work hours and higher taxes or a huge cut in Social Security payments for seniors, which do you think they will choose?

Again, it is not the obligation of the younger generation to provide for the older generation.  It should be voluntary.  The younger generation should not be forced to pay for other people to retire while they struggle to pay their own bills.

The government is very slowly defaulting.  It defaults every time it prints money.  What was once political taboo, is now openly talked about.  The idea of cutting Social Security is finally out there.  The politicians are lying (what else is new) in trying to imply that the inflation adjustment is overstated.  But regardless of the rhetoric, Social Security is no longer off the table.

We should continue to expect more of this as time goes on.  The senior citizens of the U.S. will learn the lesson that the Greeks are learning.  There is no such thing as a free lunch.  And if you try to take someone else’s lunch, you always run the risk of a revolt.