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 - July 7, 2010 - - - - - Since the G-8 and G-20 meetings in Toronto a couple of weeks ago, debate regarding economic policies has become particularly intense.  This situation is epitomized by an array of articles published this morning in the world's financial media.  Two of great interest to your editor appeared in this morning's Wall Street Journal.  One was entitled "U.S., U.K. Go Different Ways to Fight Deficits."  The other was headlined, "Keynes vs. Hayek:  The Great Debate Continues."  In our opinion, both are related and are deserving of the closest attention, given the size of the two economies involved.  We also believe that the issues raised are also of great importance to the long range future of the monetary precious metals, since fear of future economic destabilization constitutes one of the primary arguments in favor of acquiring and holding precious metals assets. Combining the two articles, the undeniable impression gained is that the United States remains firmly committed to the principles expressed by Lord Keynes.  In the "Keynes vs. Hayek" piece, a letter Keynes wrote to the "Times of London" newspaper on October 17, 1932 is quoted.  In that missive, Keynes wrote that "...private economy was the culprit that impeded a return to prosperity."  One of the bases of his argument was that there was no certainty that funds acquired privately would be invested constructively in the economy-at-large, but when money was distributed by government then such certainty could take.  Ergo, government spending was infinitely superior to private accumulation of capital. Hayek, who later won the Nobel Prize for Economics, and several other University of London economic professors replied to the same publication on October 19, 1932.  While they agreed with Keynes on the goal of increasing overall participation in the economy, they provided two reasons why they felt government should not be the primary factor in such participation. Their first reason was a preference for securities markets and bank lending as the avenues for such activities and second, and perhaps more important, they viewed government deficit financing with alarm.  Their specific comment was, "The existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by private debt." These debates appear to be particularly relevant in this era, given the enormous reliance on federal debt and federal interventionism by the Obama Administration.  Unfortunately, the entirety of international economic performance is the "rat in the laboratory" and should the interventionists be wrong, there could be serious consequences indeed. The "U.S., U.K." article highlights the clear preference of the new U.K. coalition government for Hayek-like actions while the Obama Administration seems most reluctant to even consider abandoning Keynesian principles.  As the Op-Ed piece written by Alistair Macdonald states, "...The U.S. and U.K. have two of the highest budget deficits in the world, but while Britain's newly-elected government has embraced austerity in a bid to quickly cut the deficit, Washington continues to bang the drum for more spending, saying it is essential to rescue the global economy."  Simply stated, Britain's newly-announced program calls for sharp cuts in spending combined with massive tax increases. Those who disagree with such measures point out that both would serve to reduce the income and discretionary spending of Brits, forcing further reductions inside an already-moribund economy, thereby reducing tax revenues and making deficits worse, not better. One of the threats Britain and the USA - along with many other countries - must deal with is the wildly out-of-control retirement benefits programs for civil servants.  A U.K. Telegraph article describes these benefits as being so large that they constitute, "...an unstoppable Ponzi Scheme that threatens to impoverish future generations."  The source of the problem is that contributions by civil service union members into their retirement programs is far below that which is required in the private sector in order to retain actuarial soundness and, "...The shortfall has left taxpayers with a growing bill to plug the gap." That bill is expanding geometrically, calculated at 2.29 billion Pounds in 2008; 4.6 billion Pounds in 2011 and a whopping 9.4 billion Pounds by 2015.  Other actuaries have calculated the future unfunded pension obligations of the British government to be in excess of one trillion Pounds - or more than 35,000 Pounds per family.  One of the factors which will make spending reductions in Washington more difficult to accomplish is the growing list of demands for assistance from municipal and state governments across America.  An excellent example of the problem relates to education in Wisconsin.  The Milwaukee school board recently was forced to let go 428 teachers because of funding shortfalls.  Ironically, the problem could have been resolved if the teachers' union had accepted a reduced medical benefits program which would have allowed the school board to keep all the teachers. The rationale for the union's refusal was they are counting on Washington to provide the wherewithal to continue as things are - and they may be right.  Obama just proposed a $23 billion bill for the express purpose of re-hiring teachers who have been dismissed across the country due to a lack of funds. It appears to us that the present Administration is determined to solve all problems so that no economic pain is felt by anyone and their chief means is a continual barrage of spending proposals.  Our fear is that by this means, they may undermine the entire structure of national and international economy stability - or what is left of it - thereby endangering the entire nation and perhaps the world.  In our opinion, that type of economic destruction, should it take place, could inflict genuine pain of a magnitude far greater than what the Administration is trying to avoid.  It could also enhance the positions of gold and silver as monetary insurance vehicles.  At least that's the way we see things. Financial markets this morning are taking a much more optimistic view of things and, as of 9:45 AM PDT, the Dow Industrials were ahead by 130 points and Canada's TSX had gained about 80.  Precious metals rebounded from early selling and gold was back to near $1,200 while silver was ahead by 18 cents to just above $18 per ounce.  Base metals were higher on balance and mining share indexes were ahead by about 1.5%.  Crude oil is trading up by almost $2.00, the Greenback is falling back in currency trading and interest rate futures are little changed. One of the factors of inflation which has been absent for some time is rising grain prices, but that might be changing, as exemplified by the price graph for the September 2010 wheat contract which has soared by over 20% in just the past few weeks.  In our experience, nothing can incite fears of inflation like rising food prices.  This bears watching. - - - - - All prices US Dollars unless otherwise noted. Next "Melman Minute" scheduled for Friday, July 9, 2010 when we plan to deal with potential advances in the manner by which information is presented is presented to the mining investment community.           ◄  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.