A Melman Minute — June 13, 2011

For some reason, the old movie Groundhog Day keeps coming to mind. For those not familiar with that films plot, Bill Murray plays a gentleman who must live through recurring Ground Hog days one after another. The event which brought Murrays classic film to mind was the report out of Washington that President Obama had just announced a plan to take new steps to reduce government waste.

Of course, one of the problems related to government waste is the sheer number of bureaucracies with whom industrialists and entrepreneurs must contend, which makes it passing strange indeed that the Presidents solution of choice to the problem is the creation of an entirely new bureaucracy, this one to be entitled, Campaign to Cut Government Waste. According to an AP story this morning, ...Obama will call for a new oversight board to work with federal agencies to cut back waste and improve their performance. The order also requires cabinet Secretaries to hold regular meetings with Vice President Joe Biden to report progress.

This is where memories of Murrays film come in. Havent we heard the same story, over and over again, and with little or no positive results to show for those efforts? Didnt Obama himself stress in this years State of the Union Message five months ago that reducing or eliminating government waste was one of his primary objectives? Didnt President Clinton propose exactly the same type of plan with Vice-President Gore assuming the focal role?

We believe there is much more to this story than is at first evident, that it actually relates to a particularly obscure point of regarding philosophies of government. In fact, we believe that one of the hiding places behind which most advocates of the political Left stand is the presumption that if only we can eliminate government waste we will save so much money that a n ever-growing array of socialist/welfare programs can suddenly become affordable.

To us, the Presidents new announcement smacks of hypocrisy of an unusually intensive nature since, as the Wall Street Journal just put things, ...The best measure of the overall regulatory burden comes from Wayne Crews of the Competitive Enterprise Institute in his annual The Thousand Commandments scorecard. Mr. Crews recently reported that there are more than 4,000 new regulations now in the pipeline, and he notes that in 2010 (two years into Obamas presidency-LMM) the bureaucrats set an all-time record by churning out 81,405 pages in the Federal Register, where new and proposed rules are published. (Our emphasis)

Therefore, we at TMR have little to zero faith that this mornings article will truly be an indication that there will be a genuine reduction in government programs, there will be a genuine cutting of government spending in America and there will be a stop to pandering to the demands of all-powerful civil service unions. As a result, it is difficult for us to see any genuine reduction in excessive government regulation, deficit spending and huge deficits, accompanied by easy money policies. Therefore, it appears to us that programs of economic stimulation are likely to continue into the foreseeable future.

According, we are holding firm to our opinion that the long-term future for the monetary precious metals remains bullish.

More than two years ago, we wrote in this space that one of the likely outcomes of the growing financial crisis was a determination by many governments to increase taxation in order to finance a continuation of government expenditures and/or to bring their fiscal books into balance. Unfortunately, this was one prediction that turned out to contain a considerable degree of accuracy as we have seen one increased taxation measure after another, mostly directed against the wealthy.

The parade of increasingly intrusive taxation measures either proposed or enacted of late has been quite impressive and includes increasing property taxes in France; increasing income taxes in Great Britain and America; massive hunts for tax cheats around the world by several nations; special taxes on oil firms; taxation on cruise ship customers; increasing taxes on all petroleum complex products; imposition of a Value Added Tax (VAT) in America; special taxes on mining products in many nations; raising Estate Taxes and a host of other related articles which happen to fill two thick folders in my office.

We believe that while strategies of soaking the rich seem to hold strong appeal to the egalitarians out there, perhaps they should take a realistic look at one of the more profound economic considerations involved in such plans. In order for governments to consistently provide many of the public-demanded services, it is absolutely necessary for the general society to be sustainably prosperous. Only in that manner can sufficient revenues be raised for government purposes without inflicting serious harm and distortions on the economic body.

For the economy to achieve prosperity and hold on to it, it is necessary for there to be a continuous flow of risk capital and that is where taxation policies can inflict a great deal of harm. Capital owned by the wealthy does not sit idle, but is invested in one manner or another and it is those investments that feed the flow of equipment purchases, aid in new business creation, keep the wheels of banking and international finance well-greased, etc.

When the government takes money away from the wealthy, that money is then turned over to non-productive hands which normally do not make the kind of investments noted above. It is generally used for one-time consumption and must be continually replenished, frequently weakening the economy in the process.

From our point of view, and particularly in relation to the precious metals, the imposition of heavy taxation against major holders of capital within an economic society retards economic growth, retards genuine net taxation revenues and compels governments to run greater deficits than might otherwise be required, thereby forcing them to impose even higher levels of taxation which impose new increments of negative economic pressures, resulting in a downward spiral for the entire economic structure.

This is not new news at all. Economist Arthur Laffer determined these truths years ago and convinced President Reagan to reduce taxation in order to increase prosperity and that is the strategy Reagan ultimately adopted and it worked, since the 15 years between 1985 and 2000 were among the most prosperous on record for America and the world. It is our belief that Laffers concepts had better be tried again and soon if there is to be any chance at all of averting an economic calamity.

One of the most intriguing charts for the moment is lumber. By all precedents, one would expect lumber to be rallying strongly since long-term interest rates have recently been in decline, but that has not been the case. After falling sharply for many weeks, the best lumber has been able to achieve is a sort of holding action and it is a negative non-confirmation of this sort that suggests that difficult times for construction may yet lay ahead.

As of 9:00 AM financial markets in America have given back most of their early gains while Canadas TSX Index has fallen by about 80 points. Precious metals have sold off moderately with gold down by $4 to near $1,525 while silver is off by almost $1 to under $35.40 per ounce. Base metals are trading moderately lower on balance while mining share indexes are off by about one-half percent.

In other markets, crude oil is down by about one dollar, the US Dollar Index is off by about 20 basis points and long term interest rates are close to unchanged.

All quotes US$ unless otherwise indicated.

Next Melman Minutes are scheduled for Wednesday, June 15 and Friday, June 17, 2011 subject to Internet availability on our forthcoming trip to the Shining Tree mining district in Northern Ontario.

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