A Melman Minute — September 16, 2011

Details of the latest ‘rescue’ program (just how many have there been?) are now emerging and, given the nature of this latest European plan, it is easy to conclude that the level of desperation among the world’s financial leaders is rising rapidly, for it is apparent that, to use an over-worked expression, they are ‘pulling out all the stops’.

That plan, just announced yesterday, involves no less than five major players: the European Central Bank, USA’s Federal Reserve, Bank of England, Bank of Japan and the Swiss National Bank. All of those mighty bastions of government intervention jointly announced that they would gather together to prevent any private banking failures, at least for the time being. The Dow Industrials raced ahead yesterday by almost 200 points (see chart) and once again, sighs of relief were heard in various parts of the western world.

But what really took place? In our opinion at The Melman Report, all that occurred was that the combined central banks guaranteed that the value of government bonds now being held by various banking establishments would be repaid at their present US Dollar conversion rate, thereby rescuing those banks from lending decisions which turned out to be unfortunate at best and downright stupid at worse.

In essence, we believe that the funds for this rescue will be dollars provided by the Federal Reserve Bank in America, then transferred to various central banks in Europe and then finally deposited into the balance sheets of various European private banks which at present face considerable risk. Those banks would then clear the potentially bad government debt off their books and return those bonds and bills to the various central banks.

If the Fed was simply acting as a transfer agent for already-existing American dollars, that would be bad enough. But what appears to be the case – at least to us – is that the Federal Reserve is simply going to create these funds electronically out of thin air, thereby adding to the US$ monetary stock of the world without adding a single increment of any real value.

Such are the financial resolutions we see in the world of today. The problems have been caused by governments spending too much in relation to their real income and a sane person might suggest that the true resolution would be to spend less and earn more, but not one so-called leader offers such thoughts. Instead it is merely a case of creating more (artificial?) money and using those funds to re-finance existing debt, adding to the total amount in the process.

While the Dow’s rally yesterday might have appeared strong, it is apparent that we have simply moved toward the top of the recent trading range. That isn’t much of a reaction for an earth-shaking endeavor such as we have just witnessed.

In the meantime, new claims for Unemployment Insurance shot up for the second consecutive week last week and have now reached 428,000. This figure is indicative of the real problem with the economy, namely a lack of job opportunities to stimulate growth.

President Obama take note: Americans are seriously troubled about the economic problems they can see with their own eyes. Perhaps it is time to seek other approach than simple repetitious Keynesian remedies.

Compounding the problems is the fact that both the New York Fed and the Philadelphia Fed reported that manufacturing activity was contracting in each of their regions and the Wall Street Journal just reported that a growing percentage of major economists are now forecasting a renewed period of recession in America.

For the most part, attendees at the Cambridge House Resource Conference in Toronto appear to be non-committal about the metals’ future and it is specific news relating to individual mining ventures rather than any collective emotions that seem to be the primary force in evaluating sentiment at this gathering.

Once again we are writing prior to most market openings, but overnight indications call for slightly higher precious metals, lower financial markets and steady performance in both the US Dollar and long term interest rates.

All quotes US$ unless otherwise indicated.

Our schedule for next week’s Melman Minutes remains uncertain as I will be totally out of touch until late Tuesday’s planned arrival in Southern California. Simply put, while on vacation I plan to prepare Melman Minutes depending on computer availability and important market action on a ‘best efforts’ basis. Our regular Melman Minute schedule should resume Monday, October 3, subject only to work-related travel requirements.

← All A Melman Minute