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 5, 2010 FUNDAMENTAL STATEMENT OF POLICY During the three years of The Melman Report's existence, we have adhered to three primary, consistent underlying philosophies which we believe have had and will have an impact on global financial stability and, therefore, an inverse effect on the price of the monetary precious metals. Those three policies or philosophies are: 1 - Since electors around the world have learned that they can vote themselves benefits from the public purse, in order to please and placate those voters, governments inherently spend more than they can legitimately receive in direct taxation.  As a result, deficits are growing; artificial attempts to finance those deficits are growing; and the net long term result is inherent instability in international and national economic/currency systems. 2 - The first condition is facilitated by the abandonment of sound money - namely currency that is minted rather than printed - a condition that has become universal since the early 1930's and which has resulted in the fact that fiat monetary aggregates in nation after nation have soared to previously unimaginable levels, yes another factor which is breeding instability. 3 - Government's attempts to regulate human action have frequently, one might say almost always, resulted in negative consequences.  These negative consequences in terms of an economic society's ability to function in an optimal, cost-effective and efficient manner have accumulated over the years and are now threatening to overwhelm the productive and distributive efforts of industrialized societies. As these conditions worsen - and they are doing so at an ever-increasing rate of late - the economic functioning of nations such as Portugal, Italy, Ireland, Greece and Spain ("PIIGS" in the over-used acronym), where these philosophies have become entrenched and advanced, has become unstable and unpredictable and it is our opinion that this advancing deterioration is now becoming ever-more visible and is leading to market disruptions such as we have seen during the past few trading days.  It is our opinion that these disruptions will occur with increasing frequency and, ultimately, will result in growing fear and panic, occurrences which will add to gold and silver's desirability as monetary insurance vehicles. - - - - - Having stated those philosophies, we must also be aware that many prominent people including political leaders, professional economists and a healthy percentage of the media, believe otherwise, and it is folly to bury our heads in the sand and ignore their arguments.  One of those prominent individuals is Robert Reich, former Secretary of Labor under President Clinton and presently professor of public policy at UC Berkeley.  In an Op-Ed piece in this morning's Wall Street Journal, Reich presented arguments diametrically opposed to our viewpoint. Central to his overall position is the concept that when private consumers are in a period of 'retrenchment', such as the present time frame, and commerce and industry are falling backward, then, "...the public sector has to borrow and spend in order to keep the economy moving forward."  He then points to the second wave of stimulus which will be shortly forthcoming as well as the upcoming jobs bill which will add an additional $90 billion of government expenditures, but he concludes that, "...even this sum is not likely to be enough to make up for the shortfall in private spending.  Consider also that state and local governments are slashing jobs and services - while raising taxes by about $350 billion over this year and next - so the feds probably need to spend even more."  (our emphasis) Central to his argument is the theme that government must spend enough in the short run to get jobs back or else the long term will suffer in the long run.  Therefore, current spending should increase as a matter of policy. We believe this type of thinking is rife throughout the Obama Administration; that virtually no trust should be put into concepts such as the self-adjustment tendencies of free-market economies; and that government spending must be the primary focus in order to restore economic growth. Unfortunately for that side of the argument, we are able to note what happens when that manner of thinking has predominated for many years and we turn to nations such as the "PIIGS" noted above.  In each nation, government support programs have grown steadily, government regulatory programs interfere with the workings of commerce and industry and among growing percentages of the general population, such concepts have fostered a dependency to look at Father Government as the guarantor of future comfort and prosperity. Only it isn't working out.  Deficits have grown through the years until they are out of hand.  Debt has skyrocketed far beyond the ability of those nations to raise taxes and now, finally, a point has been reached where a descent into utter financial chaos appears to be an actual possibility. As there are now five nations considered to be high-risk and all of them are members of the European Economic Union, the value of the Euro has also begun to descend against the US Dollar, a trend clearly demonstrated in the accompanying chart of the Euro. One of our concerns is that the U.S. Dollar itself may be in some jeopardy due to their own enormous debts, deficits and wild spending and Moody's rating service has just offered the opinion that for the first time in history, America's AAA debt rating may be reduced.  However, for the moment at least, it is clear that worldwide financial managers are turning to the Greenback - and not yet gold - as their monetary refuge. In our opinion, the stability of the entire system of international transactions is at risk.  We believe that the degree of that risk is a vital consideration in the long term price of the monetary precious metals. Markets this morning have suddenly begun to more decisively as of 9:00 AM PST.  The Dow Industrials are reacting negatively to this morning's job report which shows continuing losses while Canada's TSX is down on falling resource quotes.  Both averages are presently down by more than 60 points and precious metals are continuing sharply lower, continuing the pattern of yesterday's sharp plunges.  Gold is off another $16.00 to about $1,045 while silver is relatively weaker, down by 57 cents - or about four percent - and the Gold/Silver ratio has expanded to over 71, close to its highest level ever.  Base metals have joined gold and silver in their downward moves and mining share indexes, not surprisingly, are also head down with a vengeance.  Crude oil is trading near $72 per barrel while the U.S. Dollar, reflecting an influx of funds escaping from the Euro, has continued higher. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Monday, February 8, 2010 when we plan to address these sharply negative moves in the base and precious metals, as well as interest rates pressures which are also of vital future importance.                ◄  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.