The current debt limit is 14.294 trillion dollars.  You can view the U.S. national debt here.  Right now, it is showing the U.S. national debt and the U.S. public debt subject to limit.  The debt subject to the limit is slightly lower.  It is projected to hit the limit in mid-May, sometime next week.

If the debt ceiling is not raised, the government can keep things going for a few more months using accounting gimmicks.  The politicians are good at accounting gimmicks.  They can continue to run up debt a little while longer while not really counting it as debt.

Many of the politicians are screaming right now that refusing to raise the limit is not an option.  They are wrong.  It just isn’t an option that they like.  It would not necessarily mean default.  It would mean that they would have to drastically cut spending.  This is why the limit will be raised.

If you didn’t have enough evidence already, the next few weeks should tell you all you need to know about the Republicans.  They will demand a few spending cuts.  The actual cuts will just be a small fraction of the total bloated federal budget.  Both sides will compromise on more debt and more spending and the party will live to see another day.

It is even hard to judge your congressman by his individual vote.  Congress has this trick of vote counting.  They just need to come up with enough votes to raise the limit.  They will allow some of their colleagues to vote “no” if they are fighting hard for reelection and they need to prove to the voters that they are tough on spending.  The whole game is rigged.

Obama voted against raising the limit when he was a senator.  He has now changed his tune.  The Republicans (with a few exceptions) are frauds too.  The Republicans have the majority in the House of Representatives right now and could refuse to raise the limit.  This will not happen.

As a libertarian, I believe the federal government should sell off its assets and pay off its debts.  Anything remaining should be repudiated.  I understand this is a radical stance, even for a libertarian.  But for any libertarian, you should at least be demanding that the limit be held where it is.  This would force immediate and dramatic cuts.  If the politicians started shutting down whole departments and dismantling the empire overseas, then the government could probably continue to pay interest on the debt and continue to hand out money for Social Security and Medicare, at least for now.

There is no hope of a balanced budget.  It is going to take a crisis in the dollar.  We will end up in a situation like Greece or we will end up with massive inflation and then we will end up like Greece.  Until the American people make serious demands about drastically cutting spending, including entitlements, the military, education, and virtually everything else, then the politicians will continue to spend as long as the Fed keeps buying debt.  This really isn’t going to be a pretty ending.

After the violent downfall last week for gold and silver, things turned around today.  Gold had fallen below $1,500 and silver had dropped about 30% in less than two weeks.  This was not surprising as silver’s run toward $50 was rather quick, but I think it still scared a few people.

The little bounce back up today is a promising sign.  We will see if it holds or if there is more of a correction to come.  Either way, I still see gold and silver both going to new all-time highs, most likely this year.  If they don’t see new all-time highs soon, that means there is likely to be a severe correction in the stock market.

That is why I like a strategy of owning gold and silver related investments along with a short position in the stock market.  I should emphasize that this is for your speculation money.  If you want to minimize speculation and keep your money as safe as possible, just put it all in a permanent portfolio setup.

But again, for speculation purposes, a long position in gold and silver investments along with a stock market short is a decent bet right now.  If the stock market crashes, your short position should do better than the loss you will get from your gold and silver investments.  If gold and silver do well, then your position there should do better than your loss from your stock market shorts.

The only way this strategy won’t work is if the stock market continues to go up and gold and silver go down.  While anything is possible, I don’t see a high likelihood of this happening over a long stretch.  I suspect the stock market is going up due to the hot money being created by the Fed.  If this continues, then gold and silver should do even better as they are natural inflation hedges.

If the Fed puts on the monetary brakes and the new money stops flowing, I would suspect that the stock market would collapse rather quickly.  Silver and gold might also go down quite a bit in this scenario, but at least you would be making money on your short positions.

There is a possibility that stocks might stay flat for a while or even trend down while gold and silver go up. You would really be a winner then, but just remember to take profits along the way.  As we saw last week, things can correct rather quickly and rather severely.

This strategy is easier than ever with ETFs.  You can buy an ETF that shorts any of the broad stock markets indices.  Again, this should be for your speculative money only.

On Friday, Lew Rockwell ran a piece on his site in which The Gold Report interviewed John Williams of Shadow Stats.  Williams predicts that there will be hyperinflation.  In the interview, he does not define hyperinflation.

While I understand that different people have different definitions for hyperinflation, it is nice for them to define it if they are predicting it.  Some people would say that hyperinflation is when prices are going up 20% or more per year.  Others would say 100% or more per year.  Others would say we are in hyperinflation now because of the huge increase in the monetary base.  Others would say that hyperinflation is occurring only when consumer prices are going up every single day.  This last case would be like Zimbabwe or Weimar Germany where people receive their pay from work and they immediately run to the store to buy food or anything else before prices go up again.

It is certainly unprecedented what the Fed has done in the last few years.  The adjusted monetary base has approximately tripled.  This has never happened since the creation of the Fed in 1913.  But while we are in uncharted waters, I don’t think we will see hyperinflation.  Anything is possible, so we can’t say that it can’t happen, but it seems unlikely.

I do find it plausible that we could see price inflation of 20%.  I would not consider this hyperinflation.  If we define hyperinflation as prices going up every day, then it is highly unlikely.  If we define it as prices doubling in a year, then I might give it a 5% chance at best.

The reason I think hyperinflation (as defined by the more extreme cases) is highly unlikely is because the bankers (who control the Fed) would lose too much themselves.  In a severe case of a currency collapse, the division of labor would break down.  If there are no alternative monies readily available, there will be major chaos.  I don’t think that is likely.  Why would the bankers want to destroy their own pensions and create a world in which trucks stop delivering food to the grocery stores?

In addition, the U.S. dollar is still the reserve currency of this planet.  While that may be slowly changing, I don’t think foreigners will be too happy if the U.S. goes into hyperinflation mode.  I believe that is one of the major reasons that Volcker slammed on the monetary brakes in the late 70’s and early 80’s.  I’m sure foreign governments and other elitists pressured him and the Fed into saving the currency.

Again, I won’t say that anything is impossible, but people should be careful not to be so loose with their language.  To just say that we will have hyperinflation without defining it and without telling us why the Fed and the bankers would allow this to happen, is really shooting from the hip.

The Fed will slam on the monetary brakes again one day, just as Volcker did three decades ago.  When that happens, congress will finally be forced to cut spending and we will experience a very difficult recession/ depression.

I have talked before about investing in silver in comparison to gold.  Silver is referred to as the poor man’s gold.  It is a lot easier for the average American to buy a one-ounce silver coin than a one-ounce gold coin.  In fact, many Americans could not even buy an ounce of gold today with their liquid savings.

Another difference is that, while both have a history of being money, gold still has a better reputation as money.  Silver has a lot of uses in electronics and other things.  Gold has a few uses, but it is mainly used for jewelry and savings/ investment.  I don’t know of any governments/ central banks that hold silver in any significant way.  On the other hand, many governments hold large gold reserves.

This past week has really shown the biggest difference in gold and silver when it comes to your investing.  Silver is far more volatile than gold and that has been demonstrated in a major way.  In the matter of just a few days, silver fell about 30%.  That is a huge drop.  If the stock market dropped like that in such a short period of time, there would be panic and headline news.

While silver crashed, gold has pulled back more gently.  Of course, silver also just had a huge run-up in a very short period of time, so it makes sense that it pulled back as violently as it went up.  Gold has shown itself to be much more stable.

For your investments, I recommend that you have most of your precious metal holdings in gold.  If you want to keep a small percentage in silver, that is fine as long as you can take the bigger swings.  For speculation purposes, silver is actually more fun (as long as you are on the winning side).  There is more risk with silver and there is also more reward.

This pullback in silver will be a great speculation opportunity for those who can handle some high risk.  We are still in a huge bull market in precious metals and the Fed keeps creating new money out of thin air and the government keeps spending like crazy.  There is great reason to believe that the metals will continue to go much higher with big pullbacks along the way as we have just seen.

It is hard to say where silver will bottom out on this pullback, but it really will be a great opportunity for risk takers to do a little speculating.  If silver goes right back up from $40 to $50, that is a 25% return.  That would be a great return considering that your savings account is probably paying a fraction of one percent.

There was an article that appeared at Mises.org titled “Charting the Course to $7 Gas”.  The author hit on some of the points that I have hammered on, particularly the tripling of the adjusted monetary base and the increase in excess reserves.

I found it amusing where he pointed out the blip on the chart of the adjusted monetary base back in 2000.  This was Greenspan and the Fed responding to the dot-com bust.  It is circled in red.  If you look at the recession in 2001, you can also see a small blip there too (just to the right of the red circle).  I believe this increase in the monetary base was a response to 9/11.  It just shows how tiny it was compared to what has happened since 2008.

If the gradual increase in the monetary base from the 1980’s all the way to 2008 could cause a major tech bubble and then a major housing bubble, just think what might happen now.  This is why we could see oil, gold, silver, and other commodities double, triple, or more in a short period of time, even from where they are now.  I’m not making a prediction, but I am saying that it is not unlikely at this point given what the Fed has done in the last three years.

The excess reserves held by banks has slowed down price inflation.  Likewise, unemployment and uncertainty in the economy has increase the demand for money (slower velocity) to a certain extent, which has also slowed down price inflation.  We could easily see this shift quickly.  When more people perceive that their dollars will be worth less tomorrow than today, then more and more people will start rushing to spend those dollars, thus driving up prices.  The Keynesians will get what they want in more spending and the American people will get it good and hard with dramatically increasing prices.

In listening and reading the people I respect the most when it comes to economic analysis, it is scary how much consensus I find.  Certainly people have different ideas on how things will progress (or maybe regress is a better word), but it is almost unanimous that there is major trouble up ahead.  We should hope that the American people (along with the rest of the people on earth) start withdrawing their consent from the federal government and that the troubles ahead will be short-lived.  We should hope that the trouble ahead caused by current policies is the start of a new era; an era of peace and prosperity with more liberty.

Here is what Wikipedia says about devaluation:
http://en.wikipedia.org/wiki/Devaluation

Here is what Wikipedia says about depreciation:
http://en.wikipedia.org/wiki/Depreciation_(currency)

Here is what Wikipedia says about debasement:
http://en.wikipedia.org/wiki/Debasement

Devaluation actually occurs within a fixed exchange rate system.  The last time there was a formal devaluation of the U.S. dollar was in 1971 when Nixon told foreign governments that they could no longer redeem their dollars for gold.

Depreciation occurs in a system of floating exchange rates.  Wikipedia says that depreciation refers to a decrease in the value of a country’s currency with respect to one or more foreign currencies.

When we look at debasement, Wikipedia says it is the practice of lowering the value of a currency.  It goes on to say that, “It is particularly used in connection with commodity money such as gold or silver coins.  A coin is said to be debased if the quantity of gold, silver, copper or nickel is reduced.”

All of these words seem to be used interchangeably.  In the entry for “devaluation”, Wikipedia says this is incorrect, but that they always refer to values in terms of other currencies.  But my question is, how do you refer to an increase in the money supply?  This used to be called inflation, but the definition of inflation was changed by the statists to refer to prices (which is actually just the effect of inflation).

I use these terms interchangeably with the knowledge that it is not technically correct in the financial world.  But I don’t really care about other currencies.  You could say that the dollar is not depreciating against the euro, yen or some other currency at some particular time, but that is not helpful if all of the central banks are creating new money and every fiat currency is becoming worth less in purchasing power.

I am not sure why Wikipedia says that debasement is used particularly in connection with gold and silver.  While these metals have a long history of serving as money, the major governments of the world have changed all of that and most money used today is paper money with no backing.  So just as the kings debased money by clipping coins, today the central banks of the world debase our money via money printing (or the modern version of creating digits on a computer).

Although the term devaluation was generally used with fixed exchange rates (which we don’t have any more), I really don’t think there is anything wrong with this term to describe monetary inflation.  When you “devalue” something, you are reducing the value of it.  This perfectly describes monetary inflation as far as I’m concerned.  The Federal Reserve or some other central bank creates new money out of thin air.  This reduces the value of the money that we already have.  It really is that simple.

The news has come that Osama bin Laden was shot and killed by U.S. Navy seals.  The conspiracy theories are already going strong and I’m not talking about Obama’s speech interrupting Donald Trump’s Celebrity Apprentice (although that is amusing).  The U.S. government is claiming that it dumped bin Laden’s body into the sea according to Islamic practice.  Since when has the U.S. government cared anything about Islamic culture or practices?  Ok, the U.S. government kills hundreds of thousands of people and wrecks the lives of millions more in Iraq and Afghanistan, but let’s make sure we give a proper burial (which it wasn’t) to the person who was on the FBI’s most-wanted list.  I’m starting to think the government likes seeing all of these conspiracy theories.

But let’s assume that the story is true.  Even if it’s not true, let’s assume bin Laden is dead and the story is accepted by most people.  What are the political ramifications, the economic ramifications, and the investment ramifications?  Unfortunately, while I wish this meant the end of the war on terror and the Patriot Act and all of the other horrible violations of our liberties we have had to endure, I think we will see more of the same.  This was just one man.  Give me over a trillion dollars and I could find one man on the planet too.  But there will be someone to take his place.  If that person is captured or killed, then someone else will take his place and on and on it goes.

Back to the conspiracy theories, there are certainly a lot of reasons that Obama and others would wish for a story like this.  The American people have been quite upset with their government and unfortunately many will give the government credit for this (again, who couldn’t catch someone with a trillion dollars at their disposal?).  Obama’s poll ratings have been low and there will be a certain segment of the population who, like idiots, will all of a sudden support Obama again.

But another theory is that this would give Obama an excuse to withdraw from Afghanistan.  During most times, governments and presidents like wars.  But the U.S. is in major fiscal trouble and will not be able to afford these big expensive wars much longer.  The Fed can’t keep printing money like crazy or it will risk hyperinflation.  If the government is forced to cut, I’m sure they would rather reduce military spending than cut Social Security and make voters even more angry.

I do not predict an end to the wars any time real soon, but having bin Laden out of the way certainly makes it easier to get out, politically speaking.  For now, I would count on more of the same.  We can expect the deficits to continue until the Fed is forced to stop creating new money.  Until that happens, it seems unlikely that the wars will end.  This story should not change our investment strategy of favoring hard assets over paper money.

I received a comment last week in response to my post about the possibility of a pullback in the near future.  A pullback seems less likely at the moment now after the Fed’s meeting and Bernanke’s press conference this past week.  However, I would still like to address the comment and add some more thoughts.

The question posed to me was, what would be good to have in a portfolio (presumably in the case of a pullback).  He says that his only current investments are in a 401k.

First, I should reiterate my opinion of 401k plans.  I don’t think you should ever contribute more than what your company matches.  The only exception might be is if you are trying to get your income low enough for a certain tax deduction or credit beyond the amount being contributed to your 401k.  If all you have is a 401k, I really would encourage you to do everything you can to get some more liquid funds.  If you can save some additional money, you can split it between gold and cash as an emergency fund.  If this means doing a second job for a while or cutting your costs, I think it would be worth it.  Obviously every person’s situation is unique, but I think my suggestion would apply well to most adults.

When I said that there may be a pullback, particularly in stocks and commodities, I was saying it as a speculation.  If all you have is a 401k, then you should really ignore most of my speculative advice, unless you have good fund choices and you can put a little more weighting into gold and commodities (for right now).  But a 401k is not meant for short-term trading and you may even get hit with fees for doing that.

I am a strong advocate of Harry Browne’s permanent portfolio.  I think it is good to view this as a home base.  If you put 80% of your investments into the permanent portfolio, that will leave you with 20% for speculation.  Let’s say your speculative investments do well.  For example, maybe you put half of it into silver and it has doubled in price.  If you are really uncertain about where things are headed from here and if you fear a pullback, maybe you could take the original amount you put into silver and shift that over to your permanent portfolio.

While the permanent portfolio can certainly go down, I consider it the best safety investment there is.  Cash by itself is not a safe investment because you are risking it being devalued by inflation.

Imagine playing a game where you have a home base for safety.  You can run away from the base and try to grab something, but you risk being hurt.  If you run out and get something, sometimes it is best to run right back to your safety base before trying to grab something else.  I look at grabbing things as your speculative investments.  I look at your home base as the permanent portfolio.

You should take as much time as you need at your safety base.  If you are unsure of what is going on around you, just stay put.  There will be other opportunities in the future.  You can wait for a long time before you are more certain that you can jump out and grab something without putting yourself at too much risk.

This is really a time to protect what you have.  There are a lot of risks right now and you should make sure you know them if you are speculating.  If you have absolutely no stomach for risk, then put all of your investments into a permanent portfolio setup.  You can sit back and enjoy the show while continuing to sleep at night.  If you want to take more risk, do it with a smaller amount of money.  You don’t have to hit the lottery.  Just make sure to protect the vast majority of your assets at your home base. Keep them safe from this risky environment.

This blog focuses on money and investments from a libertarian perspective.  To determine our investments, we must study the economy.  To study the economy, we must study politics.  This is unfortunate, but it is reality.  Unfortunately, politics plays a huge role in our lives and in the economy because politicians wield so much power.  While I wish it weren’t this way, we have to deal with the situation.

There are two things that will matter more than anything else in your long-term future when it comes to money.  The first thing is your own personal decision making and the actions you take.  The other thing is the state of liberty in which we live.  I suppose you could throw in luck as a third thing.

While it may seem we can’t do much to determine the future of liberty as individuals, it is important to at least know where we are headed.

Ron Paul has announced that he will form an exploratory committee in seeking to run for president.  With the success of his last campaign, I can’t imagine that there won’t be an even bigger following, with even bigger donations this time around.  So it looks like there is a good chance that Ron Paul will be running for president.  While the general election is in late 2012 and most of the primaries will be in early 2012, this year will be the big year for him.

I don’t think Ron Paul will become the Republican nominee.  Perhaps he is thinking that he can pull off what Reagan did in 1980 after not winning the nomination in 1976.  But I don’t see the Republican Party nominating Ron Paul as their nominee.  Rand Paul would have a better chance.  The main reason is foreign policy.  There are too many pro-war people in the party.  Ron Paul’s foreign policy stance of non-intervention does not appeal to these people.  I think Ron Paul will convert some people or at least get them to examine their position more closely, but I doubt it will be enough at this point.

For the cause of liberty, I strongly believe that the solution does not lie in politics.  The system is rigged in favor of big government.  There is no way that voting will solve our problems.  With that said, I was happy when Ron Paul ran for president 4 years ago and I am happy he is considering it again.  The reason is because it gives him a platform to reach out to so many people.  Look back at 2007 and 2008 and how many libertarians were created because of Ron Paul’s campaign.

As libertarians, we couldn’t ask for a better all-round person to get out our message.  He is honest, humble, and a great role model.  He does not come across as the typical politician.  Most importantly, he understands the issues of liberty clearly and he sticks by his principles.

It was a great move in 2007 for Ron Paul to run as a Republican.  It got him into the debates where he got incredible exposure.  Now that he is more well known and there is already a core group of supporters, I think he should run as a Libertarian (the party that is).  In a three-way race between Ron Paul, Obama, and the Republican nominee, I think Ron Paul could do some damage in attracting many independent voters and even some typical non-voters.  The best case scenario would be for him to just barely lose.  After all, why would we want him to win and inherit the total mess that there is right now?  I don’t think he will run as a third party candidate and I completely respect his decision, but I think he should ditch the pro-war Republican Party, except when he is running for his congressional seat.

Ron Paul has released a new book and he has been getting a lot of media attention in the last few days.  With his message and the internet as a tool to spread it, the future for liberty is actually brighter than you may think.  The best thing you can do to advance liberty is to continue to educate yourself and to educate others.  We will only achieve more liberty and less government when more hearts and minds are changed.  This will not happen in a voting booth.

Today was a first.  Ben Bernanke became the first chairman of the Federal Reserve to hold a press conference directly following a Fed monetary policy decision.  Perhaps Bernanke is trying to make the Fed more transparent.  Perhaps more likely, Bernanke is feeling the heat from Ron Paul and his following of Fed critics.

The Fed announced that it was maintaining the federal funds rate low for an “extended period”.  As Gary North has pointed out, the Fed isn’t really maintaining this rate.  The federal funds rate is the rate at which banks borrow from each other for overnight loans to settle accounts.  With most of the new money created by the Fed going into excess reserves at banks, most banks have no need to borrow money overnight.  They have plenty of money of their own.

Bernanke also acknowledged that the Fed would continue with its QE2 program (money creation) through the end of June as planned.  While he hinted that it would not continue after that, he also hasn’t ruled it out. Bernanke and the Fed are leaving their options open.  I really don’t think they know what to do at this point.  Bernanke is acknowledging that some price inflation is present now and he is also acknowledging that the economy has weak spots.

The reason the Fed is acting so cautious with its words and actions (not that tripling the monetary base has been a cautious action) is that these people really don’t know what to do.  The Fed is walking on a tightrope.  If the Fed keeps hiking up the monetary base, price inflation could quickly follow the monetary inflation.  With just today’s announcement, the stock market, oil, gold, and silver all shot up.  Gas is already expensive and getting more so by the day and food is probably not far behind.  The Fed really is risking a run on the dollar.

On the other hand, the Fed could pull back and stop its money creation.  It could even withdraw some of its previous “stimulus” money.  If the Fed does this, it risks a hard and deep recession and this is with the official unemployment rate near 10% already.  We should actually hope that the Fed chooses this latter course as it will be much better for the long run.

I think the most likely scenario is that we will see a lot of ups and downs and we will eventually see recession and significant price inflation at the same time, much like we saw in the 1970’s.  If we can get out of this like the 70’s, we would be very lucky at this point.

For now, I expect heavy volatility and I expect the uptrend to remain for oil, gold, and silver.  I’m a little more unsure about the stock market.  These really are unique times that we live in.  Let us hope that we don’t go to hyperinflation as that would truly be disastrous.  Let’s hope that we can slowly phase out the Fed and start using money like gold or silver as determined by a free market.