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 22, 2010 As noted Friday, we consider the European financial crisis, presently centered on Greece, to be one of the major difficulties the international financial community must resolve.  The situation is made ever more threatening by the realization that at least four additional nations are heading directly down Greece's path. The situation is actually relatively simple.  Because of horrendous mismanagement - combined with allegations of outright fraud - Greece has found itself operating far outside the guidelines set up by the European Community.  They also find themselves in the embarrassing position of being unable to service their mountain of government debt by paying principal and interest on that debt in a timely manner. There are normally two solutions to problems such as Greece is facing.  First, severely cut expenditures down to a level that can be afforded based on current incoming revenues.  Second, borrow sufficient funds to pay the amounts due while planning to re-structure the government's operations in order to avoid continuing and even worsening problems. Unfortunately for Greece, both solutions are floundering.  Their attempts to truly rein in government spending are floundering as anyone likely to be adversely affected by governmental cutbacks has turned to public protests which threaten to disrupt Greece's civil society.  In addition, the Greek government has been deemed so dysfunctional that no one in the European Community will come to their rescue with sufficient grants and loans to tide them over this period of crisis. And so, an impasse has been reached which could potentially cause the unraveling of the European Community itself because, as noted, many other nations find themselves in the same relative boat and no nations in Europe are willing to come to Greece's rescue. When one looks for the reasons for this situation, it is not difficult to find the errors of the Greek style of government mismanagement.  Columnist Gwyn Morgan touched on six of them in a recent column published in the Toronto Globe & Mail newspaper.  His six reasons include:  Accept a high level of government corruption and obfuscation; implement tax measures which penalize achievement and reward those who produce nothing; involve government in virtually every facet of human life and create an indecipherable maze of bureaucratic red tape; build a bloated public sector while ignoring debt and deficits; foster an attitude of minimal expectations regarding the 'work' produced by civil servants; and, when the "dirt" finally hits the fan, always blame everyone else in sight instead of looking inward. Morgan also states that many other European nations are following, "...along the path to self-destruction" and added, "...Reaction to the financial meltdown has unleashed activist politicians who believe big government is the solution..." And so, we now stand at the crux of the problem, one we believe relates directly to two American Presidents; Roosevelt and Nixon, who combined to remove every tie between gold and the U.S. Dollar.  As Greece flounders and the European Community turns its back, Greece now says it may turn to the International Monetary Fund (IMF) for a bailout.  But what is the IMF?  It is an artificial creation, which has been funded through the decades for a substantial part of its revenues by the American government (read 'taxpayers').  However, that source is tapped out.  America is grossly in debt (see below), it is running horrible deficits and spending is already projected to far exceed revenues for years to come. And so, it is our opinion that the 'solution' will be found with the Federal Reserve Board's ability to create US currency out of thin air, payment of those funds to the IMF in the form of loans (never likely to be repaid) to ultimately fund Greece's bailout - and the American Greenback will have suffered yet another weakening of its fiscal underpinnings. ............... Part of Morgan's equation related to the explosive growth of government and we certainly obtained an object lesson in such growth over the weekend with the passage of most of President Obama's "Patient Protection and Affordable Care Act of 2010" last night.  (Some small portions will be sent back to the Senate for further reconciliation.)  The Act is staggering in its complexity, filling some 2,500+ pages.  We firmly believe that many of its provisions will inflict additional costs on the insurance business, perhaps driving many out of business and will also inflict additional major costs for government. The U.S. Congressional Office of the Budget asserts two seemingly contradictory statements.  In the first case, they say Act will add $940 billion in costs over ten years, but they also state that it will result in budget deficit reductions at the same time!The saving grace in this strange formula is the expectation that massive new taxation will be imposed on insurance companies, medical equipment providers and, in the form of fines for not acquiring insurance as ordered, payments from individuals themselves. Somehow, it has not occurred to these worthies that if you remove such vast sums from the consumer-driven economy, you may very well send the overall economy into a deep slump, thereby requiring ever-greater doses of government solutions! One other note which concerns us is the fact that the leftist segments of the Democratic majorities in the House and Senate now smell legislative blood as can be seen by rising cries for the immediate enactment of complex legislation for the control of the entire financial system; for the "creation" of uncountable jobs; and we cannot doubt we will soon hear mounting calls for passage of the now-stalled Climate Control Act. Each of these additional initiatives, if passed, will also result in bureaucracy-laden legal monstrosities of a thousand pages or more, and there is yet another complex problem coming down the pike, namely the dramatic shortfalls in state and municipal pensions which we noted last week.  That beauty will also involve trillions of dollars, which America simply does not possess. Anyone hoping for a turning off of the Fed money-creation spigot may have a long wait as the latest U.S. National Debt figures look truly ominous, having passed through the $12.66 trillion mark on March 18.  Just one month earlier, on February 18, that debt stood at $12.40 trillion, meaning America's debt has grown by more than one-quarter trillion dollars in one month!  That is beyond astounding. However, American financial markets seemed determined to enjoy the 'triumph' of last night and, following a spate of early selling; recovery rallies are taking place with the Dow ahead by about 40 points as of 9:30 AM PDT while the S&P 500 Index and NASDAQ also showed similar advances.  Canada's TSX Index was held back by declining metals and petroleum prices and was slightly lower.  Metals prices were indeed falling this morning with gold off by about $8.00 to just under $1,100 per ounce.  Silver and platinum were also lower and the base metals have fallen by about 1% on average.  Mining share indexes were also down by a similar amount.  Crude Oil fell to under $80 per barrel and the U.S. Dollar was slightly higher in currency markets. Gold's declines of this morning bring the price chart to a most interesting area.  As can be seen, a " reverse head-and-shoulders formation has been built over the past few months and now suggests two critical points; a 'neckline' which comes in near $1,145 as an upward goal and $1,075 as a suggested point where support should come in. - - - - - All quotes US$ unless otherwise noted. Next Melman Minute scheduled for Wednesday, March 24, 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.