The end of a year and the beginning of a new year is always a good time to assess things.  The new year is just a date on the calendar, but for some reason people use it as a time to reflect and look forward.  People make resolutions for the new year, but they could just as easily do this in the middle of July.

As far as resolutions, there is nothing wrong with them and you should do them if they work.  However, you shouldn’t put off to January things that should be done before then.  Also, if a resolution consists of a good habit (like eating well or spending less), then this should be done year-round.  It is better to form good habits with exceptions than bad habits with exceptions.  It is better to eat well for most of the year but let yourself indulge during the holidays than it is to eat poorly for the year and then spend a couple of weeks in January trying out your resolution.

The end of the calendar year can be a good time to assess your situation in life and this includes your financial situation.  It is a good time to figure our your net worth and where you can do better financially.  You could just as easily do this in July or any other month, but will you remember to do it then?  That is why the end of the year is a good time.  You will be more likely to remember to do this exercise.

Take a piece of paper and write down your assets and liabilities.  Take your year-end statements from any 401ks, IRAs, brokerage accounts, bank accounts, etc.  Write down the amounts.  If you have anything else, estimate the value and write down the amounts.  Also, do this for your liabilities.  If you have car debt, a mortgage, or any other debts, write them down.  Figure out your net worth.  If you do not rent, figure out two figures.  Figure out your net worth with your house (minus your mortgage) and figure out your net worth without your house (also leave out any non-investments like cars or furniture).

After you do this, put this in a place where you can find it next year.  It may be in a filing cabinet or you may want to put it on your computer.  It will interest you to see what changes have taken place and if you are saving and investing the way you want.

In addition to this being a good exercise to seeing what you have done right and wrong, it is also good looking forward.  You can see where you can do better.  If you are not an active trader, it is also a good time to re-balance your portfolio.  If you like to keep an equal amount of stocks, bonds, cash, and gold, and stocks have gone up significantly in the last year, it is a good time to sell some stocks and add this to an investment that had done poorly.  Don’t count on stocks to keep going up.  Put your investments back into balance.

Again, you can do this any time of year, but you will more likely remember to do this at the end of the year.  You weigh yourself to see where you stand.  Do the same for your finances and step on the scale.

I was talking to a libertarian friend the other day who said that we would have hyperinflation in this country (the U.S.).  I said that I didn’t think it would happen here and we debated the topic.  I said that I would bet him 100 bucks that I would be right.  I figured that even if I was wrong, then I would be paying him 100 dollars that was basically worthless.

It is important to define hyperinflation.  Different people have different definitions.  Austrian free market economists talk about inflation as an increase in the money supply, which was originally the definition.  Most people today, when they talk about inflation, are referring to a general increase in prices.

The next question is what the “hyper” part means.  Does it mean an increase of 100% or more annually?  Does it mean an increase of 25% or more?  If someone says that hyperinflation means that prices will go up by 25% or more, then I wouldn’t disagree with them that hyperinflation is a good possibility.

My friend was defining hyperinflation as prices going up every day.  It means that when you receive a paycheck or other money, you will be running to the store to spend it on almost anything.  It means that the velocity of money is very high.

I don’t think this scenario is likely.  I think we will see massive inflation.  I think we may see prices going up 20% or 30% annually.  I think at that point, the Fed will pull back like it did in the late 1970’s and early 1980’s.  Bernanke is an elitist and a Keynesian, but he is not completely stupid.  I understand that hyperinflation has happened elsewhere.  I don’t think we are in the same position as Zimbabwe of a couple of years ago or 1920’s Germany.

You can never say never, but hyperinflation is not a high possibility in today’s world in the U.S.  The Fed cannot get away with things as easily now.  With the internet and the virtually free flow of information, there will be too many people that understand that the Fed and its increasing of the money supply is what leads to massively rising prices.

In addition, I don’t see why the Fed and bankers would allow this to happen.  They would be destroying themselves and the system that they built.  Gary North has made this point before.

When people talk of hyperinflation, I don’t know that they think through the ramifications.  If I thought it was coming here, I would be looking for another country to live in.  We have a high division of labor society.  We are not farmers like 1920’s Germany or 21st century Zimbabwe.  If hyperinflation happens, the trucks and trains will stop and there will not be food in your grocery store.  We are talking massive food shortages and riots.  You would not want to be here.

You should prepare your investments for a depreciating dollar.  You should expect 5 or 10 dollar per gallon gasoline in the next few years.  You should expect your grocery bill to double.  Let’s hope I’m wrong and it isn’t this bad.  If it is worse and we go to hyperinflation, don’t worry about your investments.  Worry about moving yourself to another side of the earth.

Merry Christmas to everyone!

Walter Block has an article on LewRockwell.com in which he lists all of the Austrian (free market) economists who predicted the housing bubble.  In it, he does give some interesting commentary about economics and making predictions.

Although I am not against making predictions, I always try to caution readers about them.  If I could predict the future with great accuracy, I would be richer than Warren Buffett and Bill Gates.  If there is one thing that Austrian economics teaches us, it is that humans act.  Because of this, it actually is impossible to predict the future with certainty.  For anyone who says they are 100% sure that something is going to happen (economically speaking), you would be wise to proceed with caution and take what they say with a grain of salt.

Because humans act freely, anything can happen in the economy.  Ben Bernanke could wake up tomorrow morning and read Mises and decide that he needs to stop expanding the monetary base at once.  He could take all of the Fed’s documents and turn them over to WikiLeaks.  Now of course this is highly unlikely and we can predict with a fair amount of certainty that this is not going to happen, but anything is possible.

We could be sure that interest rates will be going up in the next few months due to the fear of a depreciating dollar.  And while you may be correct that the dollar is depreciating, not everyone else will see things the same way.  There might be some rich investors who are waiting to buy bonds at the beginning of the new year because they think it is a sound investment.  There is no way for you to know this.

If Keynes got one thing right, it is when he said that the market can stay irrational longer than you can stay solvent.  This is so true.  Nothing is a sure bet when it comes to the economy.  The closest thing to a sure bet is that governments will be incompetent and corrupt, but there are even exceptions there at times.

This is important to remember when investing.  It is important to get a good education in free market economics and it can certainly help you in your investing strategy.  At the same time, human action always makes investing unpredictable at least to some degree.

I read an interesting comment a couple of weeks ago, but unfortunately I don’t know who to credit for it.  The person said that with the Fed’s announcement of QE2, it would give cover for the Chinese government to sell U.S. bonds.  The Chinese government has a little under a trillion dollars in U.S. bonds.  If and when the Fed keeps debasing the U.S. dollar, then the Chinese government will get paid back in dollars that are worth far less.  In other words, U.S. bonds may be a bad investment to have and the Chinese government has a lot of them.

Let’s say that Bill Gates wants to sell a bunch of his Microsoft stock.  He would not sell it all at once.  Doing so would tank the stock and he would get less money for the sale of his stock.  He would sell it slowly so that he could get as much as he can for it.  The same goes for the Chinese government or another major holder of U.S. bonds like the Japanese government.  To the individual bond holder, he can sell at any time and he doesn’t have to worry about moving the market in any significant way.  If a foreign government that owns hundreds of billions of dollars of U.S. bonds wants to sell, then it can’t just sell it all at once or it would crash the bond market.

With the Fed’s announcement of QE2 and buying $600 billion or more in U.S. bonds, it provides a buyer to those who want to sell.  All of a sudden, it would make sense for the Chinese and/or Japanese governments to sell their bonds since they have a willing buyer in the Fed.  This would have the effect of preventing interest rates from going lower, which is actually what we’ve seen since the Fed announced QE2.

This is all under the assumption that foreign governments would want to sell their U.S. bonds.  It makes sense to me why they would, but these politicians aren’t always that bright, so it is hard to say what their mindset is.  But don’t be surprised to see interest rates not go down while we see a big increase in the adjusted monetary base.  Wouldn’t it be ironic if the Fed’s big QE2 announcement to lower interest rates simply provides cover for the Chinese to sell their bonds?  It may be the perfect way out of the falling dollar for the Chinese and others.

The bond market is very unpredictable in the short run.  Other than a small portion for your permanent portfolio, I wouldn’t bet a lot either way on bonds these days.  There will be a good time to short the bond market.  It might be now, but I still wouldn’t bet against the Fed and its money creation.  Interest rates will eventually go up, but the Fed still may succeed in the short-term of keeping rates fairly low.

For anyone who has been paying any attention, the U.S. government is in over its head in debt.  The national debt is almost $14 trillion and the unfunded liabilities (mostly Medicare and Social Security) are estimated at as much as $100 trillion or more.  This will never be paid.  The “benefits” for Medicare and Social Security will be cut.  It is just a question of when, how much, and by what method they will be cut.

Now what about the national debt?  To pay back $14 trillion isn’t totally impossible.  It would take considerable restraint and discipline by the government, so I guess it really is impossible from that aspect.  It is an interesting question for libertarians on what to do with the national debt.  Some libertarians believe that the debt should be paid back because the government entered into a contract with others.  There are many holders of U.S. bonds including foreign governments, foreign citizens, U.S. citizens, U.S. corporations, and the Federal Reserve.

It seems that the libertarian thing to do is to honor contracts and that usually is the case.  There is a major problem here though.  These contracts are not legitimate from a libertarian standpoint.  The U.S. government has sold bonds to others with a promise to repay the buyer with the interest agreed upon.  But the problem is that the government does not create any wealth of its own.  The only wealth the government has is by confiscating it from others, whether through taxation or inflation.

If person A loans person B some money and person B agrees to pay back person A by stealing money from person C, then this isn’t a legitimate contract.  If person B is broke, then person A should take the fall, not person C.  Person C did not enter into the contract.  Just because his name was on the contract doesn’t mean he should have his money stolen from him for person B to make good on his contract.

The same holds true for the government.  Since the government has to confiscate (tax) Americans to pay for the bonds, then the contracts are not legitimate.  The bondholders should take the fall.  The only other option is to treat it like any corporate bankruptcy.  You liquidate the assets and pay off the creditors.  In this case, the federal government should sell off its properties to make good on at least some of its promises.  Although we can’t know the amount, there is property worth at least hundreds of billions of dollars, but probably more like trillions of dollars.  There are forests, national parks, oil fields, government buildings, government monuments, and many more things to auction off.  These should be sold to the highest bidder and the funds can be used to pay off bondholders (at least a portion) and those currently dependent on Social Security and Medicare.  This is similar to what Harry Browne suggested when he ran for president.

The government does not want to default, but it will be forced to eventually.  It will default through inflation first.  It will be painful.  At some point, it may default outright.  From a libertarian standpoint, this would actually be a good thing as compared to the alternative of hyperinflation.

There are a lot of mixed emotions on the latest legislation to extend tax rates and increase spending.  The legislation extends the current income tax rates for 2 more years.  The estate or death tax goes up, but not quite as much as what was scheduled to happen.  The payroll tax on the employee portion of Social Security will be cut from 6.2% to 4.2% for one year.  Meanwhile, the legislation also includes increased spending, particularly an extension of unemployment payments.

The Republicans and Democrats compromised on this.  The Republicans got the tax cuts extended and the Democrats got more spending.  Meanwhile, we all get a bigger national debt.  Ron Paul supported the legislation because he said doing nothing would mean that taxes would rise.  I almost always agree with Ron Paul’s votes, but I disagree with him on this one.  I completely understand his position and I am sympathetic towards it, but I think he should have voted no.

This legislation was a bribe to get the tax rates extended.  Other than the payroll tax being cut, this was not a tax cut.  This was preventing current tax rates from going higher.  If the tax part of this bill had stood alone as its own bill, then it would be appropriate to support it.  But it wasn’t.  This was legislation that contained good and bad.  Ron Paul has typically voted against such legislation.

Extending unemployment is a joke.  If someone can’t get a job after 2 years, they are either severely handicapped or they are just not trying hard enough.  Obviously 99.99% of the people fall into the latter category.  It is understandable.  If you are collecting unemployment checks and you can’t find a job making significantly more, what is the incentive?  There are many people that wouldn’t be looking for a job anyway.  Some people may have wanted to leave the workforce anyway and unemployment payments are just icing on the cake.  Any person that is not severely handicapped can find a minimum wage job within 2 years.  The government is just encouraging unemployment.  Unemployment paid by the government is unconstitutional and unlibertarian to start with.  Having it go for longer than 2 years is just plain ridiculous.

This legislation will just add to the deficit and debt because it doesn’t address spending.  The federal government keeps on spending money like crazy and there seems to be no end in sight.  The end will be when the Fed has to stop buying bonds because of massive inflation.  Then interest rates will go really high and the government will be forced to cut back.  Then we will get a depression.  This is all reasonably predictable.  The hard part is trying to time it.

Robert Murphy has written an article discussing the payroll tax cut and its possible effect on unemployment.  Murphy is a clear writer and clear thinker.  This article today may be a little bit harder to follow than some of his other material, but you can still get a good idea of what he is talking about even if you don’t understand his graphs.

The gist of the article is saying that the payroll tax cuts probably won’t help the unemployment situation and may even hurt it.  Obama and the Republicans compromised on a tax and spending package.  It will retain the current income taxes and, like most things coming out of DC, will increase or retain spending on programs such as unemployment.  The other piece of the legislation is that it will cut the Social Security payroll tax from 6.2% to 4.2% for one year, but just on the employee portion.

In this article, Murphy discusses and confirms comments by Bryan Caplan.  Basically, he says that by reducing the employee portion of the payroll tax and not the employer portion, it could actually cause an increase in unemployment.

This makes some sense.  There are several ways to reduce unemployment (reducing government), but basically wages need to fall or productivity needs to increase.  If we have high inflation in the future, this could help with unemployment in one sense because it could reduce real wages even if people don’t see a number reduction on their paycheck.  In giving a payroll tax cut to the employee, it actually increases their take home pay.  This has actually increased wages, in a sense.  But we need wages to fall if the market is going to clear the unemployment problem.

Aside from this argument, the problem once again is spending.  The Republicans and Democrats compromised.  The Republicans got tax cuts and the Democrats got more spending.  We need lower taxes with lower spending.  This whole thing just adds to the deficit and the debt and brings us closer to the day of reckoning.  We should take advantage of any money that we can get now and convert it into real assets, whether it is gold, silver, housing, food, or toilet paper.  You don’t want to be in dollars when the massive inflation comes.

There are many fallacies that exist in the world of economics.  One of the worst fallacies is the Keynesian myth that spending drives the economy.  Spending does not make someone or a nation rich.  Almost everyone likes to spend.  The problem is having the money to spend in the first place.  In the case of an entire nation, the issue is production.  You can only buy something that is first produced.  If spending was all that mattered, then everyone on earth would be rich.  Don’t you think that people in poor countries around the world would like to buy things as much as Americans do?

To go along with this myth, there is another economic issue in which we need clarity.  Even some libertarians don’t understand this point.  Hoarding money does not hurt the economy any more than spending helps the economy.  Many people think that if people aren’t spending, then they should at least be investing or loaning their money out.

Let’s walk through this carefully.  Let’s say there is a billionaire who decides to take a billion dollars and put it under his mattress.  If this is too extreme of an example, let’s say he puts his money in an offshore bank and for the sake of argument, let’s even say that the bank keeps all of the money in reserve and doesn’t lend it out.  Is this billionaire hurting the economy?  Not only is the answer no, but I would argue that he is helping the economy.

Let’s say you build a shed from scratch.  You cut down a tree in your yard, you saw up the wood, and you hammer it together to make a finished product.  You then sell your shed to your neighbor for $100.  At that point, you take your $100 and you put it under your mattress, you bury it in your yard, or you burn it.  The point is, you don’t spend the money or loan it out or invest it.  You just did the economy a favor.  You just built a shed for free.  It wasn’t free to your neighbor who spent his $100, but it was free to society.  You just deflated the money supply by $100.  Now everyone else that owns U.S. dollars has just benefited by your action.  Their money is now worth more than before because you took $100 out of circulation.  Of course, one hundred dollars is negligible, but the point stands.  Everyone benefited at your expense.  You labored and made a shed and you did it for society for free.  There is one more shed in existence now that didn’t exist before and you still haven’t consumed anything for your labor.

The same thing happens with the billionaire.  Assuming he made his money honestly by selling his labor or goods and services, then the billionaire is doing society a favor by hoarding his money.  It is less money to bid up prices.  It makes things just a little bit cheaper for everyone else.

We so often hear that you should help the economy by going out and spending some money.  It is really the exact opposite.  If you want to help the economy, take your money and hoard it.

The news on real estate continues to be bad, at least for those owning real estate.  Since the government tax credits (subsidies) expired earlier this year, housing sales have struggled.  Now interest rates have gone up in the last few weeks, which makes housing seem even more bearish.

Today, there is an article saying that foreigners are flocking to Florida for real estate bargains.  This should not be surprising.  Prices are way down from where they were 4 years ago, interest rates are still relatively low, and it is even more attractive to foreigners because the dollar is weak.  Some foreigners may be paying one quarter of what they would have paid 4 years ago due to the huge drop in prices and the weaker dollar.

It really astounds me how many articles are out there saying, essentially, that you’d have to be an idiot to buy a house right now.  Unless these people were saying the same thing 3 or more years ago, then they are not worth listening to.  If someone thinks that only an idiot would buy a house right now, then what does that make someone who actually bought a house 4 years ago that is now only worth half of what was paid for it?

If you are considering buying a house, then you should do it for the right reasons.  If you are going to live in it, then it is a consumer good you are purchasing.  You should be able to afford it.  If you are buying a house as an investment, then you should be able to afford it and you should be able to get positive cash flow from it.  If you meet these criteria and you plan to own it for a while, then there is absolutely nothing wrong with buying right now.  You can find some really good deals in some areas and you can still get a relatively low interest rate on your mortgage.

While housing will continue to struggle with the down economy, high unemployment, and a lot of foreclosures, I think it will be ok longer term.  This is not a prediction, but if I had to guess what housing prices will look like in 5 years, I think they will be down in real terms (adjusted for inflation), but I think they will be up in nominal terms.  In other words, housing prices may not keep up with inflation in the next few years, but prices will still be up from where they are now.  Food and gasoline are likely to go up in price by a greater percentage.

As the dollar weakens and price inflation starts showing up more, people will get back into housing for the simple reason that a house is a hard asset.  The Fed can’t print houses like it can money.  If you buy a house now with a 30 year fixed rate mortgage, there is a good chance that your last payment in 30 years will be about the equivalent of a nice dinner.

During the Great Depression, there were runs on banks.  Even though the Fed was printing money, the runs on banks led to, in effect, a contraction of the money supply, due to a reversal in the fractional reserve lending process.  Out of this, came the FDIC, another Roosevelt government program that is still causing massive damage to this day.

It sounds scary to most people today when they consider a world with no FDIC.  After all, how are they supposed to be assured that their money is safe?  First, it should be pointed out that there are no guarantees in life no matter what.  There are a million different ways that you could lose your money, with or without the FDIC.  Second, with no FDIC, consumers would actually pay attention to the solvency of banks.  Now you many think that you don’t have the time or knowledge to research banks, and that would be the case for most people.  But like anything else in our economy, it would be done by the whole market.  You are not a mechanic and yet you manage to buy a car.  You are not a farmer or food inspector and yet you manage to buy safe food.  It would be the same with banking.

The FDIC has created huge moral hazard.  Banks have taken on far more risk than they ever would without this insurance.  In addition, it is the Federal Reserve with its power to create money out of thin air that allows the FDIC to exist.  Without the Fed, the FDIC would not be able to guarantee deposits.  The FDIC would be broke in no time.

This whole system creates a huge problem.  It is one of the reasons for the panic that happened 2 years ago.  It was one of the reasons for the huge bailout.  If there had been no bailout, there would have been bankrupted banks with depositors losing their money.  Then the FDIC would have stepped in and gone broke.  Then the Fed would have bailed out the FDIC.  This chain of events would have been better, because at least the bailouts would have just gone to depositors and would not have propped up failing banks.

In a libertarian world, there would be no Fed and no FDIC.  The best case scenario now is to phase out the FDIC.  Everyone would be surprised by the changed behavior of the banks.  You might have to start paying a fee to have a checking account with a bank.  But at least we wouldn’t have huge bailouts and a constantly depreciating currency.

The FDIC is a tough issue for libertarians.  Should depositors be stiffed?  How do we go about eliminating the FDIC without causing a major crisis?  Do we abolish the Fed first or the FDIC?  Or do we abolish them in tandem?  There are a lot of interesting questions.  One thing for sure though is that there is no place for the Fed and the FDIC in a free market.