A Melman Minute By: Leonard Melman MELMAN MINUTE - August 9, 2010 - - - - - Friday's jobs report from the U.S. Department of Labor continues to resonate within the world's economic circles.  It was that bad and, even worse, it clearly reflected the lack of success generated by the enormous stimulative efforts from two American administrations over a three year period.  Truly, historic mountains of Keynesian stimulative activities have brought forward a molehill of economic growth. According to the theories which have become economic Gospel in one important nation after another, the world should be marching, to paraphrase Churchill, "into broad, sunlit, economic uplands."  Using America as an example, budgetary deficits have been run at historic levels to incorporate fiscal stimulus.  Wild and reckless (our opinion) government acts have been created to force-feed almost two trillion dollars of direct expenditures into the American economy.  Short term interest rates have been driven right down to zero.  Industries have been supported; financial transactions have been regulated; government leaders have engaged in a public relations barrage of historic proportions - and yet little of concrete value has been accomplished. And now, matters may come to a head tomorrow when the Federal Reserve Board of Governors meets to plot out their present evaluation of the economy and to indicate their future plans.  On one hand, some prominent "experts" are calling for much more of the same, pleading that the only reason the economies have not yet responded is because the stimulative activities have been insufficient.  On the other hand, other "experts" are stating that nothing positive can be accomplished until there is public recognition of the fact that the present course of action simply hasn't worked. In our opinion, the decisions announced tomorrow - or the failure to announce decisions - may very well rank as vitally important to the future prices for gold and silver, given the potential impact of that communication on currency markets worldwide. Let us look at both sides of the argument. Jonathan R. Laing, Senior Editor at Barron's magazine, waded in on the pro-stimulus side.  He argues that, "...the Fed should, and probably will change its tune by this fall and fire up the printing presses..."  Why should it do so?  "...Its current stance of watchful waiting in the face of slowing economic growth, inflation cycling below its preferred target rate of 1.7% to 2.0% and naggingly elevated unemployment strikes some observers as nothing short of mind-boggling.  With good reason, these critics are pushing the Fed to adopt the deflation-fighting strategies that Bernanke (present Fed Chairman) mentioned in 2002 when he was a newly-minted Fed governor."  Readers might recall that one of those 'strategies' was to push newly-minted currencies out of helicopters if that became necessary. One of the Fed's techniques has been to buy up poor quality assets from banks and other financial institutions by issuing currency values created out of thin air, with the process being known as "Quantitative Easing (QE)."  The poor quality assets are then carried on the Fed's books as an offsetting entry.  Using such legerdemain, the Fed has accumulated $2.3 trillion in such over-valued assets - but prominent economists such as Alan Blinder are calling for much more of the same. In the above-referenced article, Laing notes Blinder, who is a Princeton professor and served as vice-chairman of the Fed under Bill Clinton, "...is worried by the sag he's seen in the economic numbers.  He thinks the Fed may be forced to resume its QE in the next couple of months if the weakness in the economy continues."  How much additional QE does Blinder suggest?  He declared that amount should be another $2 trillion or more, thereby doubling the Fed's asset sheet of such paper from the present $2.3 trillion to double that figure.  (Our emphasis)    Laing ends his pro-stimulative argument with the following statement, and, in our opinion, it is frightening indeed if it is ever adopted as policy in the world's largest economy.  It reads: "So it's more than likely that the big artillery of QE will be unleashed to push the economy out of its despond.  It's high time to get out the money-printing machines.  Damn the risks of triggering a bit of inflation and some modest investment bubbles.  The alternatives are far worse." At TMR, we do not agree with that last sentiment.  Not at all! The opposite argument was reflected in a Wall Street Journal editorial headlined, "It Isn't Working."  After summarizing the negative jobs report, the WSJ editorial board added, "...small businesses in particular aren't creating new jobs the way they have in other recoveries.  The shrinking size of the labor force is helping to keep the official jobless rate below 10%, but that's mostly because some one million workers have dropped out of the labor force since April."  Then they address the 'nut' of the problem. "So far, the Obama team has thrown the entire Keynesian playbook at the economy.  We have paid people to buy cars, purchase homes, pay off their mortgages, weatherize their homes, and put solar paneling on their roofs.  And, of course, there was the original (Obama) stimulus package of $862 billion...None of it has put Americans back to work." They also addressed the fact that the Obama team has orchestrated the greatest barrage of taxation and regulatory laws in history and the WSJ's conclusion is, "...the result has been to traumatize business instead.  Why would a small business owner hire anyone new if he knows taxes are going up, health care costs are sure to rise, and the cost of each new employee is uncertain?  After noting that House Speaker Pelosi continues to call for new spending programs, they conclude their argument with this summary: "As the evidence mounts that government spending doesn't create net new jobs, the White House insists we need to double down on spending and monetary stimulus.  We've now had three years of this policy, and it isn't working.  Time to try a different economic model, the one that worked in the 1980s after another severe recession." The battle lines are drawn.  Perhaps the Fed will come down clearly on one side or the other tomorrow - or perhaps they will continue to wait and see.  We will soon find out. One of our best clues should come from movements in long term interest rates as indicated by the TYX Index.  As can be seen, that index is holding near the lowest levels in the past six months.  If the Fed chooses the path of massive stimulation, we believe that long-term rates should begin to rise. Financial markets are trading relatively quietly in advance of the Fed's communiqué with the Dow ahead by about 40 points as of 9:15 AM PDT while Canada's TSX Index is up by a similar amount.  Precious metals are trading slightly lower with gold near $1,202 and silver just above $18.30 while base metals are higher on balance with nickel rising above the $10 per pound figure for the first time in several months.  Mining share indexes are slightly lower, Crude Oil is a bit higher and the US Dollar is close to unchanged in currency markets. - - - - - All quotes US$ unless otherwise indicated. Next Melman Minute scheduled for Wednesday, August 11, 2010.  Given the possible importance of the Fed meeting tomorrow we decided to focus on the background for that event in today's MM.  Wednesday we plan to review the Fed's release and turn also to the Asian precious markets which could provide long-term stimulus for gold and silver.      ◄  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.