This essay is based on the Premium Update posted on February 2nd, 2010.

Perhaps you may have heard mentions recently of the Austrian School of Economics versus the Keynesian branch. Maybe you saw televised interviews with Congressman Ron Paul (R-Texas.) He is the Congressman who has been trying for decades to pass a bill that would give Congress the power to audit the Federal Reserve Bank. What was once a ridiculed, marginal proposal recently passed the House and will soon be considered by the Senate.

Congressman Paul blames the country's economic woes on a long-dead economist by the name of John Maynard Keynes, whose present-day adherents, he says, are the ones bringing the country's economy to the cliff's edge.

Keynesian economics gained dominance after World War II and it was President Richard Nixon who proclaimed in 1971: "We are all Keynesians now." It was about the same time that Nixon "temporarily" severed the link between the dollar and gold, thus laying the framework for the currency's debasement. Congressman Paul is an adherent of the Austrian school of Economics.

Peter Schiff, president of Euro Pacific Capital, is another follower of the Austrian School of Economics.

But there is something else that Paul and Schiff have in common, other than their economic philosophy. Both foretold the housing bubble and the near collapse of our financial system several years before they happened.

Here is what Paul told the House Financial Services Committee in September, 2003, almost five years to the day before the collapse of Lehman Brothers:

"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital that they could not attract under pure market conditions. Like all artificial bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulties as their equity is wiped out. Furthermore, the holders of mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over investment in housing."

Almost no one on the committee, or anywhere for that matter, listened to Paul's warnings. Instead, Paul was mocked and accused of insensitivity towards the poor.

Here is what Peter Schiff had to say in an August 2006 television interview: "The United States economy is like the Titanic and I am here with the lifeboat trying to get people to leave the ship... I see a real financial crisis coming for the United States."

Six months later in a televised debate, Schiff forecast that "what's going to happen in 2007" is that "real estate prices are going to come crashing back down to Earth". As Schiff was sounding the alarm, mainstream pundits were laughing in his face on national TV.

A famous YouTube video with almost 1.5 million views titled, "Peter Schiff Was Right," catapulted him into the spotlight and finally vindicated him after years of marginalization and ridicule.

So what is this Austrian School of Economics and why is it being mentioned now? How is it different from the Keynesian school of economics?

The Austrian School is an outgrowth of classical liberalism. Its main proponents were Ludwig von Mises, Nobel Prize winner Friedrich von Hayek and Murray N. Rothbard.

Austrian free-market economists use common sense principles like the idea that you can't spend your way out of a recession. They view entrepreneurship as the driving force in economic development and see private property as essential to the efficient use of resources. They see government interference as counter-productive-- you can't regulate the economy and expect it to grow. If you tax people and businesses to death don't expect them to keep producing. You cannot create an abundance of paper money out of thin air without making it worthless. The government cannot cure unemployment by just hiring people or keeping them on the dole forever. The bottom line is that you cannot indefinitely live beyond your means -- the economy must actually produce something others are willing to buy.

The Keynesians, on the other hand, advocate a mixed economy predominantly private sector, but with a large government role. According to them, private sector decisions can lead to inefficient outcomes and therefore they advocate active government involvement, including monetary policy actions by the central bank.

Governments should solve problems in the short run rather than wait for market forces to do it in the long run, because "in the long run, we are all dead."

The global financial crisis made Keynesian economics even more popular and provided the theoretical framework for the rescue plans of President Obama, British Prime Minister Gordon Brown and other global leaders.

The Austrian school advocates the opposite. The bust, as painful as it is, should be left to run its course. Society must swallow the medicine, bitter as it is. Any attempt on the part of government to forestall, will only make the inevitable day of reckoning all the more painful. |Here is what Paul wrote a few months ago in a Forbes Magazine column:

Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate... Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollar.

"The party is over," said Schiff about U.S. consumption in a recent television interview. Schiff says the U.S. must transition from borrowing and spending, to saving and producing. The government's efforts to "ease the pain" with economic stimulus packages and bailouts will only make things worse in the long run and could result in hyperinflation if the government continues to "replace legitimate savings with a printing press."

Generally, we agree that the free market is the most efficient mechanism, when applied to the vast majority of economic issues, but let's not forget that there are several mechanisms, where it does not work perfectly - for instance in the case of the tragedy of commons phenomenon. The above does not change the big picture and our libertarian views, but we simply don't like providing you with just one side of a coin.

Going back to the previous analysis - what does Schiff say about gold?

He is among those who believe it will go up to $5,000 even before Barack Obama leaves the White House. If he's been right about so many things during the past few years as far as the fundamental picture is concerned, maybe he's also right about the yellow metal.

Moving on to the technical part of this essay, we would like to provide you with our thoughts on the silver market.

Silver moved below the rising support level, to the $15.5 - $16.5 area, and the Stochastic indicator moved below the 20 level. The latter often meant that a bottom is in or is about to emerge.

The short-term chart reveals that silver is very close to a strong support level - we've marked it on the above chart with a blue horizontal line. Please note that the RSI indicator is also right at the blue horizontal line, which in the past meant that we are at a particularly favorable buying opportunity.

One of the messages that we've received in the past week (I regret that I'm not able to reply directly, but I'm thankful for each of them) included a question about the volume in the SLV ETF.

In the last 5 trading days there have been 4 down days accompanied with very heavy volume. The only up day show approximately half the volume of the down days. During that 5-day period the price dropped about 2.00. Could you address this activity and what I perceive as weakness, in the upcoming weekly update?

Please take a look at the above chart - we've marked the situation in volume with blue and red arrows. The volume clearly confirms the direction, in which the price was going recently - down. This is one of the things that makes us say that this is not yet a "crystal clear buying point". Naturally, there is no such thing as a perfect entry point, but based on the risk/reward ratio it seems that speculators may want to wait for additional signals especially with regard to the declining main stock indices. Silver is historically more correlated with the general stock market than gold, so there is a risk that when stocks plunge, silver may follow at least on a short-term basis.

Summing up, based on the analysis of the silver chart alone, the metal appears to be bottoming, however given the relatively high level of correlation between silver and the general stock market one may want to wait for additional signals before opening a sizable long position in silver. Detailed analysis (4x bigger than this essay with many important charts) of the situation on the general stock market is available to our Subscribers. Naturally, we are still bullish on the white metal in the long run.

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Thank you for reading. Have a great and profitable week!