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“Day of Reckoning”

SEPTEMBER 19, 2008


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 principles.





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 instruments!


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 paper?"


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.




The Melman Report

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