A Melman Minute — February 18, 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."

We cannot help but recall one of the most common sayings making the public rounds that declares, "a definition of insanity is to do the same thing over and over and expect different outcomes." In our opinion, the current wave of discussion about nationalization of banks falls into that category.

Nationalization has been tried before, and, in our opinion, it has a record of utter failure. During the Soviet era, which lasted from 1917 through the late 1980s - a span of more than three generations - all industry in the former Soviet Union was nationalized, was owned and operated by the government, and the result was hardly what one might desire. Despite having a land mass filled with mineral, forest and agriculture riches; despite a vigorous and intelligent people; and despite proximity to some of the world's most advanced economic markets, the Soviet standard of living resembled that of an undeveloped Third World nation.

Another example comes from post WW11 England when the Labour government nationalized the coal, steel and other industries, presuming that if they eliminated the profit motive, a resounding round of prosperity would engulf that merry nation. Instead, economic miasma set in and it was not until nationalization was repealed years later that the U.K. economy began to strengthen.

What brings this to mind is the sudden wave of coordinated calls for nationalization of banking establishments in Europe and the USA. According to an AP article this morning, Chancellor Angela Merkel just issued a call for authorization for the German government to, "...to take over private banks hit by the global financial crisis." In the U.K., we have been hearing calls for nationalization of troubled banks such as the Royal Bank of Scotland and Lloyd's Bank for weeks. Now, most recently, even Republican leaders in America are suggesting that nationalization of troubled banks may be an excellent 'solution' to their problems. A Financial Times story quotes defeated presidential candidate John McCain as stating, "...nationalization of some banks should be 'on the table'."

One of the great problems facing international banking is the sudden and virulent collapse of the Eastern European economies. Currencies in several nations such as Hungary and Poland have begun to fall sharply and bank assets denominated in those currencies have been deteriorating with frightening rapidity of late. Oil rich nations are seeing the value of their assets plummet along with the price of crude. Steel-making facilities are now encountering diminished business and horrendous losses. Unemployment in the region is soaring as, for example, industrial output in the Ukraine has plunged by 34% in January, compared to a year-earlier.

Many banks are inter-locked in their loan portfolios with Western banks having made loans to finance industrial expansion in Eastern Europe. With those loans now souring at a rapid rate, Western banks are now vulnerable to new rounds of write-downs which they cannot afford. And so, we hear more frequent calls for the nations of the west to simply take over the banks to resolve the situation and 'protect depositors.' And what is the most frequently offered solution? Print money, of course.

In London, the Bank of England just revealed that its policy makers had unanimously agreed to ask the government for authority to create money to kick start the economy, given that the other alternative, lowering interest rates, has been utterly exhausted. The goal is to spread the newly created 'money' throughout the economy to generate a resurgence of consumer activity. They have even given the process a new name. Instead of being honest and calling it "the printing press creation of funny money", they now refer to the process of outright monetization as "quantitative easing." Doesn't that make you feel better?

All of this fits in with our broad theme that the crashing economies would force governments to maximum stimulation and rescue efforts which would ultimately include the creation of vast sums of currency. The entire process is now following directly along that suggested path. Our defensive weapon of choice is the physical holding of gold and silver. Given the price action of both metals of late, the idea is catching on.

One other note worthy of a comment: the Obama Administration is continuing on its, "we can solve all problems if we only create enough money" path. Directly after signing the mammoth $787 billion (all quotes US Dollars) rescue program, he immediately announced a new program for his government to save millions of homeowners from foreclosure. No price tag was declared, but we are confident in the belief that it won't be cheap. But, hey, it's only printing press money anyway, right? It is also worth noting that GM and Chrysler now are demanding over $30 billion for their temporary allocation to stay in business, the various state governments are now standing in line at the federal feeding trough and enormous bank bailout programs are waiting around the bend.

Anyone care to begin reading about the history of hyperinflation????

Early action this morning shows precious metals retreating slightly following yesterday's vigorous rallies while base metals are also slightly lower on balance. Financial markets opened higher, but by 7:10 AM PST, the Dow Industrials had retreated to negative territory on the day and were poised just above the 7,500 level while in Canada, the TSX is down about 100 points on weaker metals and quiet crude markets. Currency trading is also on the quiet side, with few significant changes.

One look at the long term gold chart shows the power of the recent rally which began in the upper $600s.

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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