A Melman Minute — November 4, 2011

One of the central themes at “The Melman Report” is that the world is already drowning in fiat currency and the outlook, as we see things, is that the path is wide open for the unlimited creation of more of the same. That theme was reinforced by a news release this morning, coming out of the G-20 get-together in Cannes this weekend, which stated that they are actually considering directing the International Monetary Fund (IMF) to create – meaning ‘print’ – more units of what are known as Special Drawing Rights or “SDR”s.

According to an analysis by financial writers Ian Talley and Gauthier Villars datelined from Cannes, “...Asking the IMF to print more of its SDRs – essentially an IOU that countries can exchange for cash – is one of the ways the Group of 20 industrialized and developing countries is considering supplementing European efforts to stem the debt crisis that is threatening to spark a global financial meltdown and another recession.”

To our way of thinking, even the act of making such a suggestion shows just how desperate are the world’s financial leaders in the face of the debacle which is growing at lightning speed. They have abandoned all discussion of actually facing the heart of the problem which, in our opinion, is that governments have been providing levels of largesse which are far beyond their abilities to tax or repay by legitimate borrowings. The hard answer, we believe, is to reduce the level of such services and generosity to below those quantities which are truly affordable. However, as we know, the political costs of such actions – recently vividly demonstrated in Rome and Athens - can be disorders, rioting, widespread disruption of transportation and other services, and threats to the continued rule of parties presently holding parliamentary majorities.

As such, few politicians believe they can face such consequences and have opted for finding an easy way out. The creation of SDRs, which will then be ‘sold’ to governments and used to repay fiat money borrowings, appears to be a workable solution which will resolve problems for the moment. The suggested amount for the SDRs is $250 billion which would then be turned over to the European Financial Stability Facility which would subsequently be used to buy up defaulting debt from several European banking establishments.

Two things immediately suggest themselves.

First, the SDRs would be a completely artificial unit of monetary (non?) value, created to supplant another artificially created currency unit, the Eurocurrency or simply “Euro.” Somehow, at least in our eyes, the logic of the artificial replacing the artificial suggests a non-solution to the fundamental problems.

Second, a new and potentially significant problem is that the International Monetary Fund is itself an artificially created institution. It is not a country in itself and therefore, there is absolutely no precedence in the modern world for a non-country to create a valid currency. We can only ask what or who is to provide believable backing for this supposed monetary value?

To our way of thinking, such talk simply shows how far along the path to monetary destruction the world has traveled.

In the meantime, the political situation in both Greece and Italy has become almost comical and it would be so except for the fact that so many millions of people’s lives are being placed at risk because of the financial chaos now spreading so rapidly.

The latest authoritative information we can obtain - and it changes by the hour – is that the proposed referendum for the Greek people to vote on the austerity measures being proposed by the European Community will now NOT take place. Greece’s President Papandreou, who proposed the referendum in the first place, appears on the verge of resignation and the country also appears ready to overthrow the current party in power, which would result in new parliamentary elections and frequent changes of governments would appear to us to be inconsistent with any lasting solution to Greece’s horrifying array of problems. A confidence vote regarding Papandreou’s political fate is scheduled for tonight.

In the meantime Italy, which has a level of debt almost ten times that of Greece and where we were assured only weeks ago that all was in hand, has itself entered a period of maximum uncertainty. Their financial situation has deteriorated to the point where the country is begging the IMF for help. Their President Berlusconi appears to be on the verge of being ousted and the parliamentary majority owned by Berlusconi’s party also appears to be melting away.

And, waiting in the wings are such other weakened nations such as Spain, Portugal, Ireland and Iceland, plus some others where the level of national debt compared to GDP has passed far beyond fiscally responsible levels but which have not yet made world headlines.

To compound matters even further, many of the most widely disseminated projections for restoring Europe’s financial structure rest on the assumption that the overall European economy has begun to improve and will advance more rapidly into the future, throwing off increasing amounts of tax revenues and decreasing the necessity of governments to continue providing social assistance at current levels.

Unfortunately for such assumptions, economic growth in Europe may not be taking place at anything resembling the desired rates and this appears to have been confirmed by a sudden announcement by the European Central Bank that they were once again reversing policy and are now lowering interest rates after raising them earlier this year.

As we have noted in this space previously, the manufacturing numbers in several large European nations have been contracting of late and that was apparently the motivation behind today’s actions which were designed to further stimulate economic activity. Whether they will succeed in accomplishing that goal is one question, but we believe the very fact of taking such action is de facto admission that the looked-for improvement in Europe’s economic performance is simply not taking place.

This should be quite a weekend for European economic and political affairs. We can hardly wait until Monday morning.

An old song appears to be playing itself out once again in America, namely if you cannot answer your opponent with reasoned logic, try to destroy his reputation.

We saw this in the scurrilous attacks on eminent legal scholar Robert Bork during his Supreme Court nomination hearings and we saw the same manner of actions on a much more virulent scale take place against another Supreme Court nominee, Clarence Thomas, a few years later. We saw President Ronal Reagan attacked for being an old man who ‘nodded off’ during Cabinet meetings and whose undeniable political successes could be attributed to his being a “Great Communicator” alone and not being due to his policies and philosophies.

We are now witnessing yet another attack, this one against Republican Presidential nomination contestant, Herman Cain who is suddenly being called upon to explain away sexual harassment claims from well over a decade ago and to which Cain was never found guilty. The tactic has been eminently successful because no one is talking any longer about his ideas to reduce government tax regulation, reduce personal tax rates, reduce corporate tax rates or institute an American version of Canada’s GST or Europe’s VAT.

As of 10:00 AM financial markets have been trading to the downside so far today after rallying on Wednesday and Thursday. Canada’s TSX Index is off by about 80 points while the Dow Industrials are off by 145. Gold and silver are trading lower by about $10 and 40 cents respectively, base metals are close to unchanged on average and mining share indexes are down by a bit over one percent.

In other markets the US Dollar is stronger, crude oil is close to unchanged and long term interest rates have risen slightly.

Speaking of gold, it continues to trend higher in the short term and is now less than $180 away from its all-time record high near $1,935.

All quotes US$ unless otherwise indicated.

Next “Melman Minute” scheduled for Monday, November 7, 2011

NOTE: We will be returning to Standard Time effective 2:00 AM local time Sunday morning, making it time to act out the twice-annual ritual of resetting our clocks.

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