Kenneth Rogoff, for example, concludes that “improved education alone will not resolve the flaws inherent in today’s capitalism, but it [is an] essential first step down any path to a solution.”

Oh? We never quite figured out the connection. The problem in a nutshell is that developed countries have too much debt and not enough growth. And their debt is growing faster than their output. How then does spending more on non-productive behavior increase GDP output or decrease debt?

Contemporary education is a dead end. The industry has been taken over by zombies. Huge amounts of money — public, private, charitable, debt, savings, earnings — are invested. The output is small, dubious and perhaps even negative.

We know that in some fields, such as economics, the more instruction a person has, the less he knows. Economics — as taught in many universities — is a value-subtracting discipline. As to other fields — politics, sociology, literature, gender studies — we are suspicious.

We have also noted that despite huge increases in per capita, inflation adjusted spending over the last 40 years, test scores have not increased. This suggests that the money was wasted.

But our suspicions run deeper. We suspect that — outside science and engineering — most education, from the first grade to a PhD, is at best a costly luxury…at worst, a big waste of time and money.

Here is evidence, a letter from a former slave to his former master, written only a few years after the War Between the States came to an end. We don’t know, but it is unlikely the former slave had any formal education. But you will notice that today’s typical university graduate could not match his clear thinking or his polite, funny, sarcastic style:

Dayton, Ohio,
August 7, 1865

To My Old Master, Colonel P.H. Anderson, Big Spring, Tennessee

Sir: I got your letter, and was glad to find that you had not forgotten Jourdon, and that you wanted me to come back and live with you again, promising to do better for me than anybody else can. I have often felt uneasy about you. I thought the Yankees would have hung you long before this, for harboring Rebs they found at your house. I suppose they never heard about your going to Colonel Martin’s to kill the Union soldier that was left by his company in their stable. Although you shot at me twice before I left you, I did not want to hear of your being hurt, and am glad you are still living. It would do me good to go back to the dear old home again, and see Miss Mary and Miss Martha and Allen, Esther, Green, and Lee. Give my love to them all, and tell them I hope we will meet in the better world, if not in this. I would have gone back to see you all when I was working in the Nashville Hospital, but one of the neighbors told me that Henry intended to shoot me if he ever got a chance.

I want to know particularly what the good chance is you propose to give me. I am doing tolerably well here. I get twenty-five dollars a month, with victuals and clothing; have a comfortable home for Mandy — the folks call her Mrs. Anderson — and the children — Milly, Jane, and Grundy — go to school and are learning well. The teacher says Grundy has a head for a preacher. They go to Sunday school, and Mandy and me attend church regularly. We are kindly treated. Sometimes we overhear others saying, “Them colored people were slaves” down in Tennessee. The children feel hurt when they hear such remarks; but I tell them it was no disgrace in Tennessee to belong to Colonel Anderson. Many darkeys would have been proud, as I used to be, to call you master. Now if you will write and say what wages you will give me, I will be better able to decide whether it would be to my advantage to move back again.

As to my freedom, which you say I can have, there is nothing to be gained on that score, as I got my free papers in 1864 from the Provost-Marshal-General of the Department of Nashville. Mandy says she would be afraid to go back without some proof that you were disposed to treat us justly and kindly; and we have concluded to test your sincerity by asking you to send us our wages for the time we served you. This will make us forget and forgive old scores, and rely on your justice and friendship in the future. I served you faithfully for thirty-two years, and Mandy twenty years. At twenty-five dollars a month for me, and two dollars a week for Mandy, our earnings would amount to eleven thousand six hundred and eighty dollars. Add to this the interest for the time our wages have been kept back, and deduct what you paid for our clothing, and three doctor’s visits to me, and pulling a tooth for Mandy, and the balance will show what we are in justice entitled to. Please send the money by Adams’s Express, in care of V. Winters, Esq., Dayton, Ohio. If you fail to pay us for faithful labors in the past, we can have little faith in your promises in the future. We trust the good Maker has opened your eyes to the wrongs which you and your fathers have done to me and my fathers, in making us toil for you for generations without recompense. Here I draw my wages every Saturday night; but in Tennessee there was never any pay-day for the negroes any more than for the horses and cows. Surely there will be a day of reckoning for those who defraud the laborer of his hire.

In answering this letter, please state if there would be any safety for my Milly and Jane, who are now grown up, and both good-looking girls. You know how it was with poor Matilda and Catherine. I would rather stay here and starve — and die, if it come to that — than have my girls brought to shame by the violence and wickedness of their young masters. You will also please state if there has been any schools opened for the colored children in your neighborhood. The great desire of my life now is to give my children an education, and have them form virtuous habits.

Say howdy to George Carter, and thank him for taking the pistol from you when you were shooting at me.

From your old servant,

Jourdon Anderson

Regards,

Bill Bonner
for The Daily Reckoning

The Problem with Contemporary Education originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Today, it is more important than ever to keep the long-run perspective firmly in mind…

Lest you’ve forgotten, world financial markets are in a state of unparalleled disorder. More capital has been drained from markets, thanks to the irresponsibility of politicians and the acquiescence of naive citizens, than at any time in modern history. The damage done by bombers and tanks in world wars has been matched by the unintended consequences of central planning and bureaucracies.

Fortunately, however, the political and philosophical trend lines are all pointing to true long-term reform. The pendulum’s swing cannot be stopped, and the coming decades will be unmatched in terms of technological progress and wealth creation.

This is exactly the time to be investing in the future. Metaphorically, and sometimes actually, there is blood in the streets. You’ve probably heard that Baron Rothschild, the famously successful 18th-century British investor, said, “The time to buy is when there’s blood in the streets.” In fact, some believe the original quote was, “Buy when there’s blood in the street, even if the blood is your own.”

Remember, investors who bought and held a diversified portfolio of disruptive technologies before and during the Great Depression got rich. Those who lost confidence because they weren’t seeing the quarterly gains typical in bull markets missed their golden opportunity to “buy low.”

This, I repeat, is a chance of historic magnitude to buy the companies that are going to change the world and power the recovery — like the one I am going to tell you about today.

One company has accomplished a major milestone: The demonstration that the company can produce purified cell populations…

As I’ve explained in discussions about other stem cell companies, the ability to produce pure cell populations is critical. The FDA is extremely concerned that the introduction of unpurified stem cells might cause inappropriate cell growths, or even cancers. Geron’s nonpurified stem cell lines did, in fact, produce microcysts in early tests.

For liver or any other stem cell therapy, therefore, it is critical that the cells used in a therapy are only the type needed for that therapy.

While I had little doubt that this company would solve this problem, I had no idea what the solution would be.

I spoke to the leading researcher who helped me understand this breakthrough technology. Essentially, this company has discovered how to replicate a feature of early embryonic development that begins the process of cell differentiation. Known as the “primitive streak,” it is the initial division of undifferentiated embryonic cells into “bilateral symmetry.” Some bioethicists, in fact, consider this event the “ensoulment” or beginning of life.

Regardless, the primitive streak has unique characteristics that provoke very specific movement of cells within the embryo. The important thing to know is that this company has created artificial primitive streaks. Therefore, they can provoke purified cells to migrate into purified cell populations.

This company also enrolled the first US-based donor in its program to establish the clinical-grade human parthenogenic stem cells capable of immune-matching most humans.

It has already gone through the rigorous bureaucratic and regulatory process to assure that the cells created by these donor cells are acceptable to the FDA.

Regulatory approvals were obtained from the Institutional Review Board (IRB) and the Stem Cell Research Oversight (SCRO) Committee. Cell lines have already been collected offshore, but the American side is critical to the company’s road map.

Highly purified stem cells are not just effective replacement cells; they are young. People who use these cells for therapies will have organs and tissues with life spans that will extend for as much as a hundred years or more.

This will change the nature of medicine as we know it…

It’s the future of biotech. And I believe this amazing technology could eventually improve… and extend… every life of every person on earth…

Regards,

Patrick Cox,
for The Daily Reckoning

Get Rich Slow originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

On Friday, Americans were still convinced that they were never going broke. The Europeans were still squabbling about how they were going to keep from going broke And the Japanese were telling each other that going broke wouldn’t be so bad.

For the United States of America, the road to hell has never been so smooth. The country has been borrowing its way to ruin for many years. But now, the skids are greased. The wheels are oiled. Strap on your seat belt. Whee!

Lenders practically insist that the US government take their money. Reuters reports:

The US government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of US government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the US government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for US debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

“It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible,” according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for US government securities.

On Tuesday, the nonpartisan Congressional Budget Office said the United States was headed for a fourth straight year of $1 trillion-plus budget deficits, a condition that Republicans want to use as ammunition to hammer President Barack Obama’s spending record in the November voting.

Debt is still rising. At some point, it has to stop. Then, the feds go broke.

Why?

Because they are all living on borrowed time and borrowed money, only paying current expenses — including the interest on past borrowing — by borrowing more and more money. When the borrowing stops, they will no longer be able to pay their bills. And when that happens, their bonds will drop in value — fast. Governments will go broke. So will all the people who depend on the feds and their IOUs. Banks. Insurance companies. Retirees. Investors. The defense industry. The education industry. The healthcare industry.

Will this be a bad thing? Not necessarily. What has to happen sometime might as well happen now; get it over with. The longer debt builds up, unchecked, the more debt there is to liquidate when the end comes. Better for the end to come sooner, rather than later, in other words. If the end were allowed to come, we’d soon be at the beginning again.

But if there was one theme that ran through all the “Capitalism in Crisis” essays it was this: the end must be prevented, at all costs. Capitalism is inherently unstable, the writers agreed. Governments must use their power to keep it from going nuts. Otherwise, it may put an end to things.

We disagree. Markets — free markets — are meant to be unstable. They are meant to crack-up from time to time. And thank God they do. Otherwise, we’d be stuck forever with zombie industries and dead end investments. Every once in a while, capitalism throws a tantrum. But so what? Crises, breakdowns, crashes, washouts, liquidations — they’re just fast and efficient ways to get rid of the zombies.

And it’s not just developed countries that are subject to the temper fits of capitalism. Even China — a country still run by people who call themselves communists — is subject to capitalism’s mood swings.

Here’s a report from Bloomberg:

China’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the US recession that began in December 2007.

A Chinese government report yesterday showed that export orders fell last month even as manufacturing expanded. The Shanghai Composite Index (SHCOMP) dropped 1.1 percent yesterday as stronger manufacturing boosted concern that the world’s second-largest economy will decelerate further as the government refrains from loosening monetary policy to tame inflation and curb property prices.

“They slammed on the brakes,” Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said at the Bloomberg Link China Conference in New York yesterday. “Transition is not easy because they are geared up to exports.”

China’s economy expanded 10.4 percent annually in the past 10 years, five times the pace of the US, as the government boosted spending on roads and bridges and manufacturers exported everything from toys to socks. Shilling defines a hard landing as a growth rate below 6 percent.

The economy grew at a 9.2 percent rate in 2011 and its expansion will slow to 8.5 percent this year, according to economists’ estimates compiled by Bloomberg.

Shilling, 74, has been calling for a hard landing in China since at least a year ago, advising clients to sell copper and the Australian dollar as a play on the downturn.

Shilling forecast the US recession in 2007 and warned investors a year earlier that residential real estate was a bubble about to burst. As the Standard & Poor’s 500 index fell [to] a more-than 12-year low in March 2009, he said that higher unemployment would curb consumer spending, leading to “weaker stocks.” The gauge has since rallied 96 percent.

Nobody can be right all the time. Even here at The Daily Reckoning, our timing is occasionally off — by a year or two. After all, we figured the US stock index, the Dow, would be down to 6,000 by now. We thought the post-crisis bounce would have come to an end years ago. Instead, the Dow is over 12,000…and still bouncing along.

But give it time!

Bill Bonner
for The Daily Reckoning

How to Prolong an Inevitable Market Correction originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Well… Speaking of things that probably aren’t safe to do… Jumping on the government’s “strong data bandwagon” probably qualifies… But that’s not stopping the lemmings — or as my friend, Bill Bonner, calls these people the “sheeples” — from jumping on the bandwagon… That’s why I back off and say, “something smells strange here”… And so I begin to dig into the numbers…

Now, let me first tell you that the current government/administration isn’t the first one to cook the books in an election year, so, I’m not just picking on the current administration. I’ve always maintained that the books were cooked, and get extra burnt during an election year. Yes, wouldn’t you do the same thing? Get reelected is the call to order, and there’s no better way to do that, than to show the sheeples how much better they are today than four years or whenever ago…

You know this is all leading to the major story from Friday… The Jobs Jamboree… Where the Bureau of Labor Statistics, (BLS) told us that 243,000 net jobs were created in January, and that the Unemployment Rate fell to 8.3% from 8.5%… OK… Maybe, just maybe, the net jobs are close to being correct… The thing that the government doesn’t tell us is that the employment to population ratio isn’t keeping up with the unemployment rate.

And, the unemployment rate is a joke… I’ve gone over this so many times in the past, so, here’s the Reader’s Digest version of this explanation… As people give up looking for work, they are no longer counted as “unemployed”… Well… In January 1.2 million people dropped out of the labor force… Yes, that’s right, in one month, 1.2 million people dropped out of the labor force, so… The unemployment rate drops… And this will continue to occur the rest of this year, folks… So, now you know!

Look… I’m not saying this report wasn’t a good sign for jobs… All I’m saying is that we shouldn’t be holding any ticker-tape parades for the labor picture in this country…

So… Why am I all in a fuss about this, today? Well… To watch the reaction to the jobs data was like watching everyone rush out to buy a Milli-Vanilli record… Boy are they going to be really disappointed when they find out it was all a sham…

OK… So, on Friday, the sheeples ran to stocks, and bought them like they were funnel cakes at a state fair. Bonds got whacked, but that’s fine with me, because they should get whacked… But currencies, save for the true commodity currencies of Australia (AUD) and New Zealand (NZD), got whacked… But the real trip to the woodshed was for gold (& silver)… And that hasn’t stopped this morning, as gold has lost over $50 of its price since the Jobs Jamboree on Friday!

However, having blinders on right now is probably not a very safe thing to do… And stocks look pretty shaky when you consider that profit margins are circling the bowl, having suffered their biggest quarter-to-quarter drop in the 4th QTR of 2011, since the financial meltdown in 2008… I’m not a stock jockey, so I’ll just leave that at that…

The Aussie dollar pushed the envelope very close to $1.08 on Friday, and the New Zealand dollar/kiwi, traded through 0.83-cents… But, those lofty figures from Friday have been wiped out this morning. The Aussie dollar saw their latest retail spending data weaken, which is probably that last nail in the coffin as far as whether the Reserve Bank of Australia (RBA) will cut rates tomorrow or not… At this point, I would say, why not? Everyone else is cutting rates to promote growth, and it doesn’t hurt their currency…

OK… For new readers… I’m not into countries that debase their respective currencies… But, the markets have turned to a “promote growth at all costs” mentality… So we have to play along… Yes, the “plays along with others” is important in our grades!

I do believe that after this weak retail spending data in Australia, and the price action since, that the rate cut has now been priced in… So, sell on the rumor, buy on the fact is probably in play here.

Look how long I’ve gone this morning without a mention of the euro (EUR)! Not that I was saving the best for last! Another week has gone by without an agreement in Greece with private creditors… And now this past weekend, the Trokia (which is a slang term for the three organizations that have the most power in Greece. And consists of: The European Commission, The IMF, and the European Central Bank (ECB) saw their plans for new austerity measures in Greece rejected by Greek party leaders… So, this is all unraveling very quickly, folks… The Greeks can’t come to an agreement with private creditors, nor can they agree with the Trokia…

Things are pretty dire in Greece… And yet the euro remains above 1.30… Doesn’t that give you any indication of what the markets think of dollars right now? Not that it will always remain that way… Remember, when the year began, I told you that I wouldn’t be surprised to see the euro fall to 1.18, or rise to 1.40…

I would also remind you that I tell you all the time that when picking currencies to own, you want to find countries with sound fundamentals, good fiscal positions, something that the rest of the world wants, or has ties to China…

Friday, we also heard St. Louis, Fed Head, James Bullard, say that the Jobs Jamboree probably removes the need for additional quantitative easing (QE)… Of course he called it “bond buying” as QE is now a dirty word, in Fed Head circles…

OK… One of my chartist friends (whom I’ve talked about before), Scot Pluschau, sent me a note on Friday about how the volume indicators are screaming bearish in the Dollar Index… Here’s a snippet from his post:

“As for this week’s Commitments of Traders Report in the Dollar Index, the Commercials got to bang the register a little liquidating 9,703 short contracts that they were piling on near the highs. As of this report they are short 47,734 contracts and long 3,302, which is greater than a fourteen to one NET short position. This is still a very bearish structure of the COT report as far as I’m concerned.”

Then there was this… Did you see what David Stockman, the former Budget Director under Ronald Reagan, had to say last week regarding Big Ben Bernanke’s testimony before lawmakers? Well… Stockman was full of you-know-what and vinegar, when asked about Bernanke, and he let loose… Remember this is David Stockman talking, not me! (For the legal beagles.)

Bernanke giving politicians advice about fiscal stability is “about as useful as an arsonist’s lecture on fire prevention. His radical zero interest rate policy has destroyed the bond market, crushed the yield curve and eviscerated any resolve to address the deficit on Capitol Hill.”

He went on to say this about the debt… “Basically, they’re going to be facing down a $7 trillion decision and it’s going to hit [the] economy like a ton of bricks if you let the everything expire. And if you don’t you’re going to be borrowing $1 trillion a year and wondering how long Bernanke can keep printing the money. It’s a giant trap that’s been created.”

But when the government can cook the books and print a strong jobs report, everyone takes their eyes off the ball… We need to remain focused on the ball!

To recap… The Jobs Jamboree had the stock jockeys planning a ticker tape parade on Friday… 243,000 net jobs were created in January, with the Unemployment Rate falling to 8.3%… Chuck digs deeper into these numbers and shows that the ticker tape parade should be saved for the NY Giants! Looks like the RBA will cut rates tonight (tomorrow for them) but maybe the rate cut is already priced in. And Greece seems to be unraveling quickly here, folks…

Chuck Butler
for The Daily Reckoning

Jobs Data Sends Currencies and Gold Lower originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Each of the Davos-list celebrities to write on the subject basically ‘talks his own book.’ The politicians tell us that they can fix what is wrong with capitalism. The regulators want more regulations; do-gooders urge us to rely more on good works. The economists have their economic solutions. The entrepreneurs put their faith in can-do hustlers.

Bill Clinton used to be a sharp politician. Now, judging from his comments in the FT, he has moved rapidly from becoming an elder statesman to the kind of senility that affects aging world improvers. Try to figure out what this means:

“Governments, businesses and extra-governmental organizations [can] work together to share expertise and implement lasting solutions…

“What we need is innovation, imagination and commitment. The most effective global citizens will be those who succeed in merging their business and philanthropic missions to build a future of shared prosperity and shared responsibility.”

Those are words that could have been written by a dull-witted robot…or Thomas Friedman.

The words were empty; at least they were not stupid. But there were plenty of stupid words, too, in the series. A representative of Occupy London wrote to say that Friedrich Hayek had “helped us to find capitalism’s flaws.” Hayek pointed out that the widely distributed knowledge of a market economy was much better for making decisions than the centralized information and planning of a state-directed system. But the Occupy writer missed the point completely. He quoted Hayek and then went on to suggest the very sort of meddles that Hayek warned against.

Some writers seemed to have nothing to say whatever. Others seemed to have nothing to say about capitalism; it was as if they had not thought about it. And some, we couldn’t figure out what they were talking about.

All in all, the series has been a big letdown. Capitalism has no real friends and no clear defenders, not at the FT.

We will have to do the job ourselves. Look for our ‘Capitalists’ Manifesto’…

…next week.

Regards,

Bill Bonner
for The Daily Reckoning

A Crisis in Worthwhile Opinions of Capitalism originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Partly, it is because North America saw mobile phones so early. When other regions finally rolled out mobile phones, infrastructures were more modern. The larger reason, however, is that there is so much at stake.

Right now, there are a limited number of players in the lucrative payment network world. Visa, MasterCard and American Express would like to move to your phone. They fear, however, that enabling electronic wallets in phones would allow aggressive young players onto their turf. PayPal, Amazon and Google are, in fact, financial networks, and they would love to do your banking.

So far, progress has been slow, but the emergence of Android is opening up new possibilities. Work is being done by the Mobile Payments Industry Workgroup that would establish standards. What we know for sure is that the established payment networks will do their best to keep out upstarts. We also know they will fail.

Part of the reason for this is political. Part is cultural.

The politics are that Wall Street and the major banks have never enjoyed lower public regard and support. Consumers sense that the bailout profited rich bankers more than consumers. The customer base is not going to support politicians who continue to put the interests of favored banking institutions above those of consumers.

Eventually, market forces always win. Currently, retailers are capable of dealing with only a few credit and debit card companies. This limits competition and keeps prices higher than they would otherwise be. A sophisticated mobile payments infrastructure, which is inevitable now that the Android has broken free, will arise. In fact, it will arise before most people know it’s happened.

The cultural factor I referred to is the difference between the old-school financial institutions and the new electronic services. I have little confidence that Visa or MasterCard is going to do what’s necessary to exploit the convergence. They’re too habituated and institutionalized.

PayPal, Amazon and Google, however, are populated by people who want to transform the financial world. They will find a way to force themselves into an industry that has lost serious credibility and clout due to its participation in the ongoing subprime mortgage fiasco.

Fortunes will be made by financially sophisticated app developers.

Finally, I’d like to get a little speculative and tell you what I think the real long-term consequences of the Linux/Android revolution will be.

It’s not well known, but Peter Thiel, one of the founders of PayPal, was motivated by quite subversive goals. His initial purpose was to create a mechanism for financial transaction outside the reach of governments. He has written:

As an entrepreneur and investor, I have focused my efforts on the Internet. In the late 1990s, the founding vision of PayPal centered on the creation of a new world currency, free from all government control and dilution — the end of monetary sovereignty, as it were.

Obviously, he has not succeeded. Nor do I think we’re going to see such a purely private system in the near future. However, we are moving very rapidly toward developing an electronic infrastructure that would enable brand-new forms of banking. Given our recent experience with the federally controlled financial system, the need is clear.

I won’t detail here how I think this new banking will function. For now, however, I’d just like to warn you that you shouldn’t be too surprised to see completely transformed financial institutions arise from the current rubble. Who knows? Maybe Thiel will be proved right. For extra credit, you can read F.A. Hayek’s Denationalisation of Money: The Argument Refined online here.

Regards,

Patrick Cox
for The Daily Reckoning

Banking on Your Phone originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Units of this trust were trading well above $20 a few months ago. But today, even after silver’s January rally, the units are trading below $15. That’s a 25% decline, which is in sync with the drop in the price of silver.

This recommendation isn’t intended to focus on short-term moves. The idea is to build a solid silver position for the longer term. It’s your way of building a silver play for the next couple of years, by which time we should see very healthy gains.

The Sprott Physical Silver Trust is a closed-end trust that’s entirely focused on physical silver. The intent behind the trust is to invest in and hold substantially all of its assets in silver bullion. It provides a secure, convenient means for investors to hold silver without taking personal physical delivery. The trust does NOT speculate with regard to short-term changes in silver prices.

Specifically, the trust invests in unencumbered, fully allocated London Good Delivery (LGD) silver bars. That is, it owns real silver — the metallic kind that hurts when you drop it on your foot — and not paper promises from any counterparty. About 99.8% of the trust’s current net assets are invested in physical LGD silver bars.

The trust stores its silver at the Royal Canadian Mint, a “Crown corporation” located in Ottawa, Canada. The Mint is responsible for loss or damage to silver in its custody. To ensure security, the silver bullion is subject to periodic inspections and annual audits.

The Mint is also the counterparty to the Sprott Trust, meaning that there’s no financial institution standing between the unit holder and the silver. Thus, this Sprott Trust is almost as good as keeping silver yourself (which I still recommend, in reasonable quantities). I’ll even grant that this trust is, in some respects, more convenient than buying the metal and having to store it on your own.

The trust has a unique physical redemption feature for large unit holders. Investors who hold the equivalent dollar value of 10,000 ounces of LGD silver bars, or more, may “redeem” their units for physical silver. If you do that, then the Mint will deliver the bars (almost) anywhere in the world via an armored transportation service. The trust is structured such that any physical redemptions will not dilute remaining unit holders.

Furthermore, there’s a nice tax advantage for non-corporate US investors. If you hold trust units for a minimum of one year, and timely file the appropriate forms with the IRS, the trust units are taxed at a capital gains rate of 15%, versus 28% — which is the higher rate that applies against most silver exchange-traded funds and silver coins.

I’ve seen an estimate that, over the course of history, mankind has mined and produced over 42 billion ounces of silver. If that’s true, I have no idea where most of it is. Evidently, all that silver has been used up in industrial processes or lost to corrosion and the like. The point to keep in mind is that there’s very little silver out there for investment purposes.

According to the silver scholars at Sprott, the current physical silver supply that’s available for investment, in US dollars terms, is worth less than 1% of the equivalent value for investable gold.

Looking at it another way, for every one dollar available in physical gold bullion and coins, there’s less than one cent available in investable silver. This supply discrepancy isn’t reflected in the current silver price.

What else? Among other things, we’re already seeing a slowdown in copper output due to declining industrial demand. But a copper slowdown will — as night follows day — certainly cause a slowdown in silver output. That’s because a large percentage of the world’s available silver comes as a byproduct of copper mining.

Give the copper slowdown a few months and the decline will induce a shortage of silver. This phenomenon will just plain bite the silver markets in the rear end. We may even see another sharp upward spike in silver prices a few months down the road.

I would never tell you that silver prices couldn’t fall further. In this market, anything is possible. But if silver prices do fall in the near term, this Sprott Trust is still a solid play over the long term.

The bottom line here is that the Sprott Physical Silver Trust offers a convenient and tax-efficient investment in physical silver. It’s the next best thing to buying your own bars.

Regards,

Byron King
for The Daily Reckoning

My Favorite Way to Own Silver originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

What is most interesting is the movement in the price of gold. It seems to be heading up again — almost no matter what else is happening.

So, let’s look at what might be going on…

If investors sensed a recovery…they would expect banks to lend more freely…people to shop more freely…and prices to rise.

This would raise consumer prices; the price of gold should go up.

But if the market sees growth and inflation ahead, why is oil slipping? And why is the Baltic Dry Index — which measures shipping prices — at a 25-year low? And how come last month’s employment figures were disappointing? And why aren’t stock market prices going up?

Most important, if the economy is really recovering, why is the 10-year note yielding only 1.82%? And what about the long bond? Shouldn’t it be trading at a yield higher than 3%?

And how come house prices fell over the last year…and the last month?

And how come incomes are falling?

Or, to look at it from the opposite point of view, how is it possible for a real recovery to take root in the hard, barren soil of falling house prices and slipping consumer earnings?

But if the economy is not improving…then there should be no increase in inflation…and no pressure on the price of gold, right?

Maybe investors don’t anticipate a recovery at all. Maybe they’re buying gold because they see the economy getting worse, not better. We associate a rise in the price of gold with inflation. But gold is much more versatile than we think. It protects your wealth when paper money loses its value. It also protects your wealth when paper money gains in value. It protects you when you are right…and when you are wrong.

How so?

During the Great Depression, for example, the price of gold rose…against dollars…even though the prices of food, clothing and other consumer items…as well as the prices of investment assets…were falling in dollar terms. Why? Because money gains value — relative to things — in a depression. Gold is money. It is the best money. It is the only money that has stood the test of time.

Besides, there is more going on. In a financial crisis…or a depression…investors begin to doubt that their counterparties will make good. Banks fail. Investors go broke. You own a mortgage, and then you discover that the homeowner has left town…and the house has lost half its value. You own a note, and then you discover than the payer is bankrupt; your note is worthless. You own shares in a company; and then the company goes out of business.

When you are in a de-leveraging phase, you discover that many of the assets of the previous credit bubble are not assets at all. And while you’re waiting to find out, the best thing to have in your safe is gold.

As uncertainty rises; so does the price of gold.

The price of gold also rises when the return on other assets declines. At 1.82%, the real return on a 10-year T-note is negative. Consumer prices are rising faster. So, the reward for lending to the government is less than zero.

Normally, holding gold costs you money. You give up the return you could get from ‘risk free’ investments (Treasury debt). Now, you give up the risk from reward-free investments.

Gold goes nowhere. It produces no yield. It pays no dividends. It makes no profits. You can’t live in it. You can’t drive it. You can’t hang it on your wall and admire it.

But when the return on Treasury debt is negative, what do you give up by owning gold? You give up a loss!

You also give up the risk of a much bigger loss. The Fed is bound and determined to bring up the inflation rate. Ben Bernanke has suggested that he might set the inflation target higher than 2%. He has announced that he will keep the Fed’s key lending rate near zero for the next 3 years. He has hinted that he is ready to print more money — QEIII — if conditions warrant.

Holding gold protects you from Bernanke’s success. For if he succeeds in raising the rate of inflation, gold will surely soar. And there is substantial risk — bordering on certainty — that he will be no better at creating moderately more inflation than he has been at creating moderately more GDP growth.

It is quite possible that he will overshoot.

Normally, inflation is a feature of the banking system. The system takes the Fed’s monetary grubstake and parleys it into the nation’s money supply. Banks magnify the money supply by lending…and thereby create more demand, which raises prices. They do this by making loans…to people who then spend the money.

This sort of inflation is controllable, by raising interest rates and tightening banking credit rules. But there’s another form of inflation. The kind that starts with an “h.”

Hyperinflation happens when the banking system breaks down. People lose faith in the money itself…and the people who control it. Foreign dollar holders may worry that the Fed is printing too much money. It may even be good economic news that causes them distress; they may anticipate higher inflation rates, and a sell-off of the dollar, which would lower the value of their dollar reserves. They may figure that they are better off diversifying into yuan…or gold.

Then, when other investors and householders see the dollar falling…they get panicky too. Pretty soon, people are digging around in drawers, bank accounts and mattresses…looking for dollars — just so they can get rid of them.

That is when dollars hit the hyperinflationary fan. Our old friend Michael Checkan tells what it was like in Argentina in the late ’80s:

“Imagine a $2.00 gallon of milk spiking to $775.40 within a year — like in Argentina, 1988.”

Bill Bonner
for The Daily Reckoning

Buying Gold in Uncertain Times originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

I think the currencies are well bid this morning, because most economists and analysts believe the US Jobs Jamboree this morning will be strong, thus fueling the global growth thoughts. So, the Jobs Jamboree is the 500 lb. elephant in the room, today, so we might as well go right to it!

January’s Jobs Jamboree is expected to show job creation of 140,000… You may recall that December’s trumped up figure was 200,000, but as I pointed out then, I’m sure a lot of that was seasonal part-time workers. So, while 140,000 isn’t going to give our economy a strong push, it’s better than what we saw all of last year. The Unemployment Rate will remain at 8.5% according to the Bureau of Labor Statistics (BLS)… Of course, long time readers know that I don’t believe anything that the BLS prints, and prefer to use the numbers that John Williams prints over at Shadow Stats, where he believes that unemployment is really around 23%…

The thing to really watch in this report, though, is the Average Hourly Earnings, and Average Weekly Hours… This is where wage inflation shows up before most people know what’s going on… I would bet that wage inflation is nowhere to be found in this report, and that’s the kind of thing that the Fed wants to hear, so they can point to deflation when they implement their next round of quantitative easing! OK… That’s just me forecasting that the Fed will do that, I don’t have any inside information of the Fed Heads’ thoughts… Just what I read…

So… The way the market has been dealing with the Jobs reports is that a strong report is bad for the dollar and vice versa… We’ll just have to wait-n-see, but the price action of the currencies this morning indicates to me that the markets will keep that strange perverted way of reacting to the Jobs Jamboree…

Yesterday, I found myself watching news headlines go across the screens throughout the day, and each time I looked up from what I was doing, a different headline would catch my eye. Here’s a snippet of the ones that caught my eye yesterday.

1. Bernanke urges Congress to put US fiscal policy on a sustainable path

2. Bernanke warns that the nation risks the possibility of a sudden financial crisis unless action is taken

3. Bernanke says discretionary spending cuts will not fill gap

4. Fed Chicago President Evans said the central bank needs a clear low-rate commitment or a third round of purchases of Treasuries and Mortgage bonds to further stimulate a still struggling economy.

5.  US debt balloons to $15,356,140,000,000

6. Weekly Initial Jobless Claims drop from 379,000 to 367,000 last week.

OK… Let’s address these and why they are important to the value of the dollar…

1. This isn’t anything new here, folks… Even Big Al Greenspan warned lawmakers of their addiction to deficit spending… What I do believe Bernanke was doing here though, was deflecting blame. The lawmakers wanted to chastise him for his low rate policy to 2014, and Bernanke was quick to deflect it to the lawmakers’ problems.

2. Again, Bernanke is deflecting… However, he’s absolutely correct here. But then he wouldn’t be if there hadn’t been deficit spending going on for a decade!

3. Yes, the discretionary spending cuts will not bring us back to a sustainable path, but at least they are a start! And if we continue to go along without any cuts at all, our debt will be around 140% of GDP in 2015… When we reach the point of no return, only the shadow knows, but without real spending cuts, we’ll get there faster than even “doom and gloomers” think…

4. This is simply laying more groundwork for QE3. And another round of QE will deep-six the dollar once again!

5. When you put down all the zeroes, and all the commas, and the numbers, it’s pretty daunting, don’t you think?

6. Long ago, I told you that eventually, companies run out of people to cut…that is without closing their doors, so eventually the 400,000 per week figures for new claims was bound to come down… But if you did it as a percentage of the working force, I would think the number would not look so good… As if 367,000 new claims last week was a “good number”…

OK… That was fun, eh? This morning, the euro is holding its own around 1.3160, and that’s in the face of a weak Eurozone Retail Sales for December, report that printed this morning.

I think that given the ongoing Greek saga, and this weak retail sales figure, the euro would be getting taken to the woodshed… However, that’s not happening, and there are two reasons that I believe outweigh the bad reasons… First and foremost… The euro is the offset currency to the dollar… If the lemmings aren’t flocking to the dollar for so-called safe haven reasons, the euro gets to add to its value… And second… The news coming out of China regarding the Eurozone is promising…

Chinese Premier Wen Jiabao, who has been meeting with German Chancellor, Angela Merkel, told Ms. Merkel, “China may be prepared to assist in resolving the Eurozone debt crisis.” The markets are fixated on the thought that “may” is a “will”… It remains to be seen if China does find a way to participate in helping the Eurozone… As I said yesterday, China will find a way, for they understand that they need to be the world’s financier, if they want to have the reserve currency of the world!

Gold and silver had very good price action yesterday, and are struggling to gain traction this morning ahead of the Jobs Jamboree… In keeping with my thoughts on the direction of gold… I saw this in the UK Telegraph… “Troy Asset Management began buying gold at $450 an ounce in 2005 and now has 16pc of its £60m Troy Spectrum fund invested in the precious metal. Troy’s co-manager Francis Brooke tells Robert Miller why he believes the value of gold will continue to rise. Gold will rise against heavily debased currencies.”

The Swiss National Bank (SNB) is going to have to show how strong their resolve is regarding the “floor” that was established for the euro/franc cross at 1.20… The cross currently stands at 1.2045… So, it’s getting close to the level that the SNB will have to do something or suffer the consequences of having the franc rise to bloated, overvalued levels once again. This will be “the test” for the SNB… It will be interesting to see how the SNB reacts now that former Governor Hildebrand is gone…

And there was a story that I read last night regarding the Chinese renminbi (CNY)… The Chief Executive of Fosun International Ltd., told reporters yesterday that he believes the “yuan (renminbi) will likely depreciate against both the US dollar, and the euro this year, especially before the Eurozone debt crisis is resolved.” He bases this thought on the “flight to safety of dollars that will occur this year due to the Eurozone problems”…

OK… This is the first thought I’ve seen on the renminbi that goes that way… But, being fair, I printed it even though I don’t believe in it…

Then there was this… From The Wall Street Journal…

After years of delay, Congress took a big step toward approving new rules to ban lawmakers from trading stocks based on information they pick up in the halls of Capitol Hill — a move aimed in part at helping repair the institution’s low approval ratings.

The US Senate was poised to pass legislation Thursday that would ban insider trading by lawmakers, after senators reached an agreement to vote on a series of 20 amendments to the bill. Brody Mullins has details on The News Hub.

The Senate voted overwhelmingly, 96-3, to pass the legislation, called the Stop Trading On Congressional Knowledge Act, or Stock Act. The bill now moves to the House, where Republican leaders said they would vote on it next week.

OK… Who are the low-lifes that voted against this? Just shows to go you that there’s always people who think they are above the law…

To recap… It’s a Jobs Jamboree Friday, and the markets are all expecting 140,000 new jobs created in January, not the stuff that strong economies are made of, nor what December produced, but still better than nothing! But if the markets like it, the currencies should be good today, after holding their gains yesterday… China’s premier is giving signs that he will allow China to participate in the Eurozone… And the SNB is going to have to show their resolve soon…

Chuck Butler
for The Daily Reckoning

Currencies Hold Ground Ahead of Jobs Jamboree originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

One of the more striking features of this whole modern spectacle must surely be the stark contrast between the state and the free markets that exist stubbornly, gloriously, in spite of its best efforts. Wherever evidence presents itself, it appears to do so with the sole purpose of expressing this juxtaposition in ever-higher relief.

This is no mere coincidence, Fellow Reckoner. The two entities are day and night…white and black…truth and government statistic. To the extent that the former exists, the latter does not. One produces; the other consumes. One adds value and meaning to peoples’ lives; the other subtracts value and feeds on the self-worth of those it engulfs. One is dynamic, responsive, nimble and creative; the other is brittle, deaf, lethargic and breathtakingly inelegant in all its forms. One serves customers, the other serves sentences.

It might well be said that, while the free market bends over backwards to serve the needs and desires of individuals, the state merely bends individuals over backwards.

The latest battle between these diametrically opposed nemeses is today being played out in the theater of intellectual property rights. Thanks to shared, copied articles, you’ve no doubt read all about it here and elsewhere. (In addition to some excellent commentary in these very pages, we would further refer interested Reckoners to this piece, penned by Mr. Stephan Kinsella, a man many consider the libertarian expert on this most important subject).

To be sure, the IP skirmish is just one of many such political hot spots, but it may well be one of the most important.

Free individuals’ ability to copy and learn from each other (without denying anyone else a single atom of realized, tangible or even “ownable” property in the process) is an important — arguably vital — tool in our ongoing struggle against the oppression of the state. It is an advantage, in other words, of immeasurable importance and one we surrender at our peril.

To illustrate the point, here is an excerpt from an excellent article by Kevin Carson that appeared on the Center for a Stateless Society website earlier this week:

Because local nodes in self-organized networks are free to take action or innovate without waiting for permission from an administrative apparatus, and every other node in the network is similarly free to learn by example and adopt the innovations without permission, they fully exploit agility advantages of networked communications in ways that authoritarian hierarchies are unequipped to.

[And here is a link to the full article, which we are happy to share with you without permission from the author, in case you’re interested: Why the State Will Fail.]

By larding itself with bureaucracy, inefficiency and structural rigidity — all designed to serve the privileged, politically-connected looter class working the machine behind the curtain — the state positions itself at a considerable disadvantage with respect to the free markets — the self-organized networks — that it seeks to crush.

Happily, we don’t have to follow this path by subscribing to the state’s sinister web of dysphemisms and doublespeak. We can, instead, reject its definition of sharing and learning and emulating as “pirating,” and as something, therefore, to be outlawed. We can likewise reject the state’s logically-circular notion that ideas — non-scarce, un-ownable patterns of knowledge — ought to enjoy violence-backed protection against “aggression”…from a violence-based institution that exists only because of aggression.

Most private citizens would have the decency to feel embarrassed if they had to defend this warped sort of logic. The state, on the other hand, revels in its position…but only because it doesn’t have to defend it. It simply claims the right to enforce it. A big difference, you’ll surely agree.

But here, too, the state’s designs to undo all that humanity has come to enjoy as a result of said copying, emulating and learning from each other comes unstuck. How, exactly, does one grant — much less enforce — an unnatural monopoly on intangible, infinitely reproducible concepts? How does one erect a protective circle around things that have no physical properties?

The state’s strategic efforts (SOPA, PIPA, ACTA and the like) to crack down on the spread of ideas ultimately amount to little more than a woeful, modern day adaptation of the mystical dream snare. Fortunately for us, ideas (and dreams) cannot simply be “caught” in a net…just as they won’t be caught on the net. The brave individuals who daily resist this tyranny ingeniously find workarounds to the state’s feeble-minded aggressions. And bravo to them!

Continues Mr. Carson:

We saw this recently with the development of Firefox’s DeSopa circumvention utility before SOPA even came up for a vote, and Anonymous’s massive same-day DDOS attack in response to a federal takedown of MegaUpload that had been months in the planning. Last summer Tor developers released a workaround the very same day Iranian authorities thought they’d shut down the encrypted router network.

The second the state constructs a wall, 2…4…8…10,000 copies of the very idea it was built to contain emerge on the other side. They are like ornery little neutrinos, seemingly popping in and out of existence as if only to mock the government’s Neanderthalic, cinder block goals.

Fortunately for us, good ideas don’t need or seek protection, nor do they exist to serve any one master. They are non-scarce entities and, as such, are here to serve us all.

On that last note, if you would like to share, copy or “pirate” any article you see appear in The Daily Reckoning, we’re making it as easy as possible. You can:

1) Go to our website and forward the link to your favorite articles to friends or,
2) Find and “like” us on Facebook, where you can share our articles or,
3) Do likewise by following us on Twitter.

As the author Paulo Coelho recently wrote in a fantastic blog post (which you are free to read here):

“Pirates of the world, unite and pirate everything I’ve ever written!”

Joel Bowman
for The Daily Reckoning

How Piracy Works Against an Unnatural Monopoly originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.