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.

There are some good opportunities out there for people looking to invest in real estate.  Of course, this isn’t for everyone and you should definitely consider some factors when deciding.  For example, if you have a career in which you are likely to move around, then real estate investing is probably not a great idea.  It can be difficult to manage property when you live far away.  You can hire a management company, but this may eat into your potential returns.

I also wouldn’t recommend real estate investing to someone with little or no money in the bank (or other liquid assets).  Problems can arise.  You may have repairs or you may have a time period between renters where you are not collecting any rent.  You need a little cushion to get through these times.

For people with significant savings who are not planning to move out of their current city, then there really are some great opportunities for a good return on your money.  I would not recommend investing in real estate if you live in a big city that is really expensive (like New York).  I also wouldn’t recommend investing where prices are so depressed that it makes you wonder if the city will ever recover (like Detroit).

So if you live in a good place to invest in real estate and it seems like something you want to do, start doing your research on the internet.  The internet has made it so much easier for the average guy.  You may still benefit from getting a real estate agent, but at least you can look and narrow things down on what you want to seriously look at.

One thing you should seriously consider is paying cash (not literally) for an inexpensive place.  While I would more typically recommend buying a 3 bedroom 2 bathroom house as a rental property, you may live in an area where condos are depressed in price.  If you can pick up a small condo for, say, $50,000, it might give you a good return on your money.

Now I understand there are arguments against paying cash.  Libertarians usually understand the nature of inflation and there is a legitimate argument that you should take out a mortgage and pay it back in depreciating dollars.  But, also consider that if there is high inflation, owning a rental property will still have its advantages without having a mortgage.  You may get appreciation in nominal terms on the property.  In addition, you can raise rents as they tend to go up with inflation, at least over time.

Let’s run some numbers for an example.  Let’s say you have been saving your money for a while.  You have $50,000 available.  You buy a one or two bedroom condo for $50,000.  By paying cash, this may enable you to get a better deal.  You can offer the seller to close within a week.  You may get a better price because of this.

Now let’s say that property taxes will be $100 per month (the purchase price is only $50,000).  Let’s say that association fees are $175 per month.  Let’s say that insurance is another $25 per month.  Let’s say that you can rent it out for $800 per month.  On a normal month where you have it rented and don’t have any extra expenses, you will net about $500.  On $50,000, this is an annual return of 12%.  Someone please tell me where I can get a 12% return, on an almost continuous basis.

Another advantage of paying cash is that you don’t have a mortgage and therefore have less risk.  In the above scenario, even if you go for a month without renting it, it will only cost you $300.

Perhaps my numbers are too optimistic for where you live.  Either way, I spelled it out to make a point that real estate investing is something to consider right now with all of the bargains out there.  You can take your time and shop around for the right deal.  If you live in a good area and you are in the right financial situation, this might be something to consider.

I do not like to make predictions.  If there is just one thing to learn from Austrian economics, it is that humans act freely.  It is impossible to predict what every individual on this planet is going to do.  This makes it impossible to accurately predict what the economy will do and what investments will do.  The best we can do is to forecast what people are likely to do based on current conditions.

With all of that said, I would like to review some possibilities of what is to come for the rest of the summer.  QE2 has ended.  I thought there was a good possibility of another major downturn in the stock market and the economy.  A stronger U.S. dollar would most likely go along with this scenario.

It looked like this might play out a few weeks ago.  The Dow Jones dipped below 12,000.  Then, all of a sudden, it popped back up.  As of this writing, the DJIA is over 12,700 and not showing much in the way of weakness.  Meanwhile, gold and silver have been up significantly in the last few days.  While, this doesn’t make a trend, it does make it look more probable for gold to go up again and look for new highs.

I think things could easily go either way right now.  QE2 is over and the market knows it.  Greece and other European countries are on the verge of default.  In the U.S., the unemployment picture does not seem to be getting much better.  These are all potential arguments for a sharp downturn in the economy in the near term.

On the other hand, there is just as good of an argument for stocks and commodities to go higher while the dollar continues to be weak.  The debt is out of control and there is little promise of it getting any better.  We also have to remember the biggest elephant in the living room.  The Fed has tripled the monetary base in less than three years.

Although the increase in the monetary base has mostly gone into the banks as excess reserves, it is still a tripling of the money supply.  This money is available to people.  In addition, the banks could start lending it at any time unless the Fed increases the reserve requirement substantially.

So as far as which way the markets will turn this summer, flip a coin.  There are good arguments for both scenarios.  I still think the best strategy is to have a majority of your investments in the permanent portfolio as outlined by Harry Browne in Fail Safe Investing.

For speculation, I recommend additional investments in commodities and perhaps a small short position in the stock market.  The reason for this last part of the strategy is because if the stock market continues to go up, then I suspect it is mostly because of the big increase in the money supply.  This means that commodities should go up even more because commodities tend to do very well in an inflationary environment.

If there is a sharp downturn, it would not surprise me to see commodities go down, but at least you would have a small short position in the stock market to help offset any losses in your commodities.  And again, this is just for speculation.  If you are a conservative investor, just stick with the permanent portfolio.  You will sleep better at night.

Among libertarian investors, gold and silver related investments tend to be popular.  It is because hardcore libertarians do not trust the Federal Reserve and the federal government.  They understand that money can be created out of thin air and it is done on an almost continual basis for the benefit of the large banks and to enable the government to deficit-spend.

So what is the difference with platinum and would this also make a good investment?  First, I think it is important to realize the differences between the metals.  Gold and silver have a history of being used as money.  Platinum does not.  Platinum has uses as an industrial metal.  Silver does too.  Gold’s uses are more limited outside of being used for jewelry and being used as a store of value/ investment.

Central banks do not buy platinum.  Then again, central banks do not buy silver either, at least to my knowledge.  So again, it all comes back to the fact that the market has chosen gold and silver over thousands of years as having good qualities for money.

I am an advocate of setting up a permanent portfolio, as described in Harry Browne’s book Fail Safe Investing.  I think that at least half of your portfolio should be in something similar.  As a hedge against inflation, I am mostly a proponent of using gold and gold related investments.  I think it is safe to have a small percentage in silver, but it should only be about 5%.  Silver tends to be much more volatile than gold.

For speculative purposes, I see nothing wrong with owning a little bit of platinum, especially now.  Although it is not a monetary metal, it will still have a certain correlation with other metals and with commodities in general.  It will also benefit from a weak currency.

The price of platinum, in terms of U.S. dollars, was double that of gold a few years back.  Now the spread is only about $230 as of this writing and that is with gold trading just above $1,500 per ounce.  The gap between the two metals has narrowed significantly.  It just shows that gold has gone up partially because of its monetary qualities.

With the ratio of platinum to gold going from about 2 to 1, to less than 1.2 to 1 in just a few years, it makes platinum an attractive buy.  Platinum is not near all-time highs like gold right now.

So if you are looking for a speculation right now outside of your permanent portfolio, platinum might be a place to look.  I don’t know of any ETFs that invest solely in platinum like there are for gold and silver.  You can easily buy platinum eagles from most reputable gold dealers.  It is a speculative play that is another investment option for a falling dollar that is continually being devalued by the Fed.  I would recommend that platinum be less than 5% of your total portfolio if you are going to pursue this strategy.

With the Republican presidential primaries coming soon, the race for the Republican nomination is heating up.  There is one particular question that should be asked to all of the candidates.  A lot of libertarians want to know the answer.  Democrats should be asking the question to show the hypocrisy of most of the Republican candidates.

It is unlikely that this question will be asked in any of the debates.  If it is asked, most of the candidates will not answer the question.  Their hands should be forced to answer the question or else look really bad.  The question is this:

What specifically would you cut from the federal budget to balance the budget for the first budget year that you would be responsible for as president?

I do not recall hearing any of the candidates saying that they would not balance the budget.  This question would force them to admit this.  It is true that Congress is responsible for spending, but that is 535 people.  The president is one person who can veto spending bills.  The Congress needs a supermajority to override a presidential veto.  In addition, the president can influence the American people, and thus Congress, when it comes to spending cuts.

Here is the problem for the Republican presidential candidates.  They say they want a balanced budget.  They say they will not raise taxes.  Yet, it would be impossible to balance the budget unless you significantly cut military spending or cut Medicare and Social Security.  Cutting military spending would mean ending wars and bringing troops home.  Cutting Medicare and Social Security would mean severely cutting benefits for those already collecting.

Of course, there are a lot of departments that can and should be cut from the federal budget.  But even if all of the unconstitutional departments and programs were cut, it would still fall short.  But the candidates are not proposing this anyway, except for one person.

Ron Paul (and Gary Johnson to a much lesser extent) is the only candidate who is serious about making deep and significant cuts.  Ron Paul has said that he would end the wars currently going on.  They would end almost immediately on his watch.  He would like to get rid of all of the unconstitutional departments.  He would like to end foreign aid.

Ron Paul is the only candidate who has been specific enough to come anywhere close to a balanced budget. In fact, Ron Paul should be asking this question to the other candidates.  It would show that the other candidates are closer to Obama than they want to admit.  They have no plan for a balanced budget.

Balancing the budget it just one of the major issues of this campaign.  But most people know where the candidates stand on the other issues.  It is obvious that Ron Paul ( and again, Gary Johnson to a much lesser extent) is the only anti-war candidate in the race.  But when it comes to spending, the Republicans are trying to have their cake and eat it too.  There is simply no way to balance the budget without big cuts in military spending or entitlement spending.

Today is July 4, otherwise known as Independence Day to Americans.  Americans celebrate by barbecuing, going to the beach, and lighting off fireworks, among other things.  While I am hopeful that at least a majority of Americans understand that July 4 is a celebration of the American colonists declaring independence from the British Crown, I don’t think that most Americans realize that the colonists, in effect, seceded.

The labor theory of value, as stated by Wikipedia, is a theory which argues that the value of a commodity is related to the labor needed to produce or obtain the commodity.  This has been refuted by Eugen von Bohm-Bawerk and the Austrian school of economics.  Austrians believe in the subjective theory of value.

Basically, the subjective theory of value says that things are valued based on the opinions of people.  This whole thing has always kind of puzzled me.  You’re telling me that it took hundreds of years of theorizing to come to this conclusion and even now it is still debated?

For anyone who works in an office, you should know that the labor theory of value is not true.  You might observe someone who sits at his desk all day and seems to work hard.  He may even work overtime.  And yet that person may not be the most productive person in the office.  It can even be the case that there are some people who seem to be hard workers and yet are some of the least productive people.  Bottom line is, productivity is not determined just by how hard someone works.

Of course, there can be a relationship between labor and productivity.  If someone doesn’t work at all, he is not going to produce something of value.  But even for someone who is seemingly productive, it doesn’t mean that what he is producing is of value to anyone else.  That is for other people to determine.

I think the one important thing to take away from the subjective theory of value is that consumers dictate prices.  It doesn’t mean that costs don’t matter.  It doesn’t mean that the labor spent on things doesn’t matter.  But, ultimately, what matters the most is how much consumers are willing to pay.

When a business takes on higher costs (let’s say because of a government regulation or tax), we often hear people say that the business will just pass the cost on to the consumer.  Sometimes this is true.  The business will certainly try to charge more if it thinks it can get more.  But it doesn’t always work this way.  The consumer may not be willing to pay more.  The consumer might find a replacement product or just decide that it is not a necessary item to have.

If oil prices go up, food may or may not go up in price due to higher transportation costs.  If Coke and Pepsi get hit with a new corporate tax or accounting rule that drives up their costs, the price of their products may or may not go up because of this.  There are a lot of things that can contribute to prices, including costs and competition.  However, ultimately, it is the consumer who decides the price by how much they are willing to pay.