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. Since the work has been expanded to include potential solutions to the growing list of seemingly insoluble dilemmas, the working title of the book has been revised to 'REVERSING THE WAY IN!"   February 3, 2010 Just a few days ago we pointed out the tremendous long-term difficulties facing many nations regarding budgetary demands which will be imposed by a steadily growing number of aging "Baby Boomer" retirees compared to static or even diminishing numbers of tax paying contributors.  Unfortunately, there is another problem of a similar nature which is growing rapidly as well. In point of fact, as government expansion of welfare, regulatory, education, medical services, along with other areas of government actions expand, so has the number of government employees, and that is only part of the story.  Not only are their numbers expanding, but civil servants, through their powerful public service unions, have been demanding and receiving what, in our opinion, is an astonishing array of wage and benefit increases.  As a result, we find a situation comparable to the "Baby Boom Retirement" problems noted above.  Public expenditures related to civil service employment are rising rapidly while the public's ability to support those increases via legitimate taxation is declining.  Therefore, we find this situation is putting additional upward pressure on budgetary deficits. Ironically, despite President Obama's numerous claims that he is not in favor of enlarging the scope of government, his new budget which includes almost four trillion dollars of spending only continues a trend toward expanding the number of government employees in the USA.  According to government figures, the number of "full-time-equivalent" government employees has been rising sharply during the past year.  At year-end 2008, that number stood at 1.875 million but rose to 1.978 million - a gain of 113,000 - by the end of 2009 and during 2010 the Administration expects to add yet another 170,000 workers, thereby bringing the total to 2.148 million. As an op-ed piece in the Wall Street Journal noted, within government, "The real jobs boom is in the federal agencies, not the military..."  The article then commented, "...Presumably, these tens of thousands of new workers are needed to hand out stimulus grants, or monitor this or that new program, or investigate private business..." There is a second consideration which substantially increases the dangers inherent in this rapid expansion of civil service employees and that is the decades-long trend toward ever-rising civil service salaries and benefits now being paid to government workers at virtually all levels; federal, state or provincial, and municipal.  Salaries and benefits even continued to expand rapidly throughout the ongoing recession.  As reported in the newspaper, "USA Today", "The number of federal workers earning six-figure salaries has exploded during the recession...Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months.  Federal workers are enjoying an extraordinary boom time...The trend to six-figure salaries is occurring throughout the federal government, in agencies big and small, high-tech and low-tech..." What is also fascinating is that a number of automatic salary increase schedules are built into the American civil service.  As a result, even if the "announced" wage increase is a small percentage, the fact remains that salary increases for civil service workers and management frequently exceed those numbers by a wide margin.  In addition to those announced percentage gains, wages and benefits are frequently increased via revising the entire pay scales, merit raises, longevity raises and by easing of previously-enacted pay caps.  Civil service workers are represented by their public service unions which enjoy enhanced power through monopoly status in their representation. The deck appears to be stacked, and we consider this a vital long-term consideration in relation to gold and silver prices.  If this trend toward enormous increases in federal civil service expenditures continues - as we expect - and it is combined with lower or non-existent increases in private worker tax collections, then the upward pressures on budgetary deficits are likely to become sizeable, thereby exacerbating the already powerful forces for debt expansion, monetary creation and, ultimately, we believe upward pressure for interest rates and downward pressure on the U.S. Dollar. The problem is hardly confined to America.  As the Vancouver Sun recently reported, "More than 750 public-sector employees (in BC) earn $250,000 or more."  In fact, some provincial government salaries have now exceeded C$500,000 per year and the President of BC Ferries, a quasi-private government-dominated corporation earns in excess of C$1,000,000 per year.  Since most provincial governments maintain competitive salaries with other provinces, we believe that other provinces across Canada also reflect this trend toward ever-larger wages and benefits for their public sectors as well. We also note a study published in the UK Telegraph which was headlined, "Record gap between public and private pay sector."  According to the article, the average public sector worker was paid 23,660 Pounds per year while in the private sector, that figure was 21,528 pounds.  After detailing how severely the recession had hit private workers in the UK, the article told us, "...The rate from the Office for National Statistics prompted experts to warn that so far the private sector had borne the brunt of the recession and that the Government needed to take action sooner rather than later to tackle the growing public sector wage bill. David Frost, Director General of the British Chamber of Commerce added, "Public sector pay has exploded out of control."  John Philpott, Chief Economist at the Chartered Institute of Personnel and Development pointed to yet another growing problem when he said, "...I can understand the unease many private sector workers feel when they see their contemporaries in the public sector not only getting better conditions and pensions, but also better pay."  We wonder if some sort of social rebellion brought about by this type of disillusionment may not be in the offing. In the meantime, god has rallied significantly over the past few days and has now established a large trading range between the recent low near $1,070 and the preceding highs close to $1,230.  The eventual breakout from this rage could provide us with important trading guidelines. Markets this morning are following the recent pattern of strength in the U.S. Dollar Index being accompanied by declining precious metals, declining financial markets, rising interest rates and declining Crude Oil prices.  As of 10:30 AM PST, gold was off by about $8.00 to near $1,110 spot while silver has declined by a sharp thirty-five cents.  Base metals are also showing weakness on balance and mining share indexes are off by slightly less than one percent each.  Both the Dow Industrials and the TSX Index are modestly lower while the long-term interest rates Index, TYX, is up by a strong 68 points.  Crude Oil is down slightly as well. - - - - - All quotes US$ unless otherwise noted. In our next MM, scheduled for this coming Friday, we plan to take a close look at some factors relating to long-term interest rates, which appear ready to move higher.      ◄  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.