A Melman Minute — June 3, 2011
| By | Leonard Melman |
|---|---|
| Date | June 3, 2011 |
NOTE: Mr. Melman will be speaking at the upcoming Cambridge House Resource Conference in Vancouver, scheduled for Sunday, June 5 and Monday, June 6. He will be offering a PowerPoint presentation entitled On the Road to Hyperinflation Revised June 2011 at 11:00 AM, June 6 and will appear in a panel presentation at 5:30 that afternoon which will be devoted to the subject of gold. (We have just been advised that due to the Vancouver Canucks Stanley Cup championship game scheduled for Monday, the late panel may be revised or eliminated.)
The generally accepted version of the theories of John Maynard Keynes tell us that when economic dislocations occur, government should step in with aggressive actions to restore prosperity. Some of these actions might include:
Drive interest rates downward to stimulate economic activity
Run governmental deficits to create jobs
Increase the quantity and circulation of money
More effectively manage the economic structure
These ideas along with many others were presented in his widely-read textbook; The General Theory of Employment, Interest and Money published in 1936 as well as in his famed Open Letter to President Roosevelt of December 1936. They have become virtual dogma to generations of economists, particularly those with a leftist bent. And so, when the economies of the world shuddered and then headed toward collapse in 2006 and 2007, government leaders in America and other advanced nations began to apply Keynesian remedies to a degree never seen before.
By Lord Keynes theories, the American governments actions creating the lowest interest rates in America history; the greatest money creation in American history; the largest deficits in American history; the greatest expansion of governmental regulations in American history and the most abundant job creation programs in American history should have produced, well, the greatest sustained economic rally in American history.
But, it is now becoming abundantly clear that they have not. The economic rally they did help to create was the weakest post-recession rally on record and there is steadily growing evidence (see recent Melman Minutes on this site) showing even that puny surge is now reversing. Just this morning, an important piece of new evidence supporting this argument was just presented today in the form of the May jobs report from the US Department of Labor. The figures were quite literally horrible.
Just when the political establishment was gaining confidence from the March and April figures of about 200,000 job gains each month, the May figure came in at only 54,000, the lowest since last September, while the official Unemployment Rate rose to 9.1%, the highest since December 2010. Even worse, the only sector to show any real growth was the service sector which offers the lowest paying jobs of any major category.
This report follows the release of several recent statistics which show that the economy is beginning to seriously falter and that leads to a most interesting question which, at least in our opinion, directly relates to the entire Keynesian theoretical structure. In terms of the table noted above, if zero percent short term rates; more than $2 trillion in deficits in two years; a 250% gain in Fed assets in just two years; and a virtual re-writing of the regulatory background have proven to be insufficient, what is to follow? Are we headed for negative interest rates, deficits of two or three trillions per year or more, even greater Fed expansion and even more regulations?
Only time will tell, but the situation at least has progressed to the point where securities markets are beginning to reflect real concern, as noted by the six-month chart on the Dow Jones Industrial Average, shown below, which is now possibly beginning to reflect the early stages of a genuine reversal in the bullish trend which has held since the market bottom of early 2009.
Two events have occurred virtually simultaneously which would appear to contradict each other, but which we believe do not. First, headlines in this mornings European press informed us that Greece Approves New Rescue Package while at the same time we learn that Moodys bond rating service has just downgraded Greeces debt by three levels in one fell swoop, reducing that countrys bonds not just further into junk bond territory, but far enough down the scale to indicate Moodys believes there is a genuine possibility of near-term default.
In our opinion, the Moodys actions appear to be quite understandable. Greeces immediate problem is that it is drowning in unpayable debt and the European Communitys preferred solution is to add mountains of new debt. We can also note that Greece has been unable to impose many of the austerity conditions agreed upon in previous settlements, but the EC somehow has confidence that new and even more stringent conditions will be acceptable to the Greek public in general and their public service unions in particular.
Moodys is apparently skeptical about the workability of this new agreement and so are we. It appears to be nothing other than an attempt to kick the can further down the road and foist these ultra-serious problems on some future politicians and financial leaders yet to take office.
That is what stands as a solution nowadays.
As of 9:30 AM PDT, financial markets are recovering somewhat from their lowest levels but are still trading to the downside with the Dow Industrials off by about 50 points and the TSX Index is about 20 lower. Precious metals are mixed with gold ahead by over $10 to near $1,545 but silver remains more than $1 lower at just under $36 per ounce. Base metals are modestly higher on balance while mining share indexes remain close to unchanged on the session.
In other markets, long term interest rates are starting to move higher, crude oil is slightly lower and the U.S. Dollar continues to show further weakness.
All quotes US$ unless otherwise noted.
Due to our participation at the Cambridge House Resource Conference in Vancouver this coming Sunday/Monday while Tuesday will be a traveling day, our schedule of Melman Minutes for next week will be limited to Wednesday and Friday.