Note: For readers not familiar with the concept of our “Melmania” section,
this is where your editor can take any subject and develop arguments regarding
some ultimate conclusions. Since some of those conclusions might sound
extremely radical, the name of “Melmania” seems appropriate.
During the three decades and more that your
editor has been following these markets and studying literature relating to hard
money investments, one of the primary themes of what might be termed "hard
money" economists or "Chicago School" economists is that money must have genuine
value in and of itself. Therefore, it follows that money which does not have
that value is fraudulent, or at least somewhat phony.
As part of this understanding, there has been a
great deal of ink devoted to the subject that governments in general and the one
in Washington, DC in particular rejected gold as money because of the
limitations it put on them and, since 1933, have been playing a sort of 'con
game'. They have been talking the game of monetary restraint while
walking the game of ever-increasing monetary creation in order to finance
the endless schemes of government.
Therefore, these economists have been predicting
a "Day of Reckoning", which is also the title of an important financial book
authored in the late 1990s by Davidson and Rees Moog. According to their
thesis, that day will come when the markets of the world begin to reject the
American dollar as a store of long-term value, which is generally accepted to be
one of money's primary functions. When that day happens, the theory then tells
us that the world will turn to gold as that genuine safe store of value.
For year after year, the monetary magicians in
Washington have seemingly been able to pull one monetary rabbit out of their
hats after another. While the reality is that the money supply - as measured by
the now-defunct M-3 category - has ballooned from less than two U.S. trillion
dollars just two decades ago to an estimated proxy figure of fifteen trillion
dollars at this time, they have somehow convinced the public to hold to the
theory that their monetary leaders are acting responsibly.
Therefore, the monetary collapse which so many
have forecasted for so long has never taken place. The world has so far
retained confidence in the Greenback as the reserve currency of this planet
through thick and thin.
However, we believe that the scale of
absorption of debt involved in the rescue operations announced over the past few
days will have two tremendous effects. First, it is on a scale sufficient to
truly damage, if not completely ruin, the perception that the American monetary
authorities are proper stewards for the world's media of exchange and, second,
that they will violate and rule and go to any extent to
avoid short term economic pain no matter what might be the long term
consequences to the American and world economic structures.
Accordingly, we are making this "Statement of
Philosophy" as it applies to the thinking underlying this newsletter's
IMPORTANT PHILOSOPHIC STATEMENT
Well, the die is now cast in stone. The U.S.
government has demonstrated that it will now guarantee a solution every major
financial consideration now afflicting our tortured planet. Problems in banks -
the U.S. will buy up the banks! Problems in the quality of receivables - the
U.S. will buy up the receivables! Problems in the U.S. auto industry - the U.S.
will rescue the auto companies! Problems with the quality of debt held by money
market funds - the U.S. will guarantee the redemption of money market funds
investments! Problems with mortgage receivables in terms of both quantity and
quality - the U.S. will accept them as collateral for Federal Reserve debt
But we have one question to ask: "As the
quantity of newly-created Federal Reserve instruments required to accomplish
these deeds of salvation escalates toward infinity, who will undertake to
guarantee the acceptability and value of U.S. government currency and debt
At "The Melman Report", we believe that will
become the dominant question of all over the coming months and years. We
also believe that the answer to that question will become a major determinant in
the future price of gold and the other precious metals.
We would also offer the opinion that the United
States of America, a nation founded squarely on a deep and profound belief in a
free market and free individuals, has turned a major corner toward
central-government control of industry and commerce, a basic tenet of socialist
dogma. Their government now has direct ownership and/or control of portions of
the mortgage industry, the banking industry and the brokerage industry. Cries
are now being heard that Washington must "rescue" the auto industry as well.
Your editor can easily contemplate the feelings
of despair among the spirits of America's early champions of liberty, such
historic figures as Thomas Paine, Patrick Henry, Washington, Jefferson, Madison,
Monroe and Adams. We can also imagine that Karl Marx must be smiling a broad
smile in his portion of eternity as the nation which espoused the most stringent
opposition to his philosophies now quietly turns toward his direction.
It is our belief that the events of the past two
weeks in Washington carry truly historic implications - and at TMR, as advocates
of economic freedom combined with individual liberty, we are none too pleased
with those implications.