“GOLDEN CHICKENS”
| By | Leonard Melman |
|---|---|
| Date | SEPTEMBER 26, 2008 |
Note: For readers not familiar with the concept of our “Melmania” section, this is where your editor can take any subject and develop arguments regarding some ultimate conclusions. Since some of those conclusions might sound extremely radical, the name of “Melmania” seems appropriate.
For some reason, as we watch our so-called government monetary leaders react to the latest round of monetary crises, sayings relating to chickens keep popping into our heads, such as:
"The chickens are coming home to roost"
"Running around like a bunch of chickens with their heads cut off"
"Chicken Little crying out, 'the sky is falling, the sky is falling'!"
All of those and more seem appropriate for the news background we have been witnessing of late.
Here is why.
In the first instance, we have believed for many years that there would be an ultimate accounting for the horrendous level of monetary creation which has been occurring since 1971, when then-President Nixon removed all official, legal ties between gold and the U.S. Dollar. We believed that the artificial creation of monetary wealth founded on the reckless creation of fiat currencies would lead to mal-investment on a massive scale, and even, ultimately, to worldwide economic and political trauma. We saw it in the late 1970s, we saw it in the massive dot-com bubble of the late 1990s and we have surely seen it in the spectacular real estate mania of 2000-2006 - and its subsequent collapse.
The world is now drowning in fiat currencies, which, unfortunately, are not backed up by substantial and real monetary values. This kind of situation occurred in the late 1970s and early 1980s and it led to the great golden bull market of that era, a bull market which subsequently collapsed and which sent hard money advocates into a "Great Depression" of their own which lasted for a quarter of a century. However, in our opinion, this "roosting of economic distortions" will have a much different outcome from that one, due to two spectacular differences.
First, the magnitude of monetary creation is incomparably larger this time around. We have just received indications that the U.S. federal debt is rapidly approaching (all quotes US$) ten trillion dollars and will soon pass through ELEVEN TRILLION. Second, the federal budgetary deficit is expanding rapidly and could easily reach one trillion dollars in the single year of fiscal 2009 if any sizeable 'rescue plans' are enacted into law. Third, the estimated level of the money supply as formerly measured by M-3 is now estimated to be in the area of fourteen trillion dollars, compared to 'only' two trillion in the previous era.
Second, and perhaps even more important, the political will to resolve the monetary overhang through sound fiscal measures is non-existent. During the earlier episode, the Reagan Administration came into power in January, 1981 and acted with a vengeance to quell inflation. President Reagan, along with Treasury Secretary Donald Regan and Federal Reserve Board Chief Paul Volker took the bull by the horns, drove interest rates through the ceiling, sent the economy into sharp recession in order to banish inflationary expectations and then sat back to react to the storm of criticism which their actions would surely create - and it did, in abundance. But the basic underlying strength of the economy was saved, and the subsequent fifteen years were ones of economic growth and at least moderate stability.
That leads us to our second saying. This time around, instead of witnessing decisive action, we are indeed watching our leaders "running around like a bunch of chickens...", trying desperately avoid any economic pain by attempting to create some sort of 'rescue plan' which would work miracles while studiously avoiding the fundamental fiat monetary issues involved.
And that reaction has led to the third saying, one reflecting the comments we are suddenly hearing with remarkable frequency that "the economic sky is falling". We are told the banking system is in collapse, the credit markets are in collapse, the housing market is worsening, the banks and savings and loans are dying, etc. One could truly think the world was coming to an end - and there may, in fact, be reasons to believe that in some ways, that might very well be happening.
But what a difference we are witnessing between the reactions to today's problems versus those of twenty-seven ears ago! Instead of reliance on sound financial strategies and the inherent strength of the capitalist, free enterprise system, we are seeing one socialist, interventionist, government-created interference in the marketplace after another being proposed.
It is our opinion at TMR that these plans will not work for two reasons. First, if they succeed in rejuvenating the economies of the world, the preceding level of fiat monetary creation could easily drown the world with inflationary expectations, thereby driving interest rates higher to the point where those rates could bring about the very economic collapse that is so dreadful for these 'leaders' to contemplate.
In the second place, they could easily decimate the value of the U.S. Dollar itself, a value which has held through the ages and upon which much of the monetary fulcrum of planet earth is predicated.
For these reasons and more, it is our opinion at "The Melman Report" that we will NOT see a repeat of the dismal metals markets which followed the early 1980 peak!
There will indeed be fluctuations which may temporarily drive the monetary metals lower, but we also believe there will be spectacular rallies ahead which will send the price of gold and silver to levels which, for today's markets, would sound unreasonable and unlikely.
That's the way we believe matters relating to the precious metals will unfold into the future.