A Melman Minute — January 9, 2009

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NOTE: In order to complete Mr. Melman's forthcoming book on the essential fundamentals of gold and silver, new "Melman Minutes" will be posted only three times per week, each Monday, Wednesday and Friday until about mid-January 2009. The working title of the book will be 'Eight Pillars of Gold."

An interesting theme appears to be emerging on the American political scene and that is the resurgence of skepticism about government 'solutions' to economic problems. We note two articles from this morning which would tend to reinforce this suggestion.

First, serious questions are being raised regarding the disposition of authorized funds from the $700 billion "Treasury Asset Rescue Program" (TARP). (All figures US$ unless otherwise noted) Harvard Law Professor Elizabeth Warren is quoted in an AP article this morning as stating that, "...lawmakers need to take a very hard look at how banks have used the money." The story points out that numerous attempts to have banks report in detail exactly how they are using the funds appropriated by Congress are met with replies such as, "No response."

The Treasury Department finally responded to congressional inquiries on December 30, but Warren noted that their reply, "...did not provide complete answers to several of the questions and failed to address a number of questions at all." AP summarized that, "... none of the banks was willing to disclose that they were doing with hundreds of billions of dollars which have been distributed by the through directions of federal money."

So, in our opinion, it seems that in their haste to appear to be doing something, Congress rushed with undue haste and passed a bill authorizing the expenditure of about $700 billion of taxpayers' dollars without a clear idea of where and how such vast quantities of money were to be spent! It appears to us that they simply voted like a pack of lemmings in order to court public opinion by making it seem like they were 'doing something'.

Although that story relates to the present Bush Administration, the incoming Obama Administration may be facing the same problem. An article authored by AP writer Andrew Taylor was headlined "Rifts show as Obama urges quick action on stimulus." In a speech yesterday, Obama told the world that "only government action could solve the problems" and he was anticipating that a program of stimulus amounting to anywhere from $700 billion to $1.2 trillion would be approved in short order.

In fact, the article points out that House Speaker Nancy Pelosi wanted the spending bills approved before next month's Presidents Day Holiday (near mid-February) or else, threatening that Congress ional Representatives would not be allowed to go home for their normal break unless the bills were passed.

Our question is simply this: "How is a new administration supposed to evaluate exactly how much is needed across America in the form of public works for each state, county and municipality; determine the amount of expenditures required; write such a massive package into detailed law and then provide every Representative of Senator sufficient time to study the proposed laws, suggest corrections or amendments and then vote on the measure - all within four weeks of taking office?" And so, it appears to us at TMR that once again, all those congressional worthies will be asked to enact laws costing perhaps a trillion dollars or more, without having the foggiest idea of where the money is going or specifically on what it is going to be spent.

There is no question; however, that resolving the growing economic problems is an increasingly serious matter to Americans - and Canadians as well - if this morning's job reports in both nations are any indication of what the future holds. In the USA, the Unemployment Rate for December came in at 7.2%, the highest such number in 16 years, as the economy shed yet another half-million jobs. The Department of Labor report also contained the fact that during 2008, more jobs were lost than in any other single year going back to World War Two and there are now more than eleven million unemployed in America. Not only that; but the average work-week fell to the lowest level on record as many people could only find part-time work.

Canada fared only slightly better in comparison with the Unemployment Rate rising to 6.6%. What is also noteworthy is that Canada shed over 70,000 full-time jobs last month - a higher proportion than the USA when populations are compared. A Canadian Press report noted that, "...The latest sector to be hit by the economic tsunami was construction, which had previously seemed impervious to the recession...In December; the construction industry lost 44,000 jobs as housing starts fell to the lowest level in seven years." Also, employment in the petroleum sector began to decline and in the Province of Alberta, where chronic employment shortages had been the byword for the past several years, the job market shrank by 16,000 jobs and their provincial Unemployment Rate rose by 0.7% to 4.1%.

It is always a pleasure to learn that positions we have discussed on this site are also being put forward by people in prominent positions. As we have noted on many occasions, our belief at TMR is that the immense amounts of government stimulation which have been initiated during the past 12 months around the world could be setting the stage for future hyperinflation, which, by the way, could provide the springboard for a possible surge in prices for the monetary precious metals, gold and silver. Well, Kansas City Federal Reserve President Thomas Hoenig just told a gathering organized by the Colorado State Bankers Association that, "...the Fed's liquidity facilities and its recent purchases of securities are a powerful stimulus for the economy but are fraught with risks."

The risk he was referring to, of course, was future aggressive inflation and the Appenzeller Daily Bell newsletter speculates that fear of inflation may be the reason the Obama Administration has taken on noted inflation-fighter Paul Volker as one of its chief economic advisors.

And so, the "rock and a hard place continues'. America is running full-bore toward massive stimulation, because there is a widespread belief, even among some more conservative economists, that without such stimulation, the economies of the world could collapse into a deflationary black hole. However, at the same time, fears are rising that such measures could lead to huge inflationary pressures - but the normal remedy to control inflation, that is forcing interest rates higher, if used could cause dramatic economic contraction.

Such uncertainties, combined with the negative jobs reports, have sent stock markets lower in early trading a of this morning at 9:15 AM PST, with the Dow Industrials and the TSX Index both down by about 100 points. Precious metals are headed higher with gold once again above $860, while silver is also on the plus side, trading near $11.50 and base metals are also higher today. Crude oil has fallen below $40 per barrel once again and the U.S. Dollar is showing some strength this morning, with the Dollar Index (DX) up by about .64.

We regard the action in long-term Treasury Bonds as very important, because it is our belief that such trading reflects the confidence of the public in America's governmental actions. As that confidence surges, America appears to be a 'haven of safety' and people are willing to accept lower yields in return for such safety. However, should rates begin to rise - and rise rapidly - that could be interpreted as a declaration of diminishing confidence.

As can be seen, 30-year bond rates hit a low of about 2.5% several weeks ago and have now risen back to the area of 3.1%. This chart bears particularly close attention.

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.

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