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!"   March 17, 2010 As noted in yesterday's Melman Minute, an abundance of information accumulated during my recent travels to and from the PDAC Convention in Toronto this past March 7-10.  Two items appear to be directly related to the economic stability of the USA and, therefore, to the price equation for the precious metals going forward. Most financial problems normally have a straightforward solution.  Perhaps the amount due is a fixed amount and repayment to eliminate the debt can be scheduled, or the problem's cause, such as a faulty manufacturing process, can be identified and corrected.  However, according to an in-depth study by Jonathon R. Laing published in Barron's Magazine, the United States is facing a monumental problem which defies either category of solution noted above.  It is the problem of civil service pensions which have become a virtual financial tsunami poised to crash over into the entire governmental financial structure. Separately, this problem is also firing up growing resentment among the non-governmental populace which must ultimately pay for the stunning levels of largesse offered to retiring civil servants. According to Laing, there are now twenty-three million active and retired state and local public employees, including garbage collectors, police, firemen, city managers, teaches, etc.  The growing financial threat relates to the fact that, "...if they hang around to retirement, (they) can count on pensions equal to 75 to 90% of their pay in their highest-earning years."  He also notes that the condition relating to their "highest-earning years" opens the door to abuse as knowledgeable civil servants pack overtime, delayed vacation benefits, unused sick leave and any other income enhancement into their last year or two of their careers, thereby dramatically increasing their pension payouts for the rest of their lives.  (Our emphasis) The results can be startling indeed.  He gives us the example of a retired fire chief from San Ramon, Calif. who used this late-years procedure to retire with a lifetime pension presently set at $284,000 per year!!!  Not only that, but many civil service union agreements call for step increases in pensions as the cost of living increases. The point has been reached where many municipalities and states cannot afford to pay these pensions without cutting back severely on "essential" services.  For example, the city of Vallejo filed Chapter 9 Bankruptcy proceedings in 2008 after both property values and tax revenues plunged.  Since that time, they have cut their law enforcement force from 158 police officers to104 and, as a result, "...violent crime rates have shot up dramatically..." The heart of the problem lies in the fact that these pensions are written into legally binding contracts that cannot be voided and the financial pressures continue to mount.  Eight states - Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia - are now facing shortfalls of more than one-third of their pension requirements and the only alternative appears to be a combination of raising taxes or cutting deeply into services - both politically unpalatable. The risks facing America's $2.7 trillion municipal bond market are rising steadily and formal default on debt obligations by a state or municipality is a growing possibility.  The last default of a state General Obligation (GO) bond occurred in Arkansas in 1934, and since that time, confidence in the ability of municipalities and sates to honor their obligations was a given, but Laing points out that many states are now in truly perilous financial circumstances.  He quotes Todd Zywicki, law professor at George Mason University, as stating, "In many ways, some of our states are like General Motors before its bankruptcy, suffering from falling revenues, borrowing money to cover operating expenses and operating under crushing health and pension liabilities.  It's entirely possible, given the gigantic size of the pension liabilities, that some states might do what was once the unthinkable at GM and default." (Our emphasis) In our opinion, there is no plausible answer except for the Federal Government in Washington to bail out the states, rather than face a debt default which could cripple the entire state and municipal debt system.  Of course, the federal government is broke, deep in debt and running horrendous deficits of its own - leaving only one apparent alternative, namely the Federal Reserve path of "Quantitative Easing" - or outright monetary creation. THAT, in a nutshell, is another primary reason for our continuing belief in long term precious metals investments, both for investment/trading profits as well as financial insurance. One hope for a total rescue of this ominous situation would be a prolonged and spectacular securities market rally which would throw off enormous gains in individuals' net worth, enable enhanced consumption to stimulate the economy, and also result in gigantic capital gains tax revenues to help balance government books.  However, according to one analyst who is relying on his favourite time-tested indicator known as the "Investment Rate", that is simply not going to take place. Thomas H. Kee Jr., President and CEO of "Stock Traders Daily", developed the "Investment Rate" to measure major demographic trends over time, based on the total economic activity of people, which we would observe is consistent with the major theme of Ludwig von Mises' economic classic, "Human Action."  According to Kee, "...the market, which has rallied since March 2009, will start falling again before 2010's end, and the decline will accelerate in the years ahead."  He believes the long term trend reversed itself in 2007 and will continue to be negative for sixteen years - or until 2023 and added, "...growth will be difficult in coming years, and the risks will be high.  Massive debt levels, Social Security and Medicare expenses, and the retirement of Baby Boomers are just some of the added burdens associated with this down period, which could last until 2023..."  (Our emphasis) He claims his indicator, when backdated, properly forecast the Great Depression, the stagflation of the 1970s and the up periods in between.  Kee's forecast coincides with our own opinion that there will be no easy answers to the almost immeasurable problems facing economic societies around the world.  Therefore, as noted, we continue to believe there will be liberal applications, going forward, of "Quantitative Easing" and that each subsequent application of that method raises the level of danger for a true economic collapse. We shall see. We also would like to add one last note.  Mexico remains one of our favorite mining nations.  The geologic potential for discovery in that country is impressive and Mexico has shown that they value the mining industry's contributions to their economy.  However, the specter of violence and social disorder is on the rise and matters entered a new state with the murders of U.S. citizens in both Ciudad Juarez and Acapulco.  Clearly, security of personnel now must become an increasing priority for North American employees operating within that nation. Metals markets this morning rose sharply near their openings, but have retreated somewhat as gold hit an intraday high of $1,134 before falling back to $1,123 as of 8:45 AM PDT with silver and platinum following similar patterns.  Base metals continue to perform well with copper now threatening to break out strongly to the upside (see chart) and mining share indexes are slightly higher.  Crude oil is once again above the $82 per barrel mark, interest rates futures are mostly unchanged and the US Dollar is trading quietly in currency trading.  Financial markets in both the USA and Canada have posted modest gains so far this session. - - - - - All quotes US$ unless otherwise noted Next Melman Minute scheduled for Friday, March 19, 2010..                  ◄  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.