Doug Casey has written an article, linked via LewRockwell.com, on the prospects of our future.  He outlines three possible scenarios and says that we could see any one of them or a combination of pieces from each of them.  I would like to comment on this and add to it.  If you haven’t read it, it is a long piece, but Doug Casey is always worth the read.

First, he runs through the last 100 years in 20 year increments.  It really is amazing what this planet has been through in the last 100 years.  It is really the best and worst of human history.  It is the worst because of the world wars and all of the people that died at the hands of government (mostly their own).  We saw 2 major communist empires (China and the Soviet Union).  We also saw the end of the Soviet Union.  We have also seen communist China change towards more economic freedom, at least by action and not by name.  The 20th century also saw the rise and fall of the Nazis.  One other unfortunate event was the dropping of two atomic bombs that killed tens of thousands of innocent people.

The last 100 years has also been great in other ways.  We would not recognize the world of 100 years ago when there was no air conditioning, no television, no cars as we know them today, no microwave ovens, etc.  We could make a list pages long.  In just the last 20 years we have seen the amazing technology of computers and cell phones and the internet revolution.  The last 100 years really has been a combination of great and horrible things.

Doug Casey lays out three scenarios for what things will look like in 20 years.  He has a best case scenario, a middle of the road scenario, and a worst case scenario.  His worst case scenario involves war, which is hard to argue with.

While hyperinflation is certainly a possibility, I don’t think people understand the ramifications of this.  If there is little warning for the market to prepare with an alternative form of money, we could literally see massive devastation that could wipe out much of the population.  Hyperinflation in the U.S. would mean that food is no longer shipped to the grocery stores.  It means most people staying home from work.  It means a total breakdown of the division of labor, unless there is another form of money that is legal to use and has already been established in the marketplace.  This is why I don’t think the Federal Reserve will purposely put us into hyperinflation.  They would be granting their own death wish.

In Casey’s best case scenario, it actually isn’t too rosy.  I think another possibility, that isn’t too far fetched, is new technology getting us out of the mess we’re in.  Let’s say that someone invents a car that does not run on oil, but is just as cheap or cheaper to buy and to operate than what we have now.  This would be huge and would help our standard of living tremendously.

In Casey’s best case scenario, he says, “most governments decide to endure the pain of allowing interest rates to rise and limiting increases in the money supply.”  I’m not sure that he quite stated that part correctly.  It would actually be the general population that would decide this.  Most or all governments will seize power if they think they can get away with it.  The only check on government power, when it comes down to it, is public opinion.  They will not just relinquish power.

Politicians can make a difference, but they aren’t going to voluntarily give up their power.  For example, Gorbachev would not have voluntarily given up power if public opinion had stayed in his favor.  He saw the writing on the wall and gave up.  The good thing is that he was decent enough not to fight public opinion with violence and start a massive war.  But ultimately, public opinion is what matters.  He could not prevent the collapse of the Soviet Union.

I would lay out a best case scenario that Ron Paul gains tremendous popularity in this election cycle.  He doesn’t need to win, but we need for a sizable minority of people to become strong libertarians.  If this were to happen, it would actually be possible to start rolling back government and moving towards liberty.  We would still have to go through a correction from the massive increases in the money supply and the massive debt built up.  But if government were significantly reduced from our lives, the correction from the previous misallocation of resources would not be too bad.

If you need some optimism, just think of Japan and Germany after World War II.  They were both a mess.  As Casey says in his history part for 1951, “Who imagined that Germany and Japan, although literally leveled, would be perhaps the best investments of the century?”  These two countries turned to free markets and they became two of the richest countries on earth in a fairly short amount of time.  If they can recover from that, the U.S. can certainly recover from high debt and bureaucracy.

Yesterday, I discussed Herman Cain and how he is a lover of big government, even if he doesn’t admit it.  He is also a supporter of the Fair Tax.  Today, I want to discuss the “fair tax” from a radical libertarian’s perspective.

The fair tax is proposed legislation to eliminate income taxes, payroll taxes, corporate taxes, capital gains taxes, and estate taxes at the federal level.  It calls for the repeal of the 16th Amendment.  In place of all of these taxes, the fair tax would institute a national sales tax of 30%.  The fair tax proponents will say that the tax is only 23%, but they are calculating it as an inclusive tax.  For us people living in the real world, it is 30%.  If an item costs $100, you would pay an additional tax of $30.

This tax would be on all new goods and services with few exceptions.  Every family would get what is called a pre-bate check each month.  It would cover the cost of the tax of what is calculated to be essential needs.

The fair tax is appealing to many libertarians.  It has been pushed by former congressman John Linder and radio talk show host Neal Boortz.  The two wrote a book to promote the fair tax.  It was also supported by Mike Huckabee in the primaries for the last presidential election.

The biggest problem with the fair tax that I see is that it is revenue neutral.  In other words, it is set up for the government to collect the same amount of money that it collects now.  It would not touch the Federal Reserve.  It would not balance the budget.  It would not reduce government spending at all.

Filing income taxes is annoying.  It can eat up several hours of your time during tax time each year.  But even though that time spent is bad, the amount of money being taken from the American people is far worse.  The biggest issue with the income tax isn’t that it takes a long time to complete a tax return each year.  The biggest issue is that it takes money out of our pocket and money out of the private sector.

As a libertarian, I don’t want to see legislation that merely rearranges the tax code but does nothing to actually shrink government.  This is why it is easy for hacks like Herman Cain to advocate the Fair Tax.  He can push for tax reform and yet he doesn’t have to name one program that he would cut because the purpose of the fair tax is not to cut government spending.  Why would I want to spend so much time and energy promoting something that will only save me a few hours each year and does nothing to save me any money?

I attended an event in which the speaker was explaining and advocating the fair tax.  When he was taking questions, I asked about someone who had to have heart surgery that might cost $100,000 (hypothetically).  I asked if the person would have to pay $30,000 in taxes on top of that.  His response was (and I’m paraphrasing) that he would expect for people to have health insurance.  I then said, “so could you say that fair tax supporters are in support of Obamacare because people should have to buy health insurance?”  I said I was only kidding, but I think my point was made.  The presenter was kind enough and he actually laughed at my comment.  I don’t think the two women behind me were quite as amused.

I find that most strong advocates of the fair tax are not very good libertarians, let alone fiscal conservatives.  They do not really want to cut government significantly.  Otherwise they would not be spending so much time and energy promoting something that does nothing to cut government.  I also find that fair taxers push moderation.  When they get critiques, they say things like, “don’t let the perfect be the enemy of the good.”  The only problem is, the fair tax isn’t good.

The fair tax will never pass.  If you can come up with enough support to repeal a constitutional amendment (the same as passing an amendment), then you have most of the country on your side.  If you can gain this much support, then you may as well just repeal it without replacing it with anything.

A libertarian position of dramatically reducing government has a much better chance of gaining widespread support.  The fair tax people are wasting their time.  It is a distraction.  Most of them are not supporters of a libertarian agenda.  Ron Paul has a better chance of being elected president than the fair tax has of passing.

There are many libertarians from the past who opposed the fair tax or something similar.  People like Murray Rothbard and Harry Browne not only did not support the fair tax, but they strongly opposed it.

If you are a libertarian, don’t waste your time on something that has almost no chance of passing and that, even if passed, would do nothing to reduce the burden of government on society.  The fair tax people can continue to rearrange the chairs on the sinking ship.  I would rather fix the ship or abandon ship.  I would rather push for dramatic cuts in spending and regulations.

With the Republican primary continuing to heat up, I would like to share some thoughts on Herman Cain, from a libertarian point of view.  Cain ijs known by listeners of Neal Boortz’s radio show and probably a few other conservatives.  He is becoming more well-known now that he is a presidential candidate.

Herman Cain was the CEO of Godfather’s Pizza.  This makes him attractive to conservatives.  Many conservatives believe that government needs to be run more like a business.  Unfortunately, they never consider the fact that the two are not similar.  Government relies on force or the threat of force.  Businesses rely on persuasion and customer satisfaction.  Businesses want to maximize revenue.  They do this by pleasing customers.  Governments also want to maximize revenue.  They do this through taxes and inflation.

Unfortunately, many libertarians and so-called libertarians are attracted to Cain.  He sometimes fills in for Neal Boortz on the radio and is definitely supported by Boortz, at least implicitly.  For those unfamiliar with Neal Boortz, he is a popular radio host who calls himself a Libertarian.  While he is good on some issues, he definitely does not take a libertarian stance on foreign policy and he does not have much interest in monetary policy.

Boortz is also a huge advocate of the Fair Tax.  It is a plan to replace the national income tax, payroll taxes, corporate taxes, and other taxes with a national sales tax.  I will comment more on the Fair Tax tomorrow.  But for now, I will just say that Herman Cain has come out in support of the Fair Tax.

If you are a libertarian, or even if you lean libertarian, then Herman Cain should not be for you.  If your only goal is to see Obama defeated in the next election, then perhaps you should support him.  Obama and the Democrats would not be able to play the race card (or at least not effectively), since Cain himself is black.

The problem with Herman Cain, from a libertarian perspective, is that he is not for small government.  He may sound good sometimes and even have some libertarian rhetoric, but he is not a friend for liberty lovers.  While Cain is somewhat known for being the CEO of Godfather’s Pizza, it is less well-known that he worked for the Federal Reserve Bank of Kansas City.  If you look at Cain’s resume, he is not exactly a political outsider.

In 2008, Cain was a supporter of the TARP bailouts.  That should be enough said for libertarians.  The guy is not in favor of small government.  He talks that game to get support, but he is another political hack who will dole out favors to his favored groups.  In his case, it would be the powerful bankers.

If you are a libertarian, you should be running away from Herman Cain.  He may be more dangerous than Obama.  At least with Obama, and even someone like Mitt Romney, it is obvious to anyone paying a little attention that these people want big government.  With Cain, someone trying to get Tea Party support, he will say that he favors smaller government on the campaign trail, but in actuality the guy is a lover of big government and central banking.

There is a libertarian candidate in the Republican primary.  His name is Ron Paul.  There is also a quasi-libertarian and his name is Gary Johnson.  The rest of the candidates and potential candidates are hacks who only want to expand government and expand the U.S. empire.

The economy is in rough shape and more people are starting to see that.  The unemployment numbers got worse this week and there were a couple of big drops in the stock market this past week.  Now that QE2 will be finishing up at the end of this month, some are already suggesting that we should prepare for QE3.

Quantitative easing is the new politically correct term for monetary inflation.  QE1 started with the fall of 2008.  QE2 and its eight month run is almost up.  Between QE1 and QE2, the adjusted monetary base has approximately tripled.  This is unprecedented in modern American history.

The Federal Reserve obviously sees major trouble ahead.  Otherwise, I can’t see the point of QE2 (from their standpoint).  The Fed has created all of this new money out of thin air, yet most of it has gone into the banks as excess reserves.  This has helped keep a lid on price inflation.

The bottom line is that I see a good possibility for QE3.  It may not happen immediately after QE2 ends, but even that is hard to say.  It may also be less dramatic than QE2, but eventually a straw will break the camel’s back of inflation.

It is very hard to predict what will happen to the economy and your investments in the near future.  It is all dependent upon the Fed’s decision on what to do.  If the market doesn’t expect a QE3 right away, we could see a lot more down days for the stock market.  We could see the dollar strengthen in the short run which would be bad for precious metals.  On the other hand, if the Fed announces QE3 coming up, then we could see a huge boom in gold and silver.  It is harder to say with the stock market, but it could certainly resume its path higher with more monetary inflation.

I am an advocate of putting at least half of your investments in a permanent portfolio setup as described in Harry Browne’s book Fail Safe Investing.  You should put an even higher percentage if you are risk averse.  For speculative purposes, I would put your extra money into cash and gold.  You might even consider a small short position in the stock market or else you could lighten up your stock portion of the permanent portfolio by just a little bit.

I expect that we will eventually get more monetary inflation and gold, silver, and oil will continue to do well in the longer run.  But you should expect a roller coaster ride with a lot of ups and downs.  There may come a day when you will want to sell some of your gold and silver holdings.  We are not even close to that day yet.  It is likely several years away.  That will be the day that the Fed refuses to create any more new money and the federal government is forced to cut spending.  This will cause a Rollback in government and it will also cause a depression.

Peter Schiff has written a piece on the dollar and its declining status.  He has been bearish on the U.S. dollar for quite a while now and expects it to continue its decline.  However, he points out that the euro, the yen, and the yuan have flaws (besides being fiat currencies) that will make it unlikely that any one of them will replace the dollar.  I generally agree with his reasoning and his critiques of these currencies.

Schiff goes on to say that he sees signs that the world is moving back to gold.  I like his optimism and he may certainly end up being right.  As fiat currencies continue to fail and as 21st century technology helps spread the reasons why, then there should be more of a push for using gold (and possibly silver) as money. If the governments of the world are forced to loosen their grip and at least get rid of legal tender laws, then the market may head in the direction of gold.

I would like to offer another scenario too.  While I like the idea of gold being used as money and think that may be the ultimate outcome, I see another possibility developing.  With our current technology, most money is transferred with digits instead of actual bills.  It is easy to make an entry on a computer, just as banks do all the time.

So my question is, why do we need a world’s reserve currency?  In the past 65 years or so, the U.S. dollar has been considered the world’s reserve currency.  This means that countries around the world use dollars in major trading.  For example, if Japan buys oil from Saudi Arabia, they will use U.S. dollars.  But again, why is it necessary to have a world’s reserve currency, whether it is official or unofficial?

Let’s say Japan wants to buy oil from Canada (and this example works whether we are talking about private companies or governments).  Instead of using U.S. dollars, Japan can just use their own currency.  Japan can buy the oil in yen.  Then, Canada can convert the yen into Canadian dollars on the open market. If Canada (again, a private company, individual, or government) wanted to keep the yen and save it for a rainy day, that would be fine too.

With our current technology and open trading of currencies, it is easy to trade and convert currencies in the open market.  Countries like China that have currency controls would either have to loosen those controls or else they could continue to use dollars or any other currency of their choosing.

Peter Schiff is right that the U.S. dollar is losing its status as the world’s reserve currency.  It won’t matter much in the long run except that the U.S. government and the U.S. consumer will no longer be subsidized.

The central banks around the world have done a horrible job of managing their currencies (not that a currency should be “managed”).  Fiat currencies are beginning to blow up in their faces.  The average person will pay a price for this.  The price will be higher consumer prices.  It will hurt.  Hopefully, it will be beneficial in the long run if enough people realize that we should not allow governments and central banks a monopoly over our money.

If you are looking to invest in silver, you have several options.  There are certainly silver stocks, but these will not necessarily mimic the price of silver.  You can buy the silver ETF (symbol: SLV).  Another option is, of course, to buy the actual metal.

If you are going to buy actual silver, you should buy coins.  For one ounce coins, the U.S. silver eagle is the most recognizable.  You will pay a slight premium above the price of silver.  If silver is going for $40 an ounce, you may pay $43 or $44 for an eagle.

An even better way to buy silver coins is to buy dimes, quarters, and half dollars that were minted before 1965.  These coins are made up of 90% silver.  If you want to figure out the weight of silver for these coins, take the face value and multiply it by .715.  The actual content of silver was a little higher when they were minted, but due to wear and tear, the .715 figure is generally accepted.  Because the half dollars were not circulated as much and because they are not quite as common, they may demand a slight premium.

For an example, let’s say that you have 4 quarters dated 1964 or earlier.  The face value is one dollar.  Multiply one by .715.  This is how many ounces you have.  If the going price of silver is $10 per ounce (I know, that seems ridiculously low now), then the 4 quarters would be worth $7.15.  If the price of silver is $40 per ounce, then the 4 quarters would be worth $28.60 (.715 x 40).

The same calculation would hold for 10 dimes (one dollar face value).  If you have 10 dimes dated 1964 or earlier and the price of silver is at $40 per ounce, then they would be worth $28.60.  The same would be true of two half dollar coins, although it might be slightly more due to the premium.

Collecting these coins is easy and convenient.  If you don’t have a lot of money to invest in silver and you want to accumulate slowly, this is an easy way to do so.  It is also a good investment because you don’t have to pay much of a premium right now.  There may be more of a premium in the future, but then you would benefit if you own some already.  If any coin dealer is trying to sell these coins for a high premium, then you should go elsewhere.  They are not marked up to the same degree that a one ounce eagle would be.

These coins could actually be used as money in a breakdown of the system (which we should all hope will never happen).  They are in a small denomination and are easily recognizable.

I don’t see much of a downside to owning a few of these coins except the possibility of the price of silver going down in the short run.

Robert Murphy wrote a blog post last week that I thought I would comment on.  He commented on Paul Krugman’s analysis on inflation and how Krugman hadn’t expected the current developments of an uptick in inflation.  The more interesting part comes after that when Murphy comments on his own analysis from the past.  Murphy had expected a much higher CPI at this point and was admitting that he was wrong, or at least that his timing was off.

Bob Murphy is really one of the best Austrian economists there is, if not the best.  He knows his stuff and he is also a good teacher.  If he cannot make accurate economic predictions based on Austrian economics, what hope does that leave for the rest of us?

His analysis does give us some benefits of seeing where he may have gone wrong.  Murphy says, “What I can say for now is that the specific mistake I made, was in thinking that other people would see the end-game as I perceived it.”  He says later in the post, “I thought other investors would start agreeing with my views by now, whereas I still think most of them are being incredibly optimistic.”

This provides us some great insight for followers of Austrian economics who also happen to be investors.  As I’ve said many times before, we have to remember the number one thing about Austrian economics and that is that humans act.  Because of human action, it is impossible to predict anything with certainty.  We could see all of the stars align for a particular investment, but if other people don’t see it that way, then it won’t pan out the way you think it should.

As investors and free market thinkers, we must remember that not everyone else thinks the same way that we do.  And even if more people did start following and understanding Austrian economics, there is also a perception of what other people think.

For example, if everyone turned into an Austrian follower overnight, yet nobody knew it, then things might not change right away.  I personally think government bonds are a ridiculous investment in a lot of ways, given the huge monetary inflation and the massive debt. Yet I own some funds that invest in government bonds only because I know that not everyone else sees the world the same way that I do.  If there is a stock market crash, investors will likely flock to government bonds.  As long as there are idiot investors, idiot mutual fund managers, and idiot foreign governments who are willing to continue buying bonds, then I will be an idiot myself and join them.  I just want to be the first idiot out the door when the selling actually begins.

Bob Murphy has admitted that he made a mistake in his timing because others did not see things the same way as him.  Learn from his mistake.  Don’t assume that things are obvious to others that are obvious to you.  Fundamentals matter in the long run, but we should not discount human action in the short run.  This is why I think everyone should take a somewhat conservative approach in investing and speculate with only a small portion of their portfolio.

Apparently, Goldman Sachs is predicting $5 gas this summer.  Goldman Sachs is also proclaiming that oil will hit $135.  Meanwhile, JP Morgan Chase is predicting oil at $130.

You should continue to implement a strategy of safety and a strategy of hedging against inflation.  For safety, I recommend the permanent portfolio as described in Fail Safe Investing.  For hedging against inflation, I recommend hard assets that can’t be made on a printing press and I recommend against U.S. dollars and U.S. bonds.  We should look for price inflation to rise and for Americans to feel more pain at the pump and in the grocery store.

I am a strong advocate of Harry Browne’s permanent portfolio, as described in his short book Fail Safe Investing.  I believe you should have at least half of your investments in the permanent portfolio or something similar to it.  If you are a more conservative investor, I would suggest at least 80%.  As Richard Maybury says, it is not the perfect plan, but until we find something better, it is the best thing out there.

One easy way to invest in something similar to the permanent portfolio is to simply buy the mutual fund PRPFX.  It is not an exact match, but it is the closest thing you can get in one package.

With the popularity of exchange traded funds (ETFs), you can easily set up a permanent portfolio with a typical online brokerage account.  The set up of the permanent portfolio is to put 25% in stocks, 25% in gold, 25% in long-term government bonds, and 25% in cash or short-term instruments.  You can easily do this with ETFs.

For the stock portion, you can buy the ETF with the symbol SPY.

For the gold portion, you can buy the ETF with the symbol GLD.

For the long-term government bond portion, you can buy the ETF with the symbol TLT.

For the cash portion, you can leave it in the money market fund of your brokerage account, or simply hold it in a money market fund or cd in a bank.

I am not saying this set up is ideal.  I think you should own some gold coins before you put money into GLD.  I think you should consider tax consequences and also the options of your 401k or other retirement plan if you have one.  You may also have other factors in your financial life that come in to play.

The point is though, between PRPFX and the new popularity of ETFs, there is no excuse that you can’t set up a good permanent portfolio plan, at least outside of your 401k.  These are risky and uncertain times and you should make sure that you have your financial ducks in a row.

Frederic Bastiat, a French economist and theorist of the early 19th century, wrote about that which is seen and that which is unseen.  Much like Henry Hazlitt wrote about in his book Economics in One Lesson, Bastiat said that a good economist does not just look at the seen benefits, but also the unseen costs of a government program.

It actually makes me a little sad to think of this in regards to today’s society.  Just imagine what life could be like in today’s world without big government.  Imagine if we didn’t have all of the piles or regulations, taxes, and other violations of our liberties.  Imagine if we didn’t have a central bank tampering with our money.  Imagine if we lived in a free world.

I suppose I should look at the glass of milk being half full.  We do live in the best of times.  Although the economy is rough (and probably getting worse) and it is expensive to fulfill our basic needs, we are still much better off than anyone before us.  I wouldn’t trade this time period for, say, the 1950’s.  Although life was simpler in a way back then, we still have many luxuries that we take for granted that did not exist 50 or 100 years ago.  We have washers and dryers, dishwashers, microwave ovens, central air conditioning and heat, expanded cable, ipods, cell phones, and big screen televisions.  Of course, we also have high speed computers that would have been unimaginable a couple of decades ago or less.  The internet revolution has been life changing, and mostly in a good way.

All of these great things happened, not because of government interference, but in spite of it.  It is hard to imagine what we would have now if we had lived the last 50 years with minimal government.  We literally might be living something close to the Jetsons.  We might have backpacks that we could strap on to fly to the store.  We might be able to order things from the store and have it delivered within minutes with little or no cost for delivery.  We might have 6 hour work days, instead of 8 or 9 hour work days.  Bottom line is, we would have more free time (if that is what you wanted) and we would have more wealth.

Wealth (not to be confused with money) provides more freedom to do what you want.  It provides more luxuries.  It provides better overall health.  It provides more safety.  It can make life less stressful.  This is a generalization of course, but it is all true.  Who would give up a life of living in a first world country of today to live in a world 100 years ago or even in a third world country today?

It really is sad to think how much better and easier our lives could be if people would just stop consenting to more and more government.  If we ever gain our freedom back and we see a free market economy combined with 21st century technology, the sky is the limit.  We are already seeing an explosion in technology with big government around.  Instead of missing out on more unseen benefits in the future, let’s withdraw our consent from the government and seek freedom where we can enjoy many more benefits that can be seen.