A Melman Minute
By: Leonard Melman
Mid-Year summary and outlook (Part
Two)
In our MM of June 30, we stated that, in our
opinion, many of the difficulties now facing the world have their origin in the
unrestricted growth in monetary aggregates which has taken place since FDR
removed the limitations of gold from the American dollar. We honestly doubt
that American public schools and universities ever teach students about the
monetary degradation that has taken place since. However, we would simply point
out that, once the restrictions of gold were abandoned in 1933 and the
government became enabled to contract for debt on an unlimited basis, the
balance sheet of the United States government has undergone a profound change.
In 1930, the United States national debt was $16.1
billion or $131 per capita. By mid-2008, that debt has now reached $9.4
TRILLION, or about $31,000 per capita. In other words, once the restriction
gold imposes on new monetary creation was removed; the debt of the United States
grew in just 75 years by almost 600 times the amount which had been accumulated
in the preceding 144 years.
In our opinion, the U.S. dollar can no longer be
counted upon to retain significant purchasing power into the future in the face
of such reckless monetary policies and the strains on the currency, which could
have epochal implications if the U.S. Dollar begins to fail rapidly, are
beginning to finally emerge into public view.
When listing the potential troubles the world is
facing for the second half of this year, the spillover from the housing debacle
in the USA, which has been spreading to other nations of late, remains high on
the list, particularly when the effects of the petroleum complex price increases
are contemplated. In short, housing prices continue to fall, further
exacerbating the diminishing ability of American consumers to consume at
anything resembling their rates of the past few years and, most notably, the
entire American 'home in the suburbs' dream is eroding.
Christopher Leinberger, Professor of Urban Planning
at the University of Michigan, recently declared to Atlantic Monthly magazine,
"...Today, the pendulum is swinging back toward urban living, and there are many
reasons to believe this swing will continue." He noted, for example, that in
Lee County, Florida, one in every four homes stands empty. Other experts,
noting that the price of gasoline may remain high for years to come, are
convinced that transportation, utility and taxation costs associated with
maintaining suburban living styles will become so expensive and unattractive
that home values in the suburbs will continue to plunge.
Professor Leinberger quotes a study that if present
trends continue; America could have an excess stock of twenty-two million
large-lot homes as former suburban-dwellers flee to the cities. Unfortunately,
many cities are ill-equipped to handle such an influx. Looking to the future
for suburban 'McMansion communities', he concludes that, "...some that are
lovely and affluent today, may become what inner-cities became in the 1960s and
'70s - slums characterized by poverty, crime and decay." If the suburbs decline
as the professor anticipates, we can only shudder at the potential destruction
of real estate values which will ensue, further exacerbating the difficulties
facing mortgage insurers, investment banks and other financial corporations
which have invested heavily in real estate values through the years.
One news event publicized this morning reflects the
growing difficulties faced by consumers, not just in America, but in the
industrialized world. Coffee giant Starbucks, famous for the $4 and $5 cup of
specialized coffees, just announced they would be closing six hundred retail
locations in the coming year. As their customers' discretionary incomes come
under increasing assaults, it is becoming apparent that expenditures on luxuries
such as high-priced Starbucks cups of coffee are among the first to go.
Other once-popular industries are threatened as
well, including those which manufacture and distribute power boats, giant
recreation vehicles and motor homes, large pick-up trucks and the once-popular
Suburban Utility Vehicles or SUV. In fact, both Ford and General Motors shares
have plunged to multi-decade lows, wiping out tens of billions in shareholder
equity, as sales of many of their most profitable lines plunge.
The overall situation has grown sufficiently
threatening that Canada's largest national newspaper, the Globe and Mail,
recently ran an editorial which listed the horrendous roster of problems which
will be facing the next President of the United States. Among the problems they
itemized were:
-
High prices for fuel and food
-
Heavy consumer debt loads
-
Labor market softness
-
A still-shrinking housing sector
-
Tightness in credit markets
-
Declining consumer standard of living
-
Foreign ownership of U.S. government debt
-
Exploding future costs of Social Security,
Medicare and Medicaid
-
Huge budgetary and Balance of Trade deficits
Their concluding paragraph contains this summary
which is worth noting. "The U.S. government is up to its ears in debt and faces
growing and almost intractable demands on its resources. Sooner or later, Mr.
Obama and Mr. McCain will have to face these facts."
Among the other problems we note are the potential
for rising interest rates which could further hamper economic stability, growing
instability and uncertainty in the petroleum supply chain and, perhaps most
surprisingly, the onset of a subtle and negative change in the opinion regarding
the anticipated futurerate of economic expansion in China.
Regarding interest rates, one of the world's leading
experts on American government financing, Bill Gross, just told the Dow Jones
newswire that he expected interest rates to, "jump higher from 2009 and onward."
In terms of oil production, political and social instability is threatening to
eliminate production from Nigeria, one of the world's finest sources of low
sulphur, or 'clean' petroleum. Production from that nation has already fallen
to the lowest level in nearly two decades.
However, it is China that is one of our chief
concerns going forward, particularly as that nation's economic progress is a
major factor in base metals demand and prices. Stories are beginning to emerge
that all is not well in China. Just to name a few of their problems, the
Shanghai stock market index has been more than halved, pollution and water
supply problems abound, inflation is rising sharply, earthquakes and flooding
have spread tragedy and worldwide demand for their production is now becoming
suspect going forward. In fact, many manufacturers are considering re-locating
their ventures out of China and into nations closer to North American and
European markets as trans-Pacific transportation costs begin to mount. Mexico
could be a significant beneficiary of such a trend.
Going forward, we are of the opinion that gold and
silver will outperform many markets as the depths of the difficulties facing the
world begin to gain public attention. We believe gold will continue to move
toward $1,000 per ounce, encounter some resistance at that level, and then break
through late in the third quarter or early in the fourth - and then the rally in
gold could be spectacular, which should also benefit silver. However, in our
opinion, base metals could encounter an environment that reflected growing
questions about the growth of future worldwide demand.
This morning's markets show the precious metals
higher on balance, with gold holding above $940 per ounce and silver (see chart)
continuing to advance strongly, now holding above $18.25 per ounce. Base metals
are split with copper having just exceeded the $4.00 per pound level for the
first time in many months, but lead, zinc and nickel all showing new weakness.
The U.S. Dollar has fallen sharply with the DX Index now within one point of its
multi-year low and securities markets are declining somewhat with the Dow down
30 points while the TSX is off close to 50 as of 8:30 AM PDT. Crude oil is
trading near $141 per barrel.
(All prices US$)
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