Austrian economics is a term used for free market economics.  It is named so not because Austria had or has a free market economy.  It is named so because the people who originally studied and advocated it were from Austria.  The best place to read up on Austrian economics is the Mises Institute, which is named after Ludwig von Mises.  Although there were some that came before him, Mises is really the epitome of Austrian economics.

So what is the difference between Austrian economics and libertarianism?  Can you advocate Austrian economics without being a libertarian?  Can you be a libertarian without advocating Austrian economics?

There is a difference between the two, besides the obvious.  Obviously Austrian economics just deals with economics, while libertarianism deals with all issues political.  But the differences do go beyond that.

First, there are some people who call themselves libertarians, but they don’t necessarily follow Austrian economics.  It could be contested whether these people are actually libertarians, but they are going to call themselves whatever they want.  For example, there are followers of Milton Friedman who would describe themselves as libertarians, but these people obviously aren’t the radical libertarians that would be more likely to follow Austrian economics.

But there is another point to be made here.  It is possible to be a follower of Austrian economics without being a libertarian.  It is a strange thing to think because it is so rare.  I have seen this pointed out before, but don’t have a link available right now.  I believe it may have been Walter Block who made this point.

With libertarianism, it is really just an advocation of what the law should be.  If you are a libertarian, you think there should be laws against murder (whether this is a government law or private law).  You think that laws should prohibit the initiation of force and perhaps enforce contracts.  You don’t think there should be laws which redistribute wealth or make things a crime where there is no victim.

Austrian economics is the study of free market economics and uses human action as its basis.  Most followers of Austrianism would advocate laws permitting a free market environment.  But you could technically be a follower of Austrianism and still advocate statist policies.  You could have a politician who understands the Austrian Business Cycle Theory and also understands the other evils of monetary inflation.  Yet, he might care more about his job and pleasing his constituents and advocate statist policies.  He understands that these policies are not good for most people (although he probably wouldn’t say that), but he acts in his own short-term self-interest by advocating bad policies.

I see morality playing a big difference between the two.  Libertarianism really involves moral principles. You can certainly advocate utilitarian outcomes with libertarian policy, but it tends to be backed by moral arguments as well.  While many Austrians will, for example, call taxation theft, it really does not go to the heart of Austrian economics and is more of a libertarian argument.  Austrian economics tells us that humans act freely and that government interference in the marketplace will likely lead to bad and unintended consequences for the general populace.

So while these two terms overlap, there can be a difference.  You could have someone study Austrian economics to help them with their investing and yet they may not care one iota about living in a free society.

There was an article on LewRockwell.com by Michael Pollaro.  The full article can be read here.  He is obviously a supporter of Austrian economics, or at least he likes to use it for his analysis.  I think he makes many valid points and I certainly don’t want to step on someone’s toes who is promoting Austrian economics.

With that said, I would like to point out a disagreement I have with something he wrote and I believe it is relevant in studying the current economy.  About halfway through his article he writes, “First, the Federal Reserve may be ending its current QE II asset monetization program, but it’s not it seems looking to hike its zero to 25 basis point targeted federal funds rate any time soon.  And that means it will more than likely be having to supply at least some base money to the banking system (whether that be through Federal Reserve loans or asset purchases) to keep the federal funds rate in check.”

He goes on to say, “Second, and far more important, the private banking system will by June’s end be sitting on somewhere between $1.6 and $1.7 trillion in excess reserves, meaning the fuel for the banking system to expand the money supply is in a word explosive.”

This guy knows what is happening on the one hand, but then contradicts himself on the other.  Let me explain.  He is right that there are massive excess reserves held by the commercial banks.  Usually, banks are only required to keep about 10% of deposits on reserve.  They would typically loan out the rest and hope that not everyone comes to withdraw their money all at once.  This is fractional reserve banking.

Since the Fed started creating massive amounts of money in the fall of 2008, most of this new money has gone into banks as excess reserves.  In addition, the Fed now pays interest on money held at the Fed as excess reserves.  Although the rate is currently .25%, it is still better than nothing for these banks.  With the economy still shaky, banks are afraid to lend and are keeping huge excess reserves instead of what they have typically done, which is lend out 90% of the money on deposit.

Now, what is the federal funds rate?  It is the rate charged on overnight borrowing for banks.  If a bank falls below their required reserve ratio of 10%, then it will borrow money overnight to settle its accounts and remain in compliance.

But since most of these banks have huge piles of reserves, why would they need to borrow money so that they don’t fall below their reserve requirement?  The answer is, they wouldn’t.  Therefore, contrary to what Pollaro says, the Fed will not have to supply base money in most cases to the banking system.  The Fed doesn’t have to do much of anything right now to keep the federal funds rate near zero because most banks don’t need overnight loans as long as there are huge excess reserves.

This point was made in an article by Kel Kelly.  He says that “the banks – not the Fed – are in charge of interest rates.”  He basically says that the only way the Fed can raise rates is by paying the banks significantly higher rates on their excess reserves.  He also points out that this would likely cause a recession.

I think the biggest thing to take away from this whole thing is that we should not pay too much attention to the federal funds rate right now.  This is not driving the Fed’s monetary policy.  We should pay attention to what the Fed is doing directly and what the banks are doing.  In other words, monitor the adjusted monetary base and the excess reserves held by banks.  Don’t pay much attention to the federal funds rate, especially now with the banks holding huge amounts of excess reserves.

You can view the short-term chart of the adjusted monetary base here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

It had pulled back slightly for a few weeks, but it has resumed up.  It should go up some more through the end of June at which time “QE2” is set to expire.

We should continue to monitor this closely.  The Fed is playing with fire here.  The central bankers must really be scared of falling back in to recession (if we ever actually got out).

It will be even more interesting to see what happens after June.  I think it will depend on price inflation and the overall economy.  If price inflation picks up even more, then we should expect the Fed to stop expanding the monetary base for a while.  If the economy turns down again and unemployment starts going back up, then we should expect more money creation.

The most interesting scenario will be when we have high price inflation along with a down economy.  Then the Fed will really have to choose on whether to save the economy or save the dollar.  The economic crash will come eventually.  We just don’t know when it will be and how big it will be.

Things are tough right now in the U.S. and throughout much of the world.  In some ways, things have never been better.  We have access to more information than ever.  We can communicate with anyone, even if they are on the other side of the earth, and there are many ways to communicate.  We have computers that are exponentially greater than those of just a few years ago.  We have big screen televisions with great picture quality at a price that would have been unimaginable just 10 years ago.

Yet, with all of these new great technologies, our standard of living is going down in other ways.  Our basic needs are more expensive.  These include medical care and food.  You could also include housing if you ignore the peak of the boom from 5 years ago.  In the 1950’s it was common for the man to go off to work and for the woman to stay home and take care of the kids and keep up the house.  This has become increasingly difficult for families to do.

Part of this can be attributed to the fact that we want our gadgets like televisions and cell phones.  But it is hard to believe that this is the main reason, especially when these new technologies get cheaper and cheaper.  I believe the primary reason is government.  In the last 50 years, government has grown by leaps and bounds.  Some periods have been worse than others, but it has been a continuous trend of more laws, more regulations, and more taxes.  In addition, the U.S. has been completely off the gold standard since 1971.  This has allowed more tampering by the Fed.  Inflation redistributes wealth and it misallocates resources.  This is harmful to production in our society.

If you add up government at all of the levels (federal, state, and local), we fork over about half of our income to the government and this doesn’t even account for all of the things made more expensive due to government mandates and regulations.  It is not hard to believe that the average American is struggling financially.  Until the American people stop allowing politicians to have so much power, there will be more of the same.  There is certainly an economic limit as to how far the government and the Fed can destroy things, but the day of reckoning won’t be pretty.

The Fed has tripled the adjusted monetary base since 2008.  This is unprecedented.  The federal government is running deficits of over 1.5 trillion dollars.  This is also unprecedented.  The national debt is almost 100% of GDP.  There is no sign that any of this madness will stop.  The only thing that will stop it is the laws of economics.  The government will eventually have to tighten its belt or risk destroying the dollar completely.

The government surpassed the debt limit this week.  Now they are playing accounting games and borrowing money from government pensions.  They are adding problems to the already existing ones.  The politicians want to try to delay the day of reckoning.  They may succeed for a little while longer, but it seems that they are running out of tricks and don’t have much more time.

You should take every precaution you can at this point to get your financial house in order.  You should be prepared for some rough times ahead.  Don’t get caught off guard.  Most Americans can sense that something is wrong, but most don’t understand the magnitude of the problems we face.  I think with technology and an increasing awareness among Americans, we will see a rollback of government eventually.  Until then, you should be prepared for some hard times.

With the Republican presidential primary starting to heat up, now is a good time to discuss supporting political candidates.  I am doing this from a radical libertarian viewpoint.

First, the most difficult thing for most people to realize is that our solutions will not be political.  Solutions to our problems and movement toward a more peaceful society and more free market society will not come about with political candidates.  It will come about with a change in public opinion and with technology.

Ron Paul has had a big effect in favor of liberty.  He has been mostly ineffective in getting legislation passed up until this point.  His big impact has been educating others, whether he realizes it or not.  I say that we should not rely on political solutions and yet Ron Paul is a politician (although not a typical one).  But he has used his political position not to pass legislation, but to use it as a podium.  It has given him a platform from which to spread his message of liberty.

My next point is, that while I don’t think we should rely on political solutions, I am not against voting or supporting political candidates.  Even if you consider yourself an anarchist, there is nothing wrong with voting if you think it will further the cause of liberty.

With all of that said, if you are going to support a political candidate, you should make darn sure that he or she is really on your side.  In most elections, you simply should not vote or else you should write in a name that is not on the ballot.  Although it will vary depending on where you live, I would say that you shouldn’t be voting in at least 90% of races.  Voting for the lesser of two evils will not usually get you very far.  Besides the fact that your vote probably won’t make a difference, the lesser of the two evils will most likely turn out to be evil.

If you are going to support someone, I understand that the person doesn’t have to have the exact same thoughts and opinions as you.  I do not agree with Ron Paul on 100% of the issues, but I will support him.  When I say “support”, I mean that I will encourage others to support him and donate money to him.  Whether I switch my party registration to Republican and actually vote for him, I don’t know.

The reason I will support Ron Paul is because I know he is real.  He does not back down and give you some political garbage that he thinks you want to hear.  He has a track record of consistency (in a good way) and he is specific in what he will do.

I don’t think I could support any other Republican candidate for president and I certainly would never support Obama.  Therefore, I will most likely vote third party or not at all, if Ron Paul does not get the nomination.  I would only consider Gary Johnson if he starts offering specifics that I like and he is saying it with force.  For example, if he said he would end the federal war on drugs and pardon all non-violent drug offenders convicted of a federal offense, then I would support him if I thought he was serious.

There are no other Republicans worthy of support if you are a libertarian.  Herman Cain is a fraud.  He will support the bankers.  He is in favor of the Fair Tax because he is not interested in dramatically cutting spending.  If he did want to cut spending, he could advocate eliminating the income tax and replacing it with nothing.

Newt Gingrich is a total fraud.  He sat there with Nancy Pelosi and talked about the dangers of global warming.  Mitt Romney instituted Obamacare in Massachusetts before Obamacare even existed.  Even Michelle Bachman, who sometimes sounds half decent on fiscal issues, cannot be trusted.  She is a militarist and she is not specific and forceful enough on domestic issues.

If you are a libertarian,  I would suggest you support Ron Paul.  Aside from him, there are not many candidates to support for other offices.  Only concern yourself with politics in that it can affect your life and your money.  You should know what is going on so that you will know what is coming.  However, if you want to make an impact in advancing liberty, then try to stay away from too much political activity.  Instead, concentrate on educating yourself and becoming a better spokesman for liberty.  Continue to spread the word and try to live your life in the best way that you can so that you are not dependent on the state.

Austrian economics is a valuable tool in understanding the economy.  There is a lot of bad information in the mainstream when it comes to economics.  The establishment is made up of mostly Keynesians or some variation.  The government school system is much the same way.  That is why we have to hear these ridiculous claims that we need more spending to help our economy.

The policies instituted by the government and the Federal Reserve dramatically affect the economy as a whole.  In turn, the economy dramatically affects your investments.  Can understanding Austrian economics help you be a better investor?

I think the answer is “yes”, but in a very limited way.  There are some good investors out there who do not understand Austrian economics and there are a lot of people who have a decent grasp of Austrian economics who are not good, or at least not above average, at investing.  Warren Buffett is certainly no Austro-libertarian, but he has certainly done well with his money.  Perhaps this is a bad example since his father, Howard Buffett, actually was a libertarian.  Maybe Warren picked up a few things, even if he doesn’t admit it and sounds like a statist most of the time.

If you understand Austrian economics, then the most important thing you should understand is human action.  I’m not talking about Mises’ book, but just the fact that humans act.  The government constantly comes up with some new law or program that is supposed to achieve something and it turns out to be bad.  Often, it turns out that it does the exact opposite of what it was supposed to achieve.  Part of this is because of the nature of politics and the inherent corruption.  But part of this is also because of human action.

The government can double a particular tax and expect to pay for some new program as the politicians expect that twice the amount of money will flow in.  But that is in a static world where nothing changes.  If you double the taxes on some good or service, people may find alternatives or buy it in the black market.

It is important to remember the concept of human action when you are investing.  In fact, this should always be in your mind.  If you think that a particular investment has to be a winner, you should think again.  You may have done some great research and analysis.  The so-called fundamentals may all look favorable for your investment.  The problem is, your prized investment may still end up losing you money.

Just look at the bubbles that occur (primarily due to monetary policy).  If you looked at the fundamentals, housing should not have continued to go up after 2004.  Tech stocks should not have continued going up after 1997.  Yet, these things kept going for a while longer.

At the same time, you might think that some stock just has to go up in the near future.  But if few other people become as bullish as you, then it won’t go up.  It all depends on the thoughts and actions of millions of other people.  It really doesn’t matter what you think should happen.  What matters is how others act.

Austrian economics can definitely help us with our investing.  Most people, including investors, have little understanding of monetary issues.  If the Fed is creating new money out of thin air and the government is running up massive deficits, we can take a good guess that commodities will probably do well.  Again, there is no guarantee because it is all subject to human action.  But we can make a reasonable prediction that most humans will act rationally and the additional money and debt will likely motivate others to buy gold and other commodities.

We should use our understanding of Austrian economics to our advantage in the investing world.  Most others do not understand it or even know of it.  Just remember the most important point that humans act and because of human action it is impossible to predict the future with certainty.

The Irish government has announced plans to tax its citizen’s private pensions.  Ireland has a lot of problems, like many others of Europe, in that the government has been spending way beyond its means.  The government is desperate and is trying to come up with ways to narrow its deficits.  Since some people want a free lunch and the government wants to continue spending, it only makes sense for the politicians to raise taxes (at least from their perspective).

The first Republican presidential primary debate was held last week.  Only 5 candidates participated, two of whom were Ron Paul and Gary Johnson.  For anyone following politics and particularly for libertarians, Ron Paul is fairly well-known now.  That should give us a lot of reason for optimism, but that is a subject for another day.  Gary Johnson is not as well-known by most Americans and even many libertarians.

Gary Johnson was the governor of New Mexico from 1995 to 2003.  During that time, he vetoed about 750 bills, which was more than the other 49 states combined.  He is in favor of legalizing marijuana and is an advocate of lower taxes and less spending (state and federal).

So what is not to like about that record for a libertarian?  First, I think he did do an excellent job as governor when you compare him to anyone else in the last 15 years.  My criticism of him in regards to his time as governor is only that he did not leave a more permanent mark.  New Mexico is certainly in better shape right now than many other states, especially when you look at nearby California.  But New Mexico is not exactly a libertarian paradise either.  I understand that the governor (just like a president) only has so much power and that the legislature is a major piece of the puzzle.  However, state education continued to be funded along with many other government programs that do not come close to fitting into the libertarian view of things.

This is similar to the way I view the Reagan presidency, although I’m much harder on Reagan because government actually expanded quite a bit on his watch.  But even if Reagan had kept spending under control (which he didn’t) and he had balanced the budget (which he didn’t) and he had not started any wars (which he did), it would still be hard to give him a lot of praise.  If the person leaves office and things go right back to where they were before, how much good did they really do?

If a libertarian is going to become governor or president, I want him to dismantle the government.  If the legislature is not cooperative, then just veto every single spending bill that there is.  In addition, take your case to the American people on an almost daily basis, talking about the proper role of government.  Repeat often that it is not the government’s job to provide education, to eradicate drugs, to provide healthcare, etc.  This is what I would expect from a good libertarian governor or president.

I think Gary Johnson’s presence in the debates will be good.  It adds confirmation to some of what Ron Paul is saying.  I think most Ron Paul supporters will stick with Ron Paul.  Most people who support Ron Paul want someone who is radical in the defense of liberty.  They will not sell out to someone who has a watered-down message.  Ron Paul and Gary Johnson both present common sense viewpoints on why government doesn’t work.  Ron Paul adds in morality.  He is not afraid to point out that government is force.  Ron Paul will speak more philosophically as well.

I don’t think Gary Johnson has much of a chance of getting the nomination.  I think Ron Paul has a better shot, but unfortunately I think there are too many pro-war Republicans to allow this to happen.  Either way, it is good news that both Paul and Johnson are getting some attention.  It is time that Americans start to hear a more libertarian message.

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.