CurrencyTrading.net has a thoughtful article on what a Ron Paul presidency would do to the U.S. dollar. The author, Jessica Hupp, weighs the risks and benefits and concludes that a move to a commodity or gold standard would be the right move in the long run.

I agree that our dollar is “on shaky ground” and that we may have some choppy times ahead, with or without the kinds of reforms that Ron Paul has advocated for 25 years. If you’re aware of the ways in which the U.S. economy is currently shifting downward, then you may feel like I do that change is inevitable. Therefore, an intentional switch back to the gold standard (with all of its short-term risks) would be far better than ignoring the fundamental problems in the economy.

If you’re curious about Ron Paul and his views on the economy, I invite you to read the aforementioned article. Taking it a step further, you might also be interested in the liberty dollar which I recently started “investing” in. I think of it as an investment in a philosophy as well as a commodity.

Learning the fundamentals of economics has become a kind of a hobby, rewarded by a few glimpses here and there into the netherworld of the current hedge fund crisis and related incidents. It can be a little confusing, for sure. But after reading a fascinating article by Scott Thill, “The Crash of 1929: Are We on the Verge of a Repeat?” the light of understanding has illuminated my mind. I can finally put my finger on the economic worry at the back of my mind. I’ll call it “Fractional Reserve Brokeraging.”

Banking was invented about 500 years ago as a way of keeping money safe, providing easier transfer of ownership of real money such as gold and silver through certificates, and of course as a way of creating capital for investment.

For the few people who owned banks, things really got interesting with the discovery and invention of Fractional Reserve Banking. Bankers knew that not everyone needed all of their gold all of the time—in fact, only a fraction of the clients needed a fraction of their deposits at any given moment. Using this knowledge, bankers would extend “credit” to people by essentially offering them money out of thin air and requiring that they pay back the loan in real gold. It was a brilliant idea that helped fund many ventures, made bankers into international power brokers, and generally helped Great Britain and other European powers expand their empires. (For a fascinating historical documentary on the origin of money, banking, and its influence in wars and politics, see The Money Masters.)

But the general level of trust in the bank can rise and fall with current events, and if it falls far enough we know there can be a run on the bank. In that situation, it’s possible that if enough people want to withdraw their deposits at the same time (trade their paper money for real commodity money such as gold or silver), the bank will suddenly be caught without its cover—and without enough actual assets to be withdrawn, the result is bankruptcy. The bank is discredited and a lot of people lose their savings.

In modern investment practices, there is a kind of activity that is strangely similar to this “fractional reserve banking” that allows money to be created out of thin air. It’s called a “naked short”. Essentially, a naked short is an IOU (”I Owe You”) on a stock. Rather than paying money and getting a share in a company, you can pay money (through a broker) and get an “IOU” for that share instead. Apparently, this has permitted a huge sum of money to be created and floated through the markets via hedge funds. It’s essentially the same as a bank making a bet that only a certain fraction of gold will need to be in circulation, and so it can print more paper money than it actually has in gold reserves. Likewise, naked shorts allow brokers and investors to create more stocks than actually exist.

When traders realize that an IOU is not precisely the same thing as a share, the game turns into musical chairs and we wait to see who’s sitting in a chair when the music stops. Of the people who need chairs, only a fraction will be seated.

I’ve been learning about hedge funds and CDOs (”Colateralized Debt Obligations”) recently in the wake of the Bear Stearns funds collapse. It looks to me like this could be the beginning of the unraveling. Check out this article if you’d like to understand CDOs better. (Wouldn’t everyone?)

The Bank for International Settlements is also warning of dangers ahead, citing the Great Depression as a backdrop for comparison.

Personally, I’m not going crazy with fear, but as I’ve previously written, I decided to hedge my bets a little by investing in gold and gold stocks. We’ll find out soon if that was wisdom or overzealous worry.

Rather than blog about each individually, I thought I’d write a summary of things in the news and on my mind lately.

• No jobs for US citizens without Homeland Security Approval
  If I understand the implication of this recently passed immigration bill, it seems that immigration reform, too, has been turned into a vehicle for reducing civil liberties. If neither the White House Republicans nor the Congressional Democrats are for the rights of people, where should we turn?
• A 2nd Interview with Ron Paul on Real Time (Bill Maher)
  It seems that Bill has had a change of heart since the first interview, explaining that after the Republican presidential debate, he realized “this is a person I really want to talk to a lot more.”
• Homeland Security Contracts for Vast New Detention Camps
  A Canadian news service reported a year ago (as have several others) that a Halliburton subsidiary was awarded a $385 million contract to build detention facilities for “an emergency influx of immigrants”. Civil libertarians like me, of course, worry that this is part of a larger and more nefarious plan.
• Why Bush Hasn’t Been Impeached (Salon Magazine)
  This is an excellent article that opened my eyes to the social and personal aspects of the impeachment process that we each have to go through—for example, it wasn’t easy for me at first to accept that Bush was not the hero my faith-based eyes had seen in him after September 2001.
• New Presidential Directive Gives Bush Near-Dictatorial Powers in Case of Emergency
  Another piece is in place, if you’ve been following the trend. This one gives the president power over all three branches of government in the case of an emergency (note that the definition of emergency is quite liberally described).
• And in a more personal line of thought, I’ve been watching prices go up on just about everything lately. Gas is the obvious one, but I bought a sealed-gel battery (about 40 lbs) the other day and the small business owner I talked with there told me the price would be going up by about 15% next week. He cited rising costs in commodities such as lead and copper. I wonder though… is the cost increase across the board, or are we just seeing inflation? Is there a difference?

The Chinese and U.S. stock markets felt some big losses today–almost 9% in China and 3% state-side. These are the kind of losses that you hear about every 5 to 10 years. But is it over, or just beginning?

In December, I predicted that the stock market “may be able to maintain its speculative climb in to insanity for a month or two, but sooner or later things are going to come down.” I believe they are now on their way. If I’m right, then we may see a few turbulent swings up and down, but the trend itself will be all downward.

The reason, summarized by Mike Whitney in The Second Great Depression, is this:

December’s figures indicate that foreign investment is drying up and the world is no longer eager to purchase America’s lavish debt. The only thing the Federal Reserve can do is raise interest rates to attract foreign capital or let the dollar fall in value. The problem, of course, is that if the Fed raises rates, the real estate market will collapse even faster which will strangle consumer spending and shrivel GDP. In other words, we are at the brink of two separate but related crises; an economic crisis and a currency crisis. That means that the unsuspecting American people are likely to be ground between the two mill-wheels of hyperinflation and shrinking growth.

As the saying goes, we’re stuck between a rock and a hard place. As I mentioned in my first article, diversify in to gold and foreign currency if you have the resources. It’s going to be a wild ride, gravity and all.

CNN Money is reporting that the U.S. Mint has begun circulating $1 coins. Canada did that quite some time ago and I think it worked out well. We’ll have to watch and see what the rest of America thinks

I was thinking about the other recent news about U.S. coins, too, and came up with a fun tagline: “U.S. Mint: We don’t make cents any more.”

Well, that’s not true yet. But it’s still pretty crazy how you can make a profit by hoarding the raw metal material in pennies and nickels.

I’ve been watching Ron Paul for about a year now—reading his weekly posts and listening to his speeches on the floor of Congress. If there is anyone I can say I would trust with the mantle of President of the USA, this is the man. Yes, even above Barack Obama. The news I just received is that he’s begun his presidential exploratory committee to gauge interest and raise funds. I am so thrilled!

Why has he so clearly won me over? I will list a few points:

• Ron Paul was one of only 6 Republicans to vote against the Iraq War. He maintains a non-interventionist foreign policy.
• He voted against the Patriot Act, a deceptively named bill that successfully diminished our rights and redirected power to the White House for an indefinite period of time, the period we call the “War on Terror”.
• He is an economist from the good ol’ days. He supports the gold standard (the only thing that keeps the ultra-rich honest). He is fiscally responsible—and unlike most politicians who make the same claim, Ron Paul is actually a minimalist when it comes to government policy, so I believe him when he says our government can and ought to have a balanced budget. (By the way, have you seen the historical debt and deficit charts lately?) Basically, his views align with recently deceased Milton Friedman, a Nobel prize-winning economist who advocated the Free Market.
• Ron Paul supports a truly independent re-investigation the national tragedy that occurred on September 11th, 2001.

If you’d like to see Ron Paul on film and listen to some of his economic positions and thoughts, there’s a 20 minute clip on Google Video from The Korelin Economics Report that was worth the watch for me. Here are some quotes I took from this video, from Rep. Ron Paul:

[I was an] obstetrician. I delivered 4,000 babies, so I was very busy, and enjoyed it too! Matter of fact, getting in to politics was sort of a lark. I didn’t expect to be elected.

I think what has happened is that we’ve lost respect for the rule of law. We’ve got a good constitution and it’s very important, but we’ve abused it. … we don’t follow the constitution, and that’s how we’ve gotten ourselves in to trouble.

We’re running our welfare and our warfare on borrowed money that we created out of thin air.

I just received word that the small-cap gold and silver mine that I mentioned previously spiked today. Word is that trading for this stock was halted on the Toronto Stock Exchange, due to the 4-fold overnight increase. This seems to be confirmed by the fact that I can’t seem to get a reading on it today.

The source of this information said the price per share spiked to $5. We’ll see what news tomorrow brings.

Aaron Krowne, a math whiz and economic blogger, writes that the true unemployment rate in the U.S. is between 9% and 13%—more than twice the official headline of 4.5% that was recently announced—due to factors such as the shuffling of unemployment categories and the enormous prisoner population in the US (2.2 million).

What does this mean? I think that the recent surge in the value of the U.S. dollar is inflated and temporary, based on shoddy statistics. While 4.5% may be a nice number to party about for the new year, it’s not going to hold for long.

Some commodities may still be in for a downward spike, such as oil (crude) and copper, according to Mish’s Global Economic Trend Analysis. Gold and silver are still looking good, in spite of this week’s setback, however.

By my best estimation, we are about to see a “hard landing” for the U.S. economy. I’ve been watching the signs for several months now, and in the last two weeks there have been some Big signs of imminent disaster. The stock market may be able to maintain its speculative climb in to insanity for a month or two, but sooner or later things are going to come down.

The possibility of economic uncertainty first reached my awareness earlier this year through articles written in international publications such as the UK’s Indymedia— “Why the Dollar Bubble is about to Burst” —and Canada’s Maclean’s magazine— “Is America Going Broke?”

A little while later, I heard about the trillion-dollar housing bubble. Low interest rates in the early 2000s gave rise to an investor buying frenzy, along with ARM and other exotic loans to higher-risk individuals. In the first quarter of this year, the residential housing bubble burst and has been “falling off the cliff” ever since. If the “commercial construction trails residential construction” trend holds as it always has, then we are now about to see the commercial real estate bubble burst as well. According to CalculatedRisk, this translates in to a loss of half a million jobs over the next 6 months.

Then I heard about the dismal auto sales. General Motors and Ford announced they would each slash 30,000 jobs at the end of last year. Ford hired a new CEO to try to pull the company out of its slump. According to the New York Times, significant drops in auto sales have predicted recessions 5 out of the 6 times America has undergone a recession, and concludes, “[a significant drop in auto sales] has never warned of a recession that did not occur.” Auto sales are definitely falling.

Now, in the festive Christmas season when nobody is watching, the Treasury/OMB released the Financial Report of the United States Government in which the Comptroller states (p. 152):

Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.

As this long-term fiscal imbalance continues to grow, the retirement of the “baby boom” generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.

Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance.

4 times the GDP! Can you imagine a sane bank manager offering a loan to someone whose “fiscal imbalance continues to grow”? Foreign lenders, like banks, will very soon be calling the same stops on the U.S. government. As the risk of investment increases, so will their demands on interest rates. (See also the commentary by Chris Martenson, “The United States is Insolvent“.)

As if this news weren’t foreboding enough, some shady things are also going on. The measure of how much cash is available in the world economy, a statistic published by the Fed as “M3“, was discontinued in March of this year. From what I understand, it’s possible to put M3 together using the still-published M0, M1 and M2 statistics (plus some other pieces, I presume), and someone has done just that. According to this calculated M3 stat, the real inflation rate of the U.S. dollar is closer to 8 or 9 percent.

My last observation, and the one that convinces me that we’re really in for a big dip here, is that everyone is starting to catch on. There’s an elephant in the room, and we know it. And people are talking about it all over the ‘net. It’s on Digg and Reddit. It’s in blogs. The international papers have long ago covered the topic, and are continuing to do so. And, cautiously, our U.S. news outlets are making mention of it too.

What should you do? Get out of debt. Invest in gold. Invest in silver. Diversify your currency in to the Euro, Swiss Franc or some other foreign currency that isn’t heavily tied to the U.S. dollar. And scoop up some stocks in mining companies or indexes such as NYSE:GLX. I’m also invested in some smaller startups like American Creek Resources in Canada.

If the U.S. dollar collapses and is replaced by something like the Amero, you don’t want to trade dollars for Ameros. You will get a very bad deal.