"So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and when the inflation comes to an end, the subsequent depression-adjustment comes into play." 1969

Murray Rothbard (1926-1995) 1932 – Foremost of Mises U.S. disciples.

One hardly knows where to begin. America has currently embraced the monetary policies of a banana republic. The Argentine and Zimbabwe models cannot be far behind. For years (35 to be exact) we have warned about the consequences of unbridled credit expansion. We argued that artificially low interest rates would lead to catastrophe. Now the first installment of this crisis has been visited upon us. Our policymakers have greeted this dilemma with even more ruinous money and credit policies that compound the problem. We’ve had the earthquake. The Tsunami is yet to come.

The monetary authorities in Washington, who are supposedly the brightest among us, have adopted a short-term strategy resplendent with economic error. As usual, the politicians are clueless. Somehow the idea has gained ground that recklessly expanding money and credit (inflating) will cure our economic ills without repercussions. Nothing could be further from the truth. This is currency debasement on a grand scale.

The greatest economist that ever lived, Ludwig von Mises, warned against the exact monetary policies adopted by the U.S. "Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in a profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up."

Thirty-five years ago I began to study the writing of Ludwig von Mises. Have his economic theories proven correct? Did Mises write and speak the truth? You be the judge. Over the years I have written predictions and conclusions based on Austrian Economics, the school of economic thought fostered by Mises. I dug out a few from earlier newsletters.

1976 – "We are proceeding recklessly down a road of monetary expansions that has brought ruin to each and every state or nation that has attempted it."

1977 – "We are guaranteed an inflationary epidemic that saps the vitality of the country and its economy."

1977 – "Sometime in the future the evils of monetary expansion will sunder us. No nation has ever escaped the havoc that springs from loose money and credit."

1985 – "Tremendous cyclical upheavals lie ahead."

1985 – "The East is rising while the West declines."

1995 – "Our economic sins are real. They defy ready solutions. Consequently, you can lose enormously on your paper assets. Your retirement and savings plans can be devastated."

1997 – "Massive exposure to derivative risk by U.S. banks is another alarming trend. Major banks appear to be speculating heavily in currency and derivative markets. Balance sheets are burdened with financial leverage and astonishing levels of derivative risk that require liquid international markets to unwind positions."

1998 – "Today we inflate at will. Fiat money created out of thin air, runaway government borrowing, huge government financial guarantees, staggering levels of leverage in securities markets, consumer credit excesses, negative savings rates, and monstrous trade and budget deficits, have created a financial house of cards."

In 1998 I wrote a novel, "Full Faith and Credit, A Novel About Financial Collapse." Here’s how it was advertised: "Credit collapse and panic! Retirement funds, bond funds and real estate are decimated. Massive derivative defaults capsize major banks and hedge funds."

I’m not tooting my own horn here. I’m showing you that with Austrian economics you can predict the economic future. At the end of this article you should be equipped to see what’s coming. That will protect you like nothing else.

1999 – "An unexpected crash in financial markets will kill off speculation."

January 2000 – "For those who think the stock market will never crash, here’s 20 powerful reasons."

2001 – "What’s most likely going to happen to the economy is a credit collapse of a magnitude and dimension that shakes the U.S. to its very foundation."

2002 – "Years of inflationary money and credit creation have fostered unmanageable levels of debt and spending. Now the debt is beginning to strangle us. An agonizing liquidation will sweep homeowners and mortgage lenders away on a tidal wave of foreclosures."

Let’s face it, this is a pretty impressive forecasting record. Am I that smart? Not really. Only smart enough to figure out that Ludwig von Mises had nailed down the truth.

Here’s what Mises wrote that is so applicable today. "It is true, the banks (or the governments) are in a position to prolong the boom for some time by injecting progressively increasing quantities of bank notes and deposits into the market. But the artificially created prosperity cannot last forever. Sooner or later it must come to an end. There are only two alternatives:

1. The banks do not stop and go on expanding credit at a progressively accelerated pace. But the spell of inflation breaks once the public has the conviction that the banks and the authorities are resolved not to stop. If no limit of the inflation and, consequently, of the general rise of prices can be foreseen, a general flight into real values starts. Everybody becomes aware of the fact that to hold cash and deposit balances with the banks involves loss, and that he does better to buy and store goods. Everybody is anxious to get rid of money and to exchange it for some other commodities, no matter how much he must pay for them. Prices are running away, and the purchasing power of the monetary unit drops to zero. The national currency system cracks up.
2. As a rule, the banks do not let things go so far. They stop sooner by restricting credit. Then the day of reckoning dawns. The illusions disappear, people begin again to see reality as it is. The blunders committed in the boom become visible."

Unfortunately, the banks aren’t restricting credit. They are being overridden by the government. They are being forced to expand credit. To assist the banks, the central bank is lowering interest rates. Go back a paragraph and read number one. Now you know.

MORE SIGNS OF A SILVER SHORTAGE

By Theodore Butler

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The evidence of a wholesale silver shortage continues to build. This is in addition to the current retail shortage. The continuing tightening in the price differentials between the trading months in COMEX futures has continued and become more dramatic.

One of the clearest indicators of a shortage in a physical commodity occurs when the nearby futures months trade at a premium to more deferred trading months. That means buyers are willing to pay more for a commodity because it is not immediately available. Remember, the definition of a commodity shortage revolves around delays and premiums. While the nearby months in COMEX silver futures haven’t yet grown to a premium over the more deferred months (called backwardation or an inverted market), they have moved noticeably in that direction.

A second sign was the unusual and persistent buying of the recently concluded October COMEX silver futures contract, which recorded almost 1300 contracts delivered (6.5 million ounces) for the month. The bulk of these contracts resulted in a removal of silver from COMEX silver warehouses.

Finally, the big silver ETF, SLV, reported a decline of around 4.5 million ounces over a two day period recently. It is impossible to tell whether declines in the metal holdings in the ETFs are due to investor share liquidation or if shareholders are removing metal for other purposes, such as industrial consumption. Looking at the share trading volume and price action for the period corresponding to this drop, I’m inclined to think it was due to removal, rather than liquidation. Recent reports of big inflows by air transport of silver from London to India seem to explain the declines in SLV more than investor liquidation. If I am correct, wholesale silver is a lot tighter than most assume.

The draw down in visible silver inventories coincides with a new theory that my mentor and friend, Izzy Friedman, conveyed to me a month ago. Izzy remarked to me then that if visible inventories stopped growing and began to decline, that might signal the silver crunch was at hand. At first, I tended to dismiss his new theory. But, after further contemplating his theory, I concluded he may be on to something.

DON’T BE FOOLED

By Israel Friedman

(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)

Sooner or later the COMEX will close their doors for one reason only - they will be considered as only a paper exchange. I write this for those people who intend to take delivery on their futures contracts. Don’t bank on receiving actual silver for your contracts.

We have signs that the supply of physical silver is drying up. Investors are buying 1000 oz bars in quantity and the miners and smelters are cutting production. The two US banks were successful to bring low prices on the COMEX by destroying the mining industry, but you the physical investor will benefit from their actions.

I was reading a study that said that twenty years from now, due to growing global demand, we will need the equivalent of a new planet to supply us with the resources we will need. Today silver is closer to a shortage situation than ever, only the price doesn’t show it. If you have decided to invest in silver, think big. 1000 oz of silver in the long run will buy you a two bedroom apartment in Trump Towers.

My crystal ball tells me that when the users panic, don’t be surprised if the price of silver doubles in a week, and we could reach $40 in less than two months, and move quickly to $100, only because there is no silver available.

Be careful, those who have certificates from COMEX, don’t deliver your contracts for paper futures contracts no matter how attractive the spreads become. Don’t give real silver for paper obligations. It is not sure if your paper contract will be worth more than the paper it is printed on. Learn that one bird in the hand is worth more than ten birds on the tree. It is better to have 1000 oz in your hand than 10,000 oz in paper futures contracts.

It’s time to be very careful. These modern gangsters are looking for ways to trick you by discouraging you from buying silver or to swindle you out from the silver you already own, by offering you many goodies like backwardation, leasing your silver with high interest rates and many other tricks. The organizations will offer you all the guarantees in the world for your silver, but remember, they can’t do that legitimately because there is less and less silver in the world.

Hold your silver close to your heart and remember that the real gold is silver. When the price of silver is equal to the price of gold, then think of profit taking. If you don’t have silver, you won’t be able to take profits.

WHY THE SILVER USERS WILL PANIC

By Theodore Butler

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

An integral component of my analysis has been that, as the inevitable shortage of wholesale silver became apparent, the industrial users would panic and attempt to build inventories of physical metal. Faced with prolonged delays of a material that threaten to shut down their production lines, the users would rush to buy enough physical silver to prevent those shut downs. This would provide a bullish price thrust that few comprehend.

Recently, I had an experience that may drive home why the silver users will panic and why that will cause the price of silver to explode. About a month ago, I drove home to Florida from Maine. Normally, I take a slightly longer, but more scenic route, than the straight run down I-95. This year, because I was sensitive to reports of gasoline shortages along the route I normally take, I swung over to I-95 further north than I usually do, to avoid any problems getting fuel. It seemed that Hurricane Ike and pipeline problems were causing gas shortages throughout the Southeast U.S.

Having navigated successfully over to I-95 (over much pouting and resistance from my wife, a strong proponent for the scenic route), I thought I was headed home gas-worry free. However, at a rest stop in South Carolina, a traveler approached me with the warning that gas was now a problem on I-95. He related to me that he just came from a gas station that was sold out and had heard that there "was no gasoline at all in Georgia." Georgia was still 100 miles ahead, and there is no other way to get to Florida.

Since I had less than half a tank of gas, I decided to fill up at the next gas station. Sure enough, that station had long lines and the dreaded plastic bags over many of the fuel nozzles, indicating empty tanks for premium and mid-grade gas. Fortunately, my car only requires regular gas, so I was able to fill up with no great difficulty.

I must tell you that such an experience wakes you up and focuses your attention on something you normally take for granted. I confess that 75 miles down the road, in stopping at a hotel for the evening, I pulled into an empty gas station and topped off my tank with 2 gallons. I wanted to get home.

It occurred to me that it didn’t matter if your vehicle is worth $1000 or a hundred times that amount; without fuel, it is of no use. You need fuel to run your car. Same thing with silver for an industrial consumer - your $100 million factory could grind to a halt without silver.

I related to my wife that the price of a gallon of gas was no longer a concern, only its availability. If there was a way to insure a guaranteed supply of gas for the next year or so, I would sign up. But that’s impossible, as the problem was that there was no practical way of storing such a supply, as we are all limited by the capacity of our vehicles’ fuel tanks. Where would you put 1000 gallons of gasoline?

It occurred to me that there was no practical way for anyone to hedge against a shortage of fuel, save build your own tanks to store the fuel. Even those that had successfully hedged the price of fuel in the past, like Southwest Airlines and others, were hedging against just the price and couldn’t guarantee themselves actual supply in a shortage. For fuel and many other commodities, there was no practical protection against a shortage of the commodity.

That’s when it dawned on me to write this article. Silver is a lot different than fuel in that not only is it a lot easier and less dangerous to store, it is more likely to go into a shortage, given silver’s investment demand. Not only could the silver industrial consumers hedge themselves against the giant silver price increases ahead (buying futures), they could easily guarantee actual supplies before the coming inevitable shortage. All the users have to do is buy actual silver, not paper contracts, but real silver. Just like you do. The users buying actual silver to protect against both price increases and availability is as easy as falling off a log. Plus, it is a very rational act.

The silver industrial users have yet to initiate any type of buying protection program, either with paper contracts or with the actual metal. But, the users are run by people who are human. When they can’t get timely delivery of actual silver, like what has occurred to investors for the past months, they will do what I did in North Carolina; they will top off, and keep topping off. Only they won’t be limited by a 15-gallon gas tank. Because of the physical nature of silver and its ease of storage, the users will be able to buy as much silver as they care to, price permitting. They will buy more silver than they need because they will fear not being able to get it, once the delays in shipments start. This will set off a chain reaction, exacerbating the shortage and causing more silver users to do the same thing. This chain reaction will set off a price spiral that will shock the world.

SILVER PRODUCTS

It appears the entire world is on an inflationary binge. Other countries are following our example. Japan has even adopted our stimulus package. They are passing out billions to their citizenry. We’ll soon be printing up a few hundred billion to send to everyone in the U.S.

The world is awash in dollars. Right now, everyone seems to want them. However, the U.S. monetary authorities are certain to overplay their hand and ladle out too much new money. Then the dollar will drop again and prices go up.

The likelihood of hyperinflation brings into focus some nasty possibilities. First would be price controls. Next would be currency controls. Demand for gold and silver would certainly escalate. If things get bad enough, the acquisition of precious metals could be forbidden. The dollar will likely be on its last legs when that happens. Get your fair share of silver and gold before any kind of controls are enacted.

We get dribbles of silver Eagles and gold coins. It’s day to day on these products. We could sell a million silver Eagles if we could get them. We need thousands of gold coins and can’t get more than a few at a time. If you want gold, call our brokers and get on the waiting list.

We have bags of 90% U.S. silver coins available. Also, we have 1,000-ounce silver bars stored at HSBC, one of the world’s largest and safest banks. This storage is separate from them and is in your name. The storage agreement has the serial number of your bar on it. Call us now at 1-800-328-1860 and order silver.

Sincerely,

James R. Cook

President

P.S. In looking over past essays, I came across this:

No country ever edged further out on a financial limb than the U.S. The gargantuan debt, the leveraging, the trade and budget deficits, don’t represent some new sort of progress or advanced economic strategy. They are as old as man, and whenever they have been practiced so wantonly, an enormous price has been paid.

The author, Henry Hazlitt, summed it up nicely. "There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: ‘In the long run we are all dead.’ And such shallow wisecracks pass as devastating epigrams and ripest wisdom.

"But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed."