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!"   MELMAN MINUTE - May 17, 2010 - - - - - The European debt crisis just will not go away.  Despite the most imaginative efforts to 'paper over' or 'spin'; their way out of the growing parade of serious problems, virtually all of the fiscal powers in Europe remain under a blanket of apprehension that we are still a long way from seeing the worst of that currency's problems. From our point of view, there is a deep and underlying source to the great, one might even say 'overwhelming', problems they are facing and while some would say that we are 'just philosophizing' or that such talk is 'just theory' - as if theory had no application to real life - it is our belief that the present massive budget deficits in one European nation after another have their source in the underlying socialist tilt of many European countries.   For more than a century, the populace in one European nation after another has been taught that it is the responsibility of government to provide for education, free medical care, welfare, unemployment relief, transportation, retirement benefits, social services, free housing, etc.  The problem is that there has been no accompanying serious discussion about how governments were supposed to finance those services, other than a generalized plan to 'tax the rich' to provide a free ride for the poor.  Unfortunately, many nations which followed such principles found their most talented and productive citizens were fleeing to havens such as Canada, the USA and Australia where socialism was far less advanced.  The loss of such talented and industrious people added to other woes and many of their national currencies began to suffer through serious losses of purchasing power.  And so, the idea of resolving the situation by the creation of a European super-currency was born.  Unfortunately, the underlying demands of the provision of unlimited services by government was never seriously addressed. In order to forestall complaints that the proposed "Euro" would simply another inflatable currency, the European Economic Community imposed certain tough-sounding rules concerning limitations on budgetary deficits in order to create an aura of stability, but cultures do not change quite so rapidly, and Europe is now witnessing the ravages.  While the strong expansion of world trade during the early part of this century helped sustain the desirable aura of  stability, it has been stripped bare by the collapse of international real estate markets followed by the contraction of world economic activity.  Quite suddenly, one European nation after another found itself unable to sustain the level of demanded social services with current revenues and so, quite naturally, deficit financing expanded dramatically and has now reached the point where a genuine crisis of potentially devastating scope is now clearly in sight. Most disconcerting to many, there appear to be no easy solutions.  Inflating the Euro would strip bare the false concept of the viability of any fiat currency, even the Euro.  Diminishing the scope and manner of government largesse to which the populace has become accustomed is hitting the stone wall of immense public resistance, including street demonstrations, rioting and death.  Efforts to stimulate genuine activity in the face of over-regulation are likewise proving ineffective at best and futile at worst. As a result, the value of the Euro has now entered a period of severe decline and the long term chart in particular indicates that a further steep decline could occur if the Euro breaks below previous bottoms just above the 120 zone. One of the reasons the potential decline in the value of the Euro is so vitally important is that if it occurs, the cost of all items imported into Europe would rise sharply, thereby increasing visible price inflation which would likely lead to increases in interest rates as investors attempted to at least maintain their stored currency values - and, as we have noted previously, increasing interest rates would have a negative effect on such industries as homebuilding, automobiles, etc. The interconnectedness of the world's economies truly enhances the dangers of some future international economic collapse, although that may sound unlikely in today's world, given the rose-colored blather now being spouted by many of the world's economic leaders.  But then, so did $2 trillion U.S. budgetary deficits, rioting in Greek streets, the collapse of a multitude of international banking establishments, etc. etc. - all of which took place despite assurances to the contrary. We would emphasize that this is not simply a matter of theory, but even the nominally leftist New York Times (NYT) is beginning to recognize the growing severity of the situation.  In a feature article this morning, headlined "Fears Intensify That Euro Crisis Could Snowball", that August publication noted, "...the Euro fell Friday  to its lowest level since the depth of the financial crisis, as investors abandoned the currency as well as stocks in favor of gold and other assets seen as offering more safety."  They also tell us that short term borrowing costs in Europe are on the rise and that banks are growing increasingly shaky due to their large portfolio of loans from such shaky borrowers as Spain, Portugal and Greece. The NYT has also been honest enough to note one of our chief concerns, that the genuine - and so far irresolvable problem - is too much debt and adding to debt appears to be a most inappropriate solution.  Their comment was, "The European rescue plan, totaling 750 billion Euros, is intended to head off the risk of default, but would vastly increase borrowing."  (Our emphasis) They also point to the worsening nature of the crisis when they state, "...Initially, it was Greek and Portuguese banks that got the cold shoulder from American lenders, but over the last two weeks, big banks in Spain, Ireland and Italy have struggled to secure short-term funds from the U.S. as anxiety has spread." One last comment from the NYT article is worth noting.  They quote Willem Buiter, Citigroup's top economist, as declaring in a recent report, "With the exception of wartime, the public finances in the majority of advanced industrial countries are in worse state today than at any time since the industrial revolution..."  That is quite a statement, since it covers a period of almost three centuries!  (Our emphasis) It is our belief that, like the real estate collapse of 2007-8 which did NOT go away quickly, this growing sense of trouble over the European Economic Community will be an unsettling factor which will be with us for some time to come.  We believe that will benefit the monetary precious metals in a significant manner.    Financial markets started out quietly this morning, but appear to be turning to the downside, along with the price of several important commodities, particularly copper (see chart). As of 10:00 AM PDT, both the Dow Industrials and Canada's TSX Index are lower, by about 140 and 3000 points respectively.  Petroleum is also making headlines as the price of Crude Oil this morning dropped under $70 per barrel by reaching an intraday low of $69.27, the first time Crude Oil has traded under the $70 level this year.  Base metals are also sharply lower with copper, nickel, zinc and lead all down by five to six percent so far today - huge drops by normal standards.  Gold alone has been bucking the trend toward lower metals prices, rising to near $1,235 before returning to about unchanged, but silver is off by over 30 cents per pound; platinum has plunged by almost $50; and palladium is down by over $25.  Not surprisingly, both major mining share indexes are also significantly lower this morning. The U.S. Dollar continues to gain on currency markets and interest rates are relatively unchanged during the session. - - - - - All quotes US$ unless otherwise indicated. Next "Melman Minute" scheduled for Wednesday, May 19, 2010 when we plan to discuss some of the implications behind the recent drops in major commodity prices.   ◄  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.