A Melman Minute
By: Leonard Melman
July 25, 2008
One of our greatest personal concerns is the
overwhelming growth in governments here in Canada and America over the past few
years and their tendency to regulate and dominate virtually every marketplace.
That concern has been heightened enormously during the past few months,
particularly in America, as one program after another is enacted into law,
aiming to resolve some crisis by turning it over to the tender hands of
government regulators and financing those resultant actions by dipping
every-deeper into the national treasury.
The headline attached to a recent Associated Press story about the House of
Representatives 'rescuing' the lending giants Fannie Mae and Freddie Mac
illustrates the point when it read, "U.S. lawmakers give green light to
home-rescue legislation." The message, at least to us, appears clear: Whenever
serious difficulties appear, all that is required is the correct degree of
meddling by lawmakers into the economic structure.
This concept is nothing new and, in fact, one of the most glaring examples came
in post-war Britain when the Labor government was in power and one chaotic
problem after another occurred, and the choice of 'solutions' always came down
to yet another government program, most often including some degree of
nationalization, subsidy or operating regulations. Noted economic writer, Henry
Hazlitt, described the result in this manner:
"The whole system of priorities, allocations, quotas, and licenses causes
endless delays, keeps efficient concerns from expanding, and keeps inefficient
concerns in business. Production is lost all around not merely because an army
of men is created to issue orders rather than produce, but because producers
themselves must spend so much of their time trying to get licenses and
allocations instead of finding out how to reduce costs and prices and make the
goods consumers really want."
Anyone attempting to drive a truck laden with consumer goods across the
Canadian-American border - in either direction - must wonder if Hazlitt's
comments weren't aimed at the modern-day dilemma of strangling bureaucracies,
intensive and time-consuming procedures and huge increments of new (and, in our
opinion, worthless) expenditures of capital, time and effort involved in the
entire process of moving goods from producer to consumer across that border.
Border crossings are hardly the only case in point as the numbers of new and
complex laws regulating virtually every industry - with mining surely no
exception - continue to pour forth in virtually endless streams on from
legislative bodies on both sides of the border. It is our belief that these
regulations continue to make industry less efficient, drive up costs, and weaken
the underlying economic structure. As a consequence, the various governments
then find it 'necessary' to solve the new problems with additional legislation
and additional government expenditures which, in America's case, lead to further
pressures on the already-beleaguered U.S. Dollar.
In our opinion, this leads to a strengthening of the case for a sustainable bull
market in the precious metals.
Several weeks ago, we noted some of the historic examples of runaway
hyperinflation and included Zimbabwe on that list. We can now report that the
situation in that nation is going from the ridiculous to the sublime. A photo
taken by Reuters' photographer Philimon Bulawayo and published in the National
Post shows a one hundred billion Zimbabwe Dollar banknote against a background
of three eggs. The accompanying story notes that this quantity of currency will
buy you those eggs or perhaps two loaves of bread - if you can find them at all.
However, there is hope that the chaos might be nearing an end as the German
supplier of special banknote paper has suspended deliveries to that nation.
Unless President Robert Mugabe is able to continue printing (so-called) money
and pay his military and bureaucratic supporters with some form of usable
currency, the danger to his regime will grow, hopefully to the point of collapse
and some form of sane and rational rule might return to that once-prosperous and
productive nation.
Zimbabwe is a perfect example of the evils of unrestricted issuance of unbacked
paper money. While this example involves a relatively minor nation in the
international scheme of things, observers had better be preparing themselves to
field the much larger question which is: "What would happen if the world's
largest issuer of unbacked monetary values - the United States of America - were
to print (or electronically produce) a fiat currency expansion of sufficient
order to cause the entire world to question the sanity and wisdom of holding
their reserve monetary values in that currency, namely the United States Dollar,
which was once esteemed to be 'as good as gold''
In the meantime, two news stories highlight the polar opposite views of the
economy and general securities investments. On he positive side, an article was
just released by the U.S. Geological Survey (isn't it amazing how positive
economic articles are released by various government agencies just when the
marketplace appears to be tottering and reeling?) which indicates that the land
masses under the polar icecap areas could contain as much as 90 billion barrels
of petroleum and untold values in natural gas. This report has been a factor in
bringing down the price of crude of late and supporting financial market
rallies.
On the negative side, a Bloomberg News article written by Kathleen Howley
carries the screaming headline, "U.S. Home Crisis Deepens." Included among the
fact she presents is the realization that American home prices were falling at
the fastest rate of the year in May, meaning that little, if any, relief is in
sight for the oppressed American home owner. Also, home foreclosure rates,
particularly in California, continue to soar.
So, which is the real world; the one offered by the optimists who continue to
believe that there is a relatively easy solution to all the major problems now
in evidence, or the one presented by listing the facts themselves, which appear
to indicate that serious problems lay ahead?
This morning, action is coming down on the side of the optimists as at 8:15 AM
PDT the securities markets are stronger with the Dow Industrials up about 60
points and the TSX ahead by over 100. Precious metals' trading shows gold down
about (all prices US$) $5 to $921 after rising to $936 in overnight trading,
silver off about 19 cents to $17.22, but platinum fighting the trend by rising
$29 to $1,724 per ounce. Base metals continue to show weakness with only copper
among them higher this morning while currency markets are close to unchanged and
crude oil is off about $2.00 to the $123.50 per barrel area.
One item which remains of concern is the performance of mining shares in general
and the juniors in particular. The chart of the XAU Index, which measures the
performance of major miners, has returned to the lower end of the trading range
which has contained that average for most of the past year.
That is a matter of potentially serious concern.
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