A Melman Minute By: Leonard Melman   NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of the developing international financial crisis and its relationship to gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday. The working title of the book will be 'Just a Melman Minute!"   December 28, 2009   Here we sit on the brink of a new decade, the 2010s, and as we look forward, it is our belief that the early years of this onrushing decade will either "make it or break it" for the economic societies now extant around the world.  Either a way will be found to resolve the massive problems which continue to grow, or those problems will crush the system's ability to function, in which case it will be virtually impossible to predict what might follow - but we doubt it will resemble free-market capitalism in any serious manner. While some socialist of the political Left might rejoice over such an eventuality, from our point of view, should free-market capitalism vanish, it will truly be a case of "killing the goose which laid the golden eggs." History would appear to be on our side of the argument.  In case after case, the imposition of socialism on economic systems has failed to produce prosperity and, in fact, the opposite has frequently been the case.  Examples supporting this contention abound.  Marxist-Socialism was imposed on Russia (later the USSR) by 1920 and lasted for almost 70 years, surely enough time to leave an identifiable track record.  After all those years, typical city dwellers lived in tiny concrete apartments frequently less than 200 square feet.  They owned no vehicles, few entertainment systems, ate what could be obtained at limited outlets and only after waiting in long lines.  Their choice of consumer goods such as clothing or household appliances was severely limited. As a provider of economic goods, Marxist/Socialism was a failure and the record of the USSR was repeated in Communist China following their revolution of 1949.  For the next 40 years, until the introduction of some basic market principles, China stagnated among the world's major economic nations. Yet another vivid example remains embedded in the memories of anyone alive in post-war (WWII) Europe.  In the summer of 1945, following the final surrender of Germany, the British people "rewarded" their war-time Prime Minister, Sir Winston Churchill, by promptly ousting him from office by electing Clemet Atlee and his Labourites.  What followed next provided a lesson in history which few have forgotten. Following Labourite policies to the letter, Atlee began nationalizing one industry after another, particularly including electric utilities, steel, coal and various manufacturing establishments.  In addition, Atlee also imposed many of the interventionist economic policies recommended by Keynes.  The result was easy to identify.  Britain stagnated for years. While much of Western Europe, America and even parts of Asia resumed economic growth following the end of the war, Britain remained in a quagmire suffering through slow growth and rationing of basics such as meat, milk and eggs.  The British people quickly tired of such economic experiments and re-elected Churchill and the Conservatives in the general election of 1951. As we look toward the coming year and decade, perhaps the most important question we might ask is whether the world is moving toward government domination (socialism) or toward the re-establishment of truly free markets combined with a sound monetary system.  Sad to say, we believe that by all indications, the world is moving, with stunning rapidity, toward socialism and increasing government domination. Perhaps no area incites our anxiety as the growing power - and what we consider recklessness - of central banks and we are indebted to financial writers Robert Klein and Joseph Reisman for their analysis of that particular situation.  In their recent Barron's Magazine article, which focuses on the causes of the economic trauma the world has recently undergone, they take a differing stance from most conventional politicians - such as President Obama who recently blamed, "fat cat bankers" - these two point in a different direction by noting, "...A deeper examination, however, reveals that this is neither a housing crisis nor a Wall Street banking crisis.  This is a monetary crisis, rooted in the lending of money created out of thin air."  At TMR, we couldn't agree more.  (Our emphasis) Reisman and Klein then document how the Federal Reserve has responded to each of the monetary problems of the past few years by rapidly expanding the money supply and by cutting interest rates, bringing about an increase in financial liquidity which, "...helped push stocks, particularly tech issues, to unsustainably high levels.."  This drove both monetary inflation and consumer prices higher, requiring the Fed to tighten, which then brought on a massive plunge in stocks from 2000 to 2002 which brought about new and even greater levels of interest rates cuts and monetary expansion.  In turn, with interest rates at their lowest levels EVER, investors sought new avenues of investment and turned in large numbers to real estate, bringing about history's greatest coordinated real estate bubble - which then collapsed from late 2006 until the present. They summarize their philosophy in this manner:  "When the Fed tries to induce business activity in this manner, it never lasts.  This is because the central bank always has to cut off the flow of easy money, in fear of causing further damage in the form of rising consumer prices.  When the Fed removes this artificial stimulus, business activity dependent upon it grinds to a halt."  (Our emphasis) In our opinion, that is where we stand today.  Consumer prices are beginning to rise,  monetary inflation is on the rise and the Fed is faced with the age-old dilemma, namely whether to act responsibly and begin the next cycle of tightening while there is still time to possibly redeem the situation, or whether to continue the path toward ever-more-rapid monetary expansion and thus avoid any economic contraction for as long as possible - but risking the entire economic structure in the process. It is our belief that the present makeup of the American Congress, particularly including the Obama Administration, is committed to Keynesian stimulation as a matter of their most fundamental economic and social beliefs and, therefore, the likelihood of them taking decisive constrictive action appears to be slight. The answer the authors provide is this:  "Lurching from crisis to crisis in boom-bust fashion is unacceptable and unnecessary...We need to move to a money that is 100% backed by a commodity, such as gold.  Only then can we rid the economy of the devastating effects of the creation of money and credit out of thin air."  (Our emphasis) Given the makeup of Congress, we believe the chances of this happening in the coming year - or even decade - are virtually nil.  This believe, then, is one of our fundamental reasons for maintaining insurance positions in the precious metals and for strongly suggesting that investors consider metals investments for capital gain purposes as well - subject to the disclosures listed elsewhere on this site. More on this subject on Wednesday's "Melman Minute" and we also plan to offer our specific forecasts for 2010 as well at that time. Markets this morning are relatively quiet, with the exception of the petroleum complex which is rising sharply as of 10:30 AM PST with crude near $79 per barrel, gasoline back above $2.00 per gallon and natural gas (see chart) advancing to just under $6.00 per contract, the highest level of 2009.  Canada's financial markets are closed for the day while in the USA; the Dow Industrials are close to unchanged.  Precious and base metals are little changed for the most part and both major mining share indexes are also trading quietly, as are currency markets as well. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, December 30, 2009.     ◄  Previous Minute                                                                                                        Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.