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!"   January 8, 2010   Perhaps the most frequently used 'comeback' one is likely to hear after providing projections based on economic concepts or political idealism is, "that's just theory" or "that's just philosophy."  Well, at TMR we believe that numbered among the most powerful forces which have driven precious metals markets during the past forty years are economic theory and political philosophy - and no period provides us with a more fascinating study than 1976 through 1981.  It is also our strong opinion that the world is not only making the same mistakes in economic theory and political philosophy of the preceding era - which led to the greatest bull markets in gold and silver in history - but it is now making them on a vaster scale than previously experienced. A review of the Carter Presidency from January 1977 through January 1981 shows the adoption of many government programs, the addition of several new Cabinet-level bureaucracies such as the Department of Energy and the Department of Energy, a tendency to run high budget deficits and finance those with heavy government borrowing and several instances of expanding government regulations which were imposed on previously-free areas of the economy, such as price controls on petroleum.  Heavy government borrowings to finance the largest deficits in history (up to that time) led to rising inflation, higher interest rates and growing dissatisfaction with the state of economic matters, eventually leading to Carter's famous "Malaise" speech wherein he decried the diminishing confidence in America's future.  It is also worth noting that in foreign affairs, he avoided any threat of confrontation with the former Soviet Union, a policy which many observers blame for the USSR's calculated invasion of Afghanistan in 1980.  He also dithered and dallied when American hostages were taken and held on public display throughout 1980. Within that background, gold soared from a 1976 low of $103 to an ultimate high of $850 in January 1980 and silver rose during that time frame in an even more spectacular manner, from barely $4.00 per ounce to almost $50.00.  When Ronald Reagan came in as President, he announced, in clear and strong language, that he did not believe in government solutions to problems, he did not believe in endless expansion of government programs, he believed in taking measures to reduce inflation and he also believed in confrontation with foreign powers, even those involving threats of military force, where necessary.  These were indeed a change in both economic concepts and political philosophies, and, in the case of precious metals, they truly mattered.  Gold and silver collapsed in price and their prices entered long-lasting periods of 'malaise'. Now, fast-forward to the present era, one of a Democratic Obama Administration in America and a Laborite Gordon Brown Administration in the U.K.  Once again we have entered a period of time where the prevailing philosophy is that government should attempt to resolve all problems, that major past difficulties have occurred because of insufficient or improper regulations, that bureaucratic expansion is necessary to provide society with a host of new and expanded services and where it is reasonable to endure expanding deficits in order to accomplish all manner of 'public good'.    The underlying, guiding economic concepts being accepted on a wholesale basis are those of the late John Maynard Keynes who advocated greater government spending, greater government controls and greater government interventions.  In our observations, with present governments now in control, we have not heard a single government official in either nation extol the virtues of free markets, capitalism or voluntary, contract-based mortgage obligations.  What we have also heard is that virtually all limits have been removed from the willingness of governments to tax the citizenry in order to pay for this array of benefits, but it is apparent, at least in our opinion, that taxation revenues alone cannot even approach the level of expenditures required to fulfill promises already made to the electorate and so deficits of an incredible order have now become the rule of the day.  Another potent factor is that because these deficits are not capable of being financed by ordinary government borrowings in open markets, we have seen a new era of "quantitative easing", cute words for outright monetization of government debt. On occasion, we come across an article which carries true symbolic value and one such article was published this morning in the on-line edition of the Wall Street Journal.  Authored by Christina S. N. Lewis, it was headlined "Rents Signal Rise of D.C., Fall of New York."  The leading concept expressed was that office rents in Washington, D.C. were now, "...poised to topple New York as the nation's most expensive, reflecting the declining fortunes of the nation's financial center and the government expansion under way in the U.S. capital."  (our emphasis.) According to the article, office rents in Washington are expected to surpass those of New York City by the end of 2010, a most remarkable change since rents in New York were almost double those of the capital city only a few years ago.  Robert Bach, chief economist for Grubb & Ellis of Santa Ana, CA observed, "...the government is one of the few sectors that has actually added jobs..." The article also informs us that while demand for office space in many major urban areas has been declining for some time, demand in Washington has been on the rise and landlords have been able to keep raising rates for desirable locations.  Clearly, government requirements have been a major factor in this state of affairs as we learn that, "...Of the 16 largest leasing transactions in Washington last year, 10 were by government agencies."  We are also informed that government agencies added 1.4 million square feet (MSF) of office space last year alone, bringing the regional total to 8.4 MSF. What this symbolized to us at TMR is the increasingly dominant role of government over free enterprise, a trend which appears both powerful and irresistible.  The major question this presents is, "Where is government going to obtain all the revenue it requires for expansion at the same time the non-governmental economy is holding steady or actually declining? Britain is facing that problem now, since with Laborites having been in power for the past twelve years, they are even further advanced along the road to government domination than America.  Deficits in that nation have swelled to over $280 billion, or 12% of their GDP, a figure far higher than any other industrialized nation in Europe or North America.  Damian Reece, Head of Business for the Telegraph Newspaper of London, believes that incredibly high government creation of money will lead to inflation which will lead to rising interest rates beginning in March or April of this year, which led to this comment from Reece:   "Sorry to be the bearer of bad news, but the economy's about to get even bumpier." Economic principles matter.  Political philosophies matter.  People like ourself, Reece, and many others believe that sound principles have been severely violated - and there will be a price to pay.  Part of our overall theme is that gold and silver will ultimately reflect the degree of such violations. Markets this morning have tended to small moves and, as of 10:15 AM PST, gold and silver are close to unchanged near $1,134 and $18.40 respectively; base metals are giving back some of their recent gains; mining share indexes are up slightly; Crude Oil is once again advancing and now trades close to $83 per barrel; the U.S. Dollar is declining and financial markets show Canada's TSX is up by about 45 points while the Dow Industrials are off by around 25 points. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Monday, January 11, 2010 when we plan to discuss the just-released U. S. Department of Labor jobs report for December. ◄  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.