A Melman Minute — December 22, 2010

We always find it interesting when the actions of ordinary people stand out in stark contrast to the utterances of the political establishment. One such case relates to the promises of politicians that it is the government that provides prosperity and all manner of goodness, yet we observe that in fact, many people prefer to live in areas where there is LESS government, not MORE.

This statement is based on data from the U.S. Census Bureau which shows that during the past ten years, people have moved much more readily toward areas with lower tax rates and less government than in the opposite direction. For example, their data shows that the average income tax rates in the fastest growing states was 4.0% while the rate in the slowest growing states was 6.9%. The report notes that, "Three of America's traditionally high-octane states, - California, New Jersey and New York - are in the population and economic doldrums." At the opposite end of the spectrum, less intrusive and previously lightly regarded states such as Utah, Idaho, North Carolina, South Carolina and Colorado are now among the fastest growing regions.

Perhaps Abraham Lincoln's old adage that, "you can fool all of the people some of the time, but you cannot fool all of the people all of the time" is still valid today.

On the same general score, masses of people are beginning to disbelieve the concept that the Federal Reserve is capable of truly resolving America's and the world's economic problems. A news release which hit this morning illustrates the point when they declared that a program which allows European central banks to tap into the Fed for American dollars to rescue their home economies will continue at least through August 2011.

Wait a minute, please! The last time we looked - which was just this past Friday - the United States government was running deficits at the rate of $1.751 trillion per year. That same government is so broke that it cannot float all the debt it needs to show balanced books, but must resort to injections from the Fed of newly-created money via Quantitative Easing just to continue in existence. How then are the same government and the same Fed supposed to take on the added weight of supporting European Community nations which have been unable to run their own countries in anything resembling an efficient manner when its own finances are in a state of ruin?

We are not given an explanation. We are told to simply assume that the Fed has magic powers to turn watered down, unbacked fiat currencies into the wine of real value. On such foundations is the world of modern international economics erected. Is it any wonder we shudder inwardly at the risks involved - and why we recommend the maintenance of insurance positions in the monetary precious metals?

A while back we wrote on the theme that "nothing is confirmed until it is officially denied." That concept worked well with the Irish financial debacle when for weeks previously, monetary authorities denied there was any trouble, at least until they went, hat in hand, begging for assistance. On the same note, Portuguese authorities have been telling us that they have their situation well in hand and they are in no danger of default or other monetary crisis.

Given our skeptical nature, we find it no surprise at all that Moody's bond rating services has just warned that it may downgrade Portugal's government debt paper by as much as two notches, citing uncertainties over the longer-term health of that nation's economy with another consideration being Portugal's deterioration in debt affordability, or its ability to withstand the fiscal consolidation which might occur if its austerity program is put into effect.

Speaking of austerity measures, Great Britain's program of government reductions in social programs is now under some pressure. Britain's new government is a "coalition" government, meaning that the largest party, the Conservatives, do not have a sufficient number of seats to form a majority and have had to join in a coalition partnership with the Liberal Democrats (LD) to gain control of Parliament. As a result, the Conservatives must allow the Liberal Democrats to have some degree of influence over the pathway of government or they may bolt the coalition and join with the Labourites to bring down the Conservative government and force a new election.

LD politicians also began to list some of the austerity measures that they may no longer support such as reductions in the housing benefit which might put some families on the breadlines and reductions in tuition support payments which could diminish the ability to attend college or university for many students.

Comments relating to Liberal Democratic problems with the policies of the coalition appear to be on the rise. If that coalition fails, the entire UK concept of austerity measures to reverse the growth of government will be called into question, and such ideas could be coming at a most inconvenient time as it was just announced that public sector government borrowings during November reached an all-time record high.

It seems strange to us that borrowing would reach an all-time high many months after austerity measures which had the stated goal of reducing government spending and borrowing had been put into effect.

All of this is yet additional evidence that all is not well in the European economic scene.

Several markets are making only modest moves as traders begin to go on holiday for the Christmas-New Year's vacation period. As of 10:00 AM PDT, financial markets in both Canada and the USA are little changed, precious metals are trading quietly on balance, as are base metals and mining share indexes. Long term interest rates are moving upward once again and the U.S. Dollar is trading quietly in currency markets while crude oil is up moderately to just above the $90 per barrel mark.

One area of commodity trading which might be providing a valuable early warning that food price inflation might become a larger story during 2011 can be found in the trading chart of the important Soybean grain contract. As can be observed, the price appears ready to break out above resistance and move toward the historic high near the $17 per bushel zone. Soybeans are used in a wide variety of food products and such increases in the price of the underlying commodity could be of some true significance in the form of rising inflationary pressues going forward.

All prices US$ unless otherwise noted.

Due to the Christmas holiday, our next Melman Minute is scheduled for Monday, December 27, 2010.

Please accept our very best wishes for a Merry Christmas and a Happy New Year - and may our worst fears for 2011 and beyond NOT be realized!

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