The Morgan Report publisher says a tightly held silver supply putting pressure on prices as the macroeconomic climate fails to improve.

David Morgan, publisher of The Morgan Report, a monthly newsletter that covers economic news, currency and precious metals, believes that silver will be persistent this year in trying to break through its resistance of $50 an ounce. A tightly held silver supply, continued sovereign debt concerns in Europe and a strong appetite for the white metal at the start of the year are factors that he says will make silver a leader in the commodity sector in 2012. HAI Managing Editor Drew Voros recently caught up with Morgan to discuss what’s in store for the silver market this year.

Hard Assets Investor: Silver is starting out 2012 strongly. Is it following gold or is it blazing its own path?

David Morgan: Silver is following gold, but if you study silver carefully, there are times when silver leads and gold lags.

A quick example was last year. We saw silver basically double from around the $25level to $48, in a matter of months. That ended about May 1. Gold did a similar parabolic move, but not quite the percentage gain that silver outlined, but it did it later in the year. So who went parabolic first, silver or gold? Well, in this case, silver did.

HAI: Why do you think silver’s volatility was more intense last year than gold? Was it the drop-off in industrial demand?

Morgan: No it wasn’t. It was purely the momentum players, the guys that sit in front of computer screens all day who see a momentum move. They know it’s a small market. They know they can get extreme leverage in the market and they can use derivatives. And that, of course, causes the price to continue further down.

HAI: Yesterday Jan. 11, 2012 we saw a large spike in silver sales and price attributed to Sprott Asset Management making a big purchase for its physical silver exchange-traded fund. Are some of these ETFs driving the metals markets?

Morgan: They do, absolutely. But relative to what’s mined in the silver sector, which is about 750 million ounces on an annual basis, the 9 million ounces purchased were not really that large. But what that indicates strongly is that the flow is tight. In other words, there are not all these warehouses full of silver. Supply is in tightly held hands. It’s all held either for investors longer term and/or by industrial users that don’t really stockpile very much. What yesterday’s purchase shows is that whatever comes out of the pipeline has got a lot of people waiting at the end of that pipeline.

HAI: Do you see more silver funds coming to the market, or is there a risk here that we’re going to get saturated?

Morgan: At some point all markets get overdone. And, as bullish as I am, silver probably will at some point. I do see more silver funds coming in. In fact, I’m actually aware of a couple that are being formed as we speak. There will be more demand. But I think the big question implied is, when will it stop? The answer to that is the global financial system is in such dire straits right now, that more and more people are gravitating to the precious metals. And that trend will continue, which implies more ETFs, more hedge funds, more silver mutual funds, more holding companies and everything else throughout the sector.

HAI: Where do you see the strongest industrial demand for silver coming from?

Morgan: Solar is No. 1 right now and is growing rapidly, almost exponentially. It will level off probably by 2014.

HAI: Where do you think silver is headed in terms of price this year?

Morgan: I’m on record saying $60 by the end of the year. And it will probably take all year to get there. The key is to get through that $50 psychological barrier. It’s probably going to take a couple of tries. And I do believe at some point it will. Once it does that, you could see silver go up from $50 to $60 in a matter of two weeks. That’s the kind of move silver is capable of making.

HAI: Let’s talk a little bit about miners. Have the silver miners been as undervalued as some of the gold miners?

Morgan: It depends on a case-by-case basis, but you’re right. The silver mining industry has got the biggest premium in the sector. A good silver miner producing silver at the top of the market in the last bull market sold at 50-to-1 P/E price-earnings ratio, whereas gold miners were selling about at 35-to-1 P/E. So silver carries a premium. And you see that throughout the sector. There are some very undervalued mining stocks, including some silver stocks in this juncture.

HAI: What is some advice you would offer someone who’s thinking about getting into silver for the first time? What kind of entry point would you suggest?

Morgan: I would say get both gold and silver. There is a program I’m associated with: www.SilverSaver.LLB1 com. That program is a dollar-cost-averaging program. Just put in the same amount every month and don’t worry about it. If the market goes down, you’re buying more silver. If the market goes up, you’re buying less silver. It’s a great professional way to handle any market, especially a volatile market like the silver market.

HAI: Do you prefer bullion or coins?

Morgan: I prefer coins. I think you want small denominations. That would serve you best in exiting the market, because you have a small unit, you can sell just part of your holdings. Once you get to the bullion, then you’re making bigger decisions. Is it 100 ounces at a time? Is it 1,000 ounces at a time? I try to get everyone to start with coins. But it depends on the individual. If you’re a well-heeled investor and committed to the silver market, you should have a mix of both.

HAI: What coins would you recommend specifically?

Morgan: One rule is to buy as much silver as you can per dollar invested, which implies getting silver rounds, which are privately minted silver coins, not government minted. The government-minted coins are exactly the same in weight and content, which is 0.999 silver. But they have the government stamps on them, which puts a big premium on those.

If you get one any of these private mints, it’s the same exact thing, except it’s not a government mint that’s stamping it out. Nonetheless, it’s just as pure, just as fine, the same weight. But again, it comes down to the individual. Someone says, “No, no, I’ve got to have a government stamp on my coin.” Well then, do that. You’re just going to pay more.

HAI: The U.S. Mint said there was a record amount of silver coins purchased in the first two weeks of the year. What was behind that?

Morgan: Silver is becoming a more popular investment, so a lot of these dealers will buy huge amounts of freshly minted 2012s. They’ll slab them, which means put them in a plastic holder, and get them graded, and then put a huge price tag on them. As far as I’m concerned, it’s a big rip-off. They then sell them for $100 each, when there’s $30 worth of silver in the coin. So that’s part of it right there

HAI: Let’s talk a little bit about asset allocation. What do you recommend when it comes to precious metals?

Morgan: I recommend 20 percent into metals, but it also depends on your age. Because the younger you are, the more risk you can take. If you’re age 60 years or older, half of that would be in physical metal. The 10 percent remaining is done like this: About 70 to 80 percent of that goes into top-tier, cash-rich unhedged mining companies; about 20 percent goes into midtiers; and the remaining 10 percent is spread out among junior miners.

HAI: Do you, at times, recommend selling silver?

Morgan: Absolutely. I got out of silver at $48/oz. on that move up last year, but not all of my position. But it’s very nice to capture $19 on the move to $48, which is basically what I did.

So I do trade, and I do invest. And they’re different topics. One is to make money and go back into cash. The other is just to buy and hold for the long term. Not everybody can do both. But I’ve been doing it for years and years, and I’m comfortable with that methodology.

(Follow David Morgan at www.silver-investor.com)

The 99% and the 1%. We see it all over the news. There are protest movements in almost every major city focused on it. We all know that something is wrong, but almost no one can put their finger on the root cause. The reason is that the vast majority of people have no idea how banking works or where money comes from.

Did you know that only about 3% of money exists in physical form as coins or bills? The remaining 97% of money exists as numbers in bank computers representing various account balances. /> /> Most people believe that the balance on their bank statement is just a symbol representing how many physical dollars, contained in the bank’s vault, that belong to them. It isn’t. The fact is, the number on the statement is the money. Think about it – there is more than 30 times as much money on bank account statements as there exists physical currency. The number on your statement is the money.

Most people have a quaint notion that banking works something like this: Joe Customer goes down to the bank to deposit his hard earned money into a savings account, which pays him a return based on an interest rate. The bank then loans that money out at a higher interest rate and profits from the difference.

If that were the case, then how can the money be both loaned out by the bank and available for use by the customer at the same time?

The answer is it can’t. Somewhere along the line, the bank obtained more money than was originally deposited.

So where did the extra money come from? Well, remember that the number on the account statement is the money. So if you’re a bank, it’s pretty simple: Create an account and key in a number. Done. Instant new money.

Of course they can’t do this completely willy nilly. There are certain rules and procedures that must be followed. Namely that the new money in accounts must be loaned out and that there are limits as to how much money can be created versus how much was actually deposited.

But at the end of the day, for every new dollar deposited into a bank, almost 99 new dollars can be created out of thin air by the banking system. But here’s the best part: The bank earns interest on all of those dollars it just created! You and I must work for our dollars before they can earn us interest. No such requirement for a bank.

And it gets better. Let’s say there was some sort of collateral promised against a loan and the loan goes bad. The bank then gets ownership of real stuff (a house, a car, a boat, etc) even though the money it “loaned” was nothing more than a number keyed into an account.

That’s quite the business model. No need to actually produce anything when the government grants you the legal right to create new money. Bankers figured out long ago that working for a living was for the middle class.

And speaking of the middle class – and the rest of the 99% – I’m afraid the bad news doesn’t end there.

There’s a larger price to pay for all of this banker privilege beyond just having to work for a living. You’ve heard the expression “there is no free lunch”, well it’s true. When a bank creates new money, it reduces the purchasing power of all other money, including the money in your savings account and your paycheck.

The average person – who doesn’t know how banking works – observes this as the price of things going up. “Gee honey, the price of milk just went up again. It must be getting more expensive to produce milk.” Wrong. It’s actually getting cheaper to produce most things due to increases in productivity. It’s just that your money and your savings and your income are losing their value faster.

Computers and electronics are an interesting case. They get cheaper every year because the gains in manufacturing productivity are so great, that even bankers can’t devalue the money that fast. But this is the normal action of prices in a sound money system. Sound money retains its purchasing power, and almost all manufactured goods cost less to produce every year. If our monetary and banking systems weren’t based on fraud, a person would never need to get a single raise or increase in pay to see their standard of living rise every single year. Please take a minute and contrast that with your experience in our current system.

That 3-10% price inflation we see is how much purchasing power our incomes lose every year. To say it another way, our standard of living falls 3-10% every year after year after year. It wasn’t that long ago that a middle class family in America could comfortably get by on a single income. It is now often necessary for a household to have two full time incomes just so it can struggle by..

So how did the 99% become the 99%? It’s because that is exactly what our monetary and banking systems are designed to do. It is an institutionalized system of wealth transfer that acts slowly over time. Like the boiling frog, most don’t realize what has happened until they’ve been cooked.

Perhaps at some point you’ve stumbled across the famous quote by Henry Ford:

“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Now you know what he was referring to.

Experienced traders recognize that volume typically dries up going into the holiday season. Light volume and the holiday seasonality generally push equity prices higher. The discussion of whether Santa Claus comes to Wall Street has arrived in earnest.

I do not envy Santa as he has the most arduous task of determining if Wall Street was naughty or nice. I suppose it depends on whether he reviews recent performance, or if past performance comes into play. Clearly coal will likely be found in a few stockings soon enough. If I were John Corzine, I would not expect to get a lump coal, but something far worse potentially.

In all seriousness, the bullishness has gotten pervasive in the media and economic data points such as unemployment and consumer credit have improved according to the government. One way to gauge investor sentiment is to look at the weekly advisor sentiment numbers courtesy of Bloomberg and Investor’s Intelligence.

According to this week’s advisor sentiment numbers, advisors who are bullish advanced to 47.4% from 44.2% last week. Bearish advisors dropped to 29.5% from 30.5% from the previous week. The 29.5% bearish data point matches a level that has not been seen in nearly 4 months. Bullishness has clearly become the leading expectation in the marketplace.

Only one asset has the opportunity to be “The Grinch” and ruin Christmas on Wall Street. If the U.S. Dollar rallies sharply, risk assets are certain to get hammered lower. In addition to the bullish tenor of market participants, most market pundits and gold bugs believe strongly that the U.S. Dollar is doomed fated for lower prices.

When I look at the long term momentum of a stock or commodity contract I will look at a monthly chart and plot the 12 month moving average against the price action. While it seems simple, equity and futures positions adhere to the 12 month moving average quite closely in many cases. The analysis is very simple as prices above the 12 month moving average equate to bullishness and prices below the moving average predict lower prices. The monthly chart of the Dollar Index futures is shown below:

As can be seen above, the Dollar Index futures are showing strength currently. The 12 month moving average is starting to flatten out which is also a bullish indicator. When looking at the daily time frame we can see that price action is trading inside a wedge pattern and is bouncing higher off of support:

An additional catalyst that could push the U.S. Dollar higher is the economic tragedy that is Europe. European political leaders need to come up with a series of strong solutions that will stabilize their economic crisis otherwise the Euro will weaken further. A weakening or potentially crashing Euro will push buyers back into the U.S. Dollar. This would in turn place downward pressure on equities and commodities.

S&P 500

On Thursday the S&P 500 flushed over 2% lower by the close as the European Central Bank disappointed investors with an expected 0.25% rate cut and no new bond purchase announcements. The bulls will tell you that the Thursday the week prior to monthly option expiration usually is volatile and price direction is generally in the opposite direction of the primary trend. We will find out next week whether that axiom holds true. The daily chart of the S&P 500 is shown below:

The strength of Thursday’s move is not going to easily be reversed. The European leaders need to shock the market with tangible decisions and launch a major offensive against their growing fiscal issues. If European leaders disappoint investors, the reaction to the news could be a violent selloff that leaves bulls flatfooted next week.

Those who are leaning long in size should consider that their trading capital is being leveraged on the hope that European leaders can come to a groundbreaking agreement. I will be in cash watching the price action in the S&P 500. However, once the dust settles and others have done the heavy lifting, I will likely get involved with a directional trade. Until then, I am just going to ponder if I were Santa, would Wall Street get a present or a lump of coal?

Get these weekly reports and trade ideas free here: www.Optionnacci.com

JW Jones

Wednesday, six of the world’s largest central banks, led by the Fed, averted a meltdown of the Eurozone’s banking system by agreeing to print more money.  One has to wonder: if solving such dire financial crises is as easy as creating still more fiat money, how did some of Europe’s major banks get in financial trouble in the first place?

The banks got in trouble primarily by buying the bonds of weak members of the Eurozone.  The banks relied more on the borrowers being sovereign states than their creditworthiness.     

Just how bad is the financial crisis in the eurozone?  Consider the following:

According to the Financial Times, so far this year European banks have been able to sell only two-thirds of the bonds needed to refinance (rollover) existing debt.  They were able to sell only $413 billion of $654 billion needed.

Compounding problems for European banks are the impending Basel III reforms, which will impose tough liquidity and capital requirements on banks.  To comply, Morgan Stanley estimates that European banks will have to dispose of as much as $3.3 billion worth of assets over the next few years.  No one seems to know who will be the buyers.  The European Central Bank that so far has not been a buyer of eurozone toxic waste.

Japanese troubled investment bank Nomura cut its exposure to European sovereign debt by 75 per cent in the past two months, from $3.55 billion to $884 billion.  Nomura slashed its exposure to Italy by 84 percent, from $2.8 billion to $467 million.  The credit rating agency Moody’s recently put the bank on notice that its rating could be lowered to one notch above junk, which shows that flames of this  financial contagion are not restricted to Europe.  And, they are reaching the United States.

According to the Institute of International Finance, US financial institutions have $767 billion worth of exposure through bonds, credit derivatives and other guarantees to private and public sector borrowers in the eurozone’s weakest economies.

When the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) acronym appeared on the scene, France and Germany were the stable members of the European Union and seemed likely to be the EU’s saviors.  Now, France’s financial integrity is in question as the interest rates the market has put on French bonds are at levels seen only a few months ago for the weaker eurozone members.

If that’s not bad enough, November 23 witnessed one of the least successful German debt sales since the launch of the single currency.  Six billion euros in 10-year bonds were priced at 2 percent, but commercial banks bought only 61 percent of the issue, which meant that the Bundesbank (Germany’s central bank) had to pick up 39 percent (3.644 billion) of the issue.  An analyst at Monument Securities in London called it “a complete and utter disaster.”

If the “euro experiment” fails, in the short run the US dollar will gain.  However, Europe is the US’s major trading partner, and in the long run a weaken European economy would be disastrous for the US economy.  And, don’t forget the $767 billion worth of exposure that US financial institutions have to borrowers in the Eurozone’s weakest economies.  If Europe suffers a depression because of problems in the eurozone or the euro fails utterly, the negative impact on the US economy will be huge.

Now, though, the world’s central banks are cranking up their printing presses, and fiat currencies will flow in abundance.  Mainstream investors seem to agree that more fiat money is the answer.  The day of the announcement, the Dow Jones Industrials tacked on 490 points, the Industrials best one-day gain in 2-1/2 years, and the German DAX leaped five percent.  Logically, the prices of US banks stocks roared higher.  Not much talked about was that the price of gold climbed double digits in many markets.

The mainstream investment world readily accepts that “just one more papering” will give the troubled members of the eurozone time to get their houses in order.  “We’ll see,” said the Zen Master.

Indeed, this is just a “papering over” of the problems because the real problems are systemic in Europe.  The Europeans are far down the road to total socialism.  There is a belief, held by too many Europeans, that the government is there to take care of them.  Those people have failed to recognize that it has been they who have been taking care of the governments, their agencies and all the bureaucrats.  For the eurozone’s problems to be solved, there will have a cultural change, a repudiation of a lifestyle engrained there.

The central banks may have averted an impending meltdown, but the move didn’t solve the problems facing the eurozone, which is that Europeans have wholeheartedly embraced socialism.  Changing that attitude will be much more difficult than convincing six central banks to print more money.

I can’t remember the last time I watched the local news. It’s probably been at least two decades – and for good reason. It tends to consist of people repeating information on topics that they have little inherent knowledge of. Take a look at the clip below in which the reporter attempts to explain the recent drop in the price of gold. She claims that people are starting to see the dollar as a safer investment than gold, as it is backed by the US Government and the Federal Reserve. She notes that gold, on the other hand, is backed by nothing. Is it any wonder that Americans are completely ignorant as to the true nature of money and our monetary system?

So, is this the same US Government whose debt is so large that even a moderate increase in interest rates would render that debt unserviceable?  Or a Federal Reserve whose chairman has promised to dilute the purchasing power of the dollar to stave off a recession? A recession that is desperately needed, by the way, as it represents a healthy, corrective process. How would this reporter back up her comments when presented with a chart showing a 98% decline in the purchasing power of the dollar since the Federal Reserve’s inception in 1913? Or the fact that gold has actually increased in purchasing power over that same period?

Here’s a concept that is completely alien to Americans: How about being able to successfully save for retirement without any investment risk, or even the need to earn interest? This is how it once worked before the government forbade gold’s use as money. What a pleasure it would be to know that your savings would actually purchase more in the future. How unthinkable is it that you didn’t even have to earn a return on your gold money as it wasn’t constantly losing its value each year? How nice would it be to avoid the casino-like atmosphere of the stock market and your 401k?

And when gold was money, you didn’t have to pay taxes on its retention of purchasing power. Whereas with the dollar, when you are successful enough in your investments to cancel out the loss of purchasing power that occurs as a result of inflation, you are required to give some back anyway in the form of taxes. Don’t expect to find any of this on your local news, however.

There is no single topic of greater importance to the cause of liberty and peace than the nature and control of money. When free market participants are no longer able to choose their medium of exchange, a critical part of the free market dies. The resulting seeds of a centrally planned economy slowly grow and suffocate the power of choice. Productivity and prosperity begin to decline as the incentives for producers are removed. When a chosen few are granted the exclusive right to counterfeit legal tender, the power of individual votes is eventually drowned by a sea of new money.

It’s a complex relationship that the majority of people simply don’t understand. The following video does a good job of introducing the topic in a way that will, hopefully, generate further interest. For a more complete understanding of the subject, I highly recommend Murray Rothbard’s What Has Government Done to Our Money? (Available for download as a free PDF.)

The video makes a couple of points that are particularly worth noting. The first is the fact that government decreed gold standards don’t work. In theory they put strict limits on how much the government can spend. But in reality, when a government feels restricted by a gold standard, it simply reneges on it’s promise to pay in gold. This is precisely what the British government did in 1914 and the United States in 1971.

The second important point is that wars are enabled by fiat money, as it allows governments to simply print the money required to pursue them. It could also be argued that empires are formed by those countries that most successfully inflate their money supply. At the same time, however, this expansion of money and debt also plants the seeds of their demise. Eventually the ever expanding debt forces an end to an empire’s overreach through the process of bankruptcy.

If we are ever to keep real fiscal reins on the government, then we must get the government out of the business of money. Abolish all legal tender laws and let the free market choose its medium(s) of exchange. Put it in the Constitution that the government may only tax and transact in gold. Require a referendum on all spending initiatives, with the cost to the individual attached. Watch how few spending measures are approved when voters see the real cost of each bill, instead of paying through the hidden taxes of inflation and debt accumulation. Watch how few senseless wars are fought when voters see the large war tax deduction on every paycheck.

Over the last 100 years, Americans have completely lost control of their Constitutional money; to the point where they must pay a tax to essentially make change. Imagine breaking a twenty dollar bill and only getting a ten and a five back, with the other five going to the government. This is the potential problem one encounters when attempting to spend gold or silver money. It’s no accident. The laws are specifically set up to force everyone to use fiat currencies.

In order to restore sound money to the market, there are a couple of laws that need to be changed. One is the repeal of legal tender laws, but perhaps more importantly, is an end to the taxation of gold and silver.  This is precisely what the Sound Money Promotion Act does. Senators Jim DeMint R-SC, Rand Paul R-KY, and Mike Lee R-UT are the sponsors.

The objective of the current system is to force everyone to store their wealth in dollars, where it can be surreptitiously taxed via inflation. To paraphrase Keynes, not one man in a million will recognize the nature of this game. This enables the government to run enormous deficits and provides a bailout mechanism for the banks whereby their losses and can added to the public debt.

In order to spend gold or silver money, one must first convert them to dollars. If you were coginzant enough not to store your wealth in a depreciating currency, then you are legally required to pay a penalty for that. When you convert gold to dollars, you are not paying a tax on the ”gains” in gold, but rather the losses in the dollar that you would have suffered through its debasement. Think about that for a second. It’s a critical point of understanding.

Currently we are all trapped in a global currency war in which every country believes it can solve its problems by debasing its currency the fastest. A difficult game to win for sure, and one that tends to destroy middle classes in the process. More and more people are waking up to this reality every day. They are opting out of paper money as a store of wealth and choosing gold and silver.

I’ve consistently noticed an interesting reaction as people begin to save in precious metals. They start to enjoy the process of saving and accumulating real money. I predict that even after the fiat currency crisis passes, that many will not want to part with their real money. That they will want to continue to store their wealth in gold and silver. And ultimately, the thought will occur to many, “why can’t I just spend my money directly? Why must I first convert it to paper and suffer the losses”?

Right now, most people still don’t know what sound money means, or why it’s so important. As a result, the current version of the Sound Money Protection Act will likely go nowhere. But a critical lesson, as to why gold and silver have been money for thousands of years, will soon be taught again. Perhaps then enough people will understand, and we will have our Constitutional money returned to us.

Utah Coin Act

Recently, I was interviewed on the Fox Business Channel regarding the Utah Legal Coin Act. Here is a little background and some interview questions.

For the first time since 1971, gold and silver are once again considered legal tender in at least one part of the United States. The State of Utah passed the “Utah Legal Tender Act,” which “recognizes gold and silver coins that are issued by the federal government as legal tender in the state and exempts the exchange of the coins from certain types of state tax liability.”

The law, signed by Governor Gary Herbert on March 25, is a voluntary system that provides an alternative to the fiat-based Federal Reserve notes that are created out of thin air in unprecedented proportions.

The most significant change from a practical perspective is that the Utah’s state tax code now considers gold and silver coins issued by the U.S. Mint as currency rather than an asset, which means since it is considered money it cannot be taxed. However, federal taxes still apply on these transactions.

1. What is this Utah Legal Coin Act about?

The Utah Legal Tender Act (HB 317) is designed to reinstate gold and silver coin as an optional medium of exchange in Utah intrastate commerce. The bill recognizes the inherent and inalienable right of citizens to voluntarily employ these time-tested, inflation-proof, complementary currencies to foster economic development throughout the state. The bill draws its authority from Article 1, Section 10 of the United States Constitution which provides that no state shall make anything but gold and silver coin a tender for payment of debts. Grounded in long-standing principles enshrined in the supreme law of the land, this statute addresses current, pressing monetary issues in modern American society—issues to which gold and silver coin solutions are uniquely suited.

2. Why do we want/need sound money?

Because the founders of our nation had experienced first-hand the ills attendant with unbacked fiat currency, they provided in Article 1, Section 10 of the United States Constitution that no state is to make anything but gold and silver coin tender for payment of debts. Unfortunately, we’ve departed from the wisdom they imparted, and embraced a medium of exchange that has no intrinsic value whatsoever. The value of today’s dollar is upheld by governmental edict, backed only by the indebtedness of our nation and its citizens. Because of sharp increases in our money supply, our national debt is on an upward trajectory, set shortly to eclipse our gross domestic product. Since there is no historical precedent for a totally fiat money system such as ours ever lasting more than a few decades, prudence dictates that alternative, sound means of exchange be put in place well in advance of any potential crises, such as those endured by the fiat-financed nations and empires of the recent and distant past.

Even absent the specter of catastrophic consequences, an alternative sound money system confers many benefits on citizens and state governments alike. Such a system serves as a refuge from the ills that fiat money produces, including the insidious “inflation tax” that our current monetary system imposes. Consider that the U.S. dollar has lost more than 95% of its purchasing power since decoupling from gold and silver backing. By contrast, sound money systems of the past continued virtually inflation-proof for centuries on end.

3. Are there other states that are looking at something similar?

Virginia House Joint Resolution 557 /> Georgia Constitutional Tender Act /> Ohio Honest Money Project /> Idaho Silver Gem Act, Bill No. 633 /> South Carolina House Bill No. 4501 /> Missouri House Bill No. 561 /> Washington House Joint Memorial 4010 /> Colorado Honest Money Act (HB09-1206) /> Indiana Senate Bill No. 453 /> Montana House Bill No. 639 /> New Hampshire Gold Money Bill 1.1.

4. Why are the states doing this and not the Federal Government?

Because of the co-dependent relationship between Congress and the Federal Reserve, the likelihood of any sound money reform coming out of Washington is remote indeed. Individual states, exercising their sovereign authority, are best equipped to restore sound money to its prior status as a trading currency. So look for a sound money comeback on a state-by-state basis. It makes sense to first support states that are well positioned to make sound money a reality today. Then as the movement gains momentum, reluctant jurisdictions will see the advantages of embracing sound monetary systems.

More information can be found at www.utahsoundmoney.org.

We have received feedback on this from many people so far and many are of the belief that Gresham’s Law will mean that no one will spend real money (gold or silver) into circulation. We will not argue with the concept but will make the case that the market will decide and perhaps there will be some who want to “spend” their profits into the community. For example, when silver was approaching the $50 level there could have been (in theory) people who wanted to take advantage of that price and spend some profits for some good or service.

Also, we think that some merchants favorable to sound money principals might offer a discount for real money being used in a transaction. We can envision two prices—a silver price and a fiat price. Again, the market will decide and it is our hope that real money circulates enough to encourage other states to adopt such measures.

We find it interesting that some of the opponents of the law come from the CPM Group:

Opponents of the law warn such a policy shift nationwide could increase the prospect of inflation and could destabilize international markets by removing the government’s flexibility to quickly adjust currency prices.

“We’d be going backward in financial development,” said Carlos Sanchez, director of Commodities Management for The CPM Group in New York. “What backs currency is confidence in a government’s ability to pay debt, its government system and its economy.”

Larry Hilton, a Utah attorney who helped draft the law, disagrees and says the gold standard would restore faith in American money at a time when spiraling debt is weakening confidence.

“We view this as a dollar-friendly measure,” Hilton said. “It will strengthen the dollar by refocusing policy matters in Washington on what led to the phrase, ‘the dollar is as good as gold.’”

We, of course, side on the principle of sound money and think the U.S. has not instilled confidence for a very long time. I am scheduled to fly to Utah and be with Governor Gary R. Herbert for a ceremonial signing of this law. We again are hopeful that other states will follow and the principle of fair weights and measures will once again be restored to the people.

Summary

We applaud Utah and are anxious to see if this is a moral victory, or actually becomes a trend. In our view a great deal depends upon how the implementation process proceeds. David Morgan interview the creator of the bill and this will be published in the July issue of The Morgan Report.

David Morgan

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For his latest piece over at Financial Times, Roger Altman fires up the economic fallacy machine and throws it into overdrive:  The economy needs more stimulus to recover; recessions must be avoided; we’ll solve our debt problem with more debt; and don’t worry, higher prices are temporary.

Let’s begin with this notion that a recession is a bad thing. Yes it’s certainly painful, like rehabilitation after an injury, but necessary in order to heal. A recession is a contraction in the economy due to the closing of failed businesses and the liquidation of bad investments. The process of clearing the market of these impediments is essential to growth. Critical capital tied up in these failed endeavors must be freed before it can be reinvested in more productive areas. It is these new investments that ultimately create new jobs and form the basis for future economic growth.

When government steps in to prevent this from happening, it only prevents the economy from repairing itself. The problems will continue to fester until they become so great that no amount of government interference can prevent the inevitable correction. When confronted with a looming recession, the cries should be not for the government to do something, but rather demands that it do nothing at all.

Stimulus spending is a political tool used to camouflage economic statistics in the short term. Temporary make-work programs do nothing to foster long term economic growth. Nor do they necessarily benefit individuals who have lost their jobs due to a failed business. The more troubling problem results from the fact that government has no wealth of its own. When government engages in artificial stimulus spending, it does so by plundering the private sector. Productive individuals are no longer able to employ the money that they have earned. The net result can only be positive if you believe that the government can allocate capital more efficiently than the free market. History and common sense tells us that this is not the case.

It makes no difference whether the source of this plunder is direct taxation, issuance of debt, or simply money printing. All is paid for in full by the private sector. The latter method is the most insidious as it steals the purchasing power from wages and savings. This is the source of the “temporary” higher gasoline prices Mr. Altman mentions. Does he believe that the 97% loss in the value of the dollar over the last one hundred years is also temporary?

In the end he leaves us in a conundrum where debt is threatening the future economy, yet still we must continue to rack up more, lest we threaten that same economy. In other words, the last stimulus failed to fix our problems, so let’s do it again.

Why on Earth do otherwise intelligent folks keep lobbying for failed policies? The answer is simple: Policies that are harmful to the economy as a whole are extremely beneficial to a select few. Fallacies are the means by which this select few convince the greater population to go against their own self interests.

I’ll leave it to the reader to decide for themselves whether Mr. Altman is one of the select few that benefits from the fallacies that he pushes.  Two good places to start would be the GM bailout and the Whitewater scandal.

Update: Further googling reveals that he is also a member of the Council on Foreign Relations and a regular attendee at Bilderberg.