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.

Here we go again.  Last week, Obama said he would set up a task force to investigate potential manipulators in the oil and gas market.  Now Obama is calling for the repeal of tax breaks (in other words, increasing taxes) for the oil industry.

Obama is a typical leftist Democrat in that he likes to speak about helping the poor and about cracking down on the rich.  Yet, for someone who really understands economics and studies his policies, his actions are about the opposite.  If Obama were really serious about helping the little guy, he could take several steps to dramatically lower gas prices.

Obama could advocate a repeal of the federal gas tax.  He could advocate the repeal of regulations on the gas and oil industry.  He could advocate the selling of ANWR and other federal lands that contain oil (and this could have the added benefit of paying off some of the national debt).  He could also stop fighting wars in the Middle East and just allow Americans to buy oil from foreigners, instead of trying to occupy other countries for their oil

Most importantly, if Obama really wanted to help the little guy with lower gas prices, he could stop signing legislation that runs up the national debt, which in turn encourages the Fed to create more money.  The primary reason for high gas and oil prices is a monetary one.  The Fed has tripled the adjusted monetary base over the last couple of years and we should be surprised that oil is only around $112.

The reason that gas prices are so high is due solely to the Fed and the federal government.  Obama is trying to find a scapegoat for his failed policies by blaming oil companies and speculators.  He can talk about manipulators of the market, but the people he is talking about serve a legitimate function to the market process.  These people help the pricing process be more accurate and help direct supply and demand.  If speculators are right in driving up the price of oil, then it is signaling the market to find more supply and to cut back its use.

Meanwhile, the politicians of both major parties serve a function of distorting the market and making everything more expensive.  Then they talk about a problem that they created and try to pass the blame to anyone but themselves.  They are trying to take advantage of the ignorance of the general public.  I really do hope that most Americans wake up to this scam and realize that they are voting for the real enemy.

Today, the price of silver nearly reached $50 per ounce.  This is right around its all-time nominal high reached in 1980.  The run in silver over 3 decades ago became a bubble.  It all collapsed with a series of events, including Volcker’s Fed stopping the crazy money creation.  This also collapsed the gold price in dollars during that time.

After reaching a high of over $49 in early trading this morning, silver pulled back a little.  It is showing high volatility at this point, with huge gains made in just the last couple of months.  If you don’t have any silver or silver positions and you are looking to enter the market, now is a risky time to do it.  Silver will probably go above $50 soon, perhaps this week, and it may have further to run in the near-term.  But it has gone up really far and fast and you should not be surprised to see a significant pullback.  Whether the pullback will start at $50, $60, or some other number, is hard to say.

Although the U.S. dollar is depreciating significantly due to the Fed’s monetary inflation (now QE2), it is still wise to hold some cash on reserve.  It is always good to have some liquid money and you should have some on hand for pullbacks.  If silver ends up pulling back to, say, $40, then it will be a great opportunity to accumulate some.

On the other hand, if silver continues running, you might want to consider taking a little in the way of paper profits.  If you have a big position in silver or silver investments, then it might be time to consider a slight reduction in your position to lock in some paper gains.  50 dollars is a milestone and somewhat symbolic, so maybe that is the magic number to consider locking in some gains.

I still see the longer term trend being up for gold and silver.  Silver will be far more volatile.  You will get greater gains during the run-ups, like now.  You will also feel the pain more in the pullbacks with silver.  Until the Fed stops creating new money and the DC politicians are forced to address the debt, then precious metals will do well.  You should always hold a core position in your portfolio of gold and gold related investments.  I recommend 20 to 25%.  Silver is more speculative, but having 5% in silver may be a good idea.  With your speculative money in precious metals, remember to take some paper profits on the run-ups and to buy on the pullbacks.  We will continue to see fierce volatility due to the uncertainty of the dollar.

This is a hard question to answer.  First, notice that the question is about wealth and not money.  The reason is because of the constant depreciation of money.  We live in a world of fiat currencies where central banks are continually creating money out of thin air.  So we could say that having one million dollars makes you wealthy, but that may not be true 10 years down the line.

Another similar question is how much wealth you need to retire.  Again, it is hard to measure with money.  It is not like you can just buy a bunch of 30 year bonds and live off the interest.  If the dollar is devalued, then your fixed interest payments may not be enough.  We also don’t know what future interest rates will be and we can’t accurately determine what rate of return we will get on our investments.

We could measure wealth in gold, but even that can be a problem.  Because of the instability of fiat currencies, gold fluctuates wildly.  You can have bubbles in gold, at least in terms of dollars and other fiat currencies.  The price of gold went down in the 1980’s while prices went up.  The price of gold has gone up 5 times of what it was 10 years ago, but consumer prices have not risen that much during that period.

Gary North has written an article on debt.  The particular part of this article that I want to point out is his comments on housing.  He discusses someone who needs $5,000 a month before taxes in order to retire.  He says, “I tell them that they need about six 3-bedroom, 2-bath houses that generate $1,000 a month net income before income taxes.”

I think Gary North has hit the nail on the head with this one.  It really is a good measure of wealth and a good measure of what you need to retire.  If you own real estate that can be rented out, then you will be paid in dollars (or whatever money your country uses).  Since you use dollars to buy consumer goods, this is a good measure.  But it also solves the problem of inflation.  As the dollar depreciates, rents will go up.  Some of your other expenses like property taxes and maintenance may go up as well, but the increase in rent should far exceed this.

I am not saying that you need to buy real estate in order to retire (although I’m not discouraging it either).  What I am saying is that it is a good measure of wealth and you can use it as a yard stick.  If owning six houses, with no mortgage, will net you $1,000 a month and that is enough to live on, then you can calculate how much money you need right now.  If such a house sells for $150,000 where you live, then you need approximately $900,000 (6 x 150,000).  I would round it off to one million just to be safe.

But you have to make sure you invest it wisely to make it last, especially with inflation.  To protect your wealth, I have two recommendations: real estate as mentioned above and Harry Browne’s permanent portfolio plan.  Both of these plans help protect you against a falling dollar.

Gold has hit an all-time nominal high of $1,500 per ounce.  Silver has hit $45 per ounce, just short of its all-time bubble high of about $50.  For those who have been paying attention, it does not come as a surprise.  The Fed has tripled the adjusted monetary base in the last few years and the federal government has been adding about $1.5 trillion in new debt each year for the last couple of years.  The worst thing (and the best thing for gold) is that there is no sign of this madness stopping.

Yesterday, there was a piece on LRC featuring an interview with David Galland.  Galland is part of Doug Casey’s group at Casey Research.  If you haven’t read this interview, it is definitely insightful.  To sum it up, Galland is warning that there could be a big policy shift in the short term.  While his long-term outlook has not changed (more inflation and higher commodity prices), he thinks there could be a pullback in the not-so-distant future.

While I’m not making any predictions, I think his analysis is reasonably sound and I think the scenario he outlines is not only possible, but reasonably likely.  Galland is saying that there will be no QE3 this year.  He is expecting an announcement, perhaps following the FOMC meeting at the end of April, that the Fed will stop buying government debt.  The Fed will either cut QE2 short or just let it play out but not buy any more after that.  Just such an announcement could cause a big pullback in the stock market.  It would also likely strengthen the dollar.  In turn, gold and silver could see a sharp pullback.

I would give this scenario at least a 50/50 chance of happening right now.  I agree with his assessment that if the Fed does announce that it will stop buying, then we will see a significant pullback.  Unfortunately, it is hard to predict what the Fed will do.  I have already been surprised at just how much the monetary base has increased, so I shouldn’t be shocked if the Fed does do something as stupid as QE3.

Regardless of what happens, Galland believes that the long-term trend will hold.  If the Fed does hold off on QE3, then it will just come later after the economy goes through another round of beatings.  If Galland’s short-term prediction doesn’t hold and the Fed starts QE3 right after QE2, then expect gold, silver, and oil to go to the moon faster than even goldbugs could have imagined.