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Sandy's Lessons; New Financial Storm Approaching

Personal preparedness is the name of the game – whether physical or financial. Leonard Melman discusses past hyperinflations.

Don't want to listen? Read the podcast below!



Mike Gleason:

Welcome to this week's market wrap, I'm Mike Gleason.

In this podcast, I'd like to talk to you about storms and preparedness.

The extent of the devastation inflicted on the Northeast by Super-storm Sandy still isn't fully known. But Mark Zandi, chief economist at Moody's Analytics, estimates the disaster will cost $50 billion.

To say nothing of the 90+ people who were killed.

Of course, for those who lost homes, livelihoods, or loved ones due to Sandy's fury, no dollar figure can quantify their sense of loss.

But one key takeaway from disasters like these is this: those who prepare for the worst – suffer the least.

Those who fled the most vulnerable areas in advance of official orders... those who stocked up on emergency survival essentials before store shelves went bare... those who had their physical possessions covered fully by insurance, positioned themselves to survive the storm relatively unscathed.

Likewise, the financial storms on the horizon will produce devastating consequences for the wealth of individuals who don't prepare for what's coming there.

Let's put things in perspective. As horrific as Superstorm Sandy was, the approximately $50 billion in damage it caused amounts to only half of what the U.S. government borrows each and every month.

Trillion dollar deficits and a $17 trillion national debt will greet the new Congress and the next occupant of the White House.

Even if the so-called fiscal cliff is avoided, that's hardly good news. It just means the government will be able to keep on spending and promising beyond its means!

Entitlement spending now constitutes 62% of federal outlays. Needless to say it's absolutely out of control. Social Security is now running an annual operating deficit and is headed for bankruptcy.

Medicare's future looks even grimmer. Its unfunded liability stands at $39 trillion, according to the Medicare Trustees report released earlier this year.

This is all leading to a perfect storm for the dollar.

We saw something like a category 3 storm in 2008, when the banking system nearly melted down. The bailouts and the stimulus and the Quantitative Easing schemes that followed have put the currency in further peril.

A category 5 storm is now brewing, and when it hits, holders of dollars and dollar-denominated IOUs – also known as bonds – could see much of their wealth completely destroyed.

Insurance from such a storm is likely to come in the form of physical precious metals. Gold and silver coins in your actual possession are investments that exist outside the financial and monetary system. Gold and silver bullion can't default or go bankrupt. They are stores of value that can't be debased by politicians or central bankers.

Like an insurance policy, you buy precious metals hoping you never actually need to use them in a crisis situation. But once the crisis does hit, it's too late prepare. The time to prepare is now – in the calm before the storm.

Precious metals have had a quiet week for the most part thanks to two days of storm-induced market closures. Although following an announcement earlier this morning of a better than expected October jobs report and an upward revision to the September jobs number, gold and silver have come under pressure. Gold sits just below $1,700 an ounce and silver is hovering under $32.00.

We'll see what happens after Election Day. And in next week's podcast, we'll share our reaction to the election outcome – especially as it relates to precious metals investing.

I recently had the great pleasure of interviewing Leonard Melman of the popular Melman Report. He gave a fascinating account of several countries in history who devalued their currency to the point of national ruin.

He sees the possibility of history repeating itself today – in a world of nothing but paper currencies. I think you'll find this interview extremely informative.

Mike Gleason:

This is Mike Gleason reporting from the Silver Summit and right now we have the privilege of visiting with Leonard Melman of the Melman Report and he is a wonderful historian and experienced and well-respected market commentator, both in the precious metals and mining and exploration space and Mr. Melman gave a tremendous speech today here at the Silver Summit on the history of fiat currencies and their ultimate demise. We are going to discuss that topic today. Mr. Melman, thank you. Welcome.

Leonard Melman:

My pleasure. Thanks very much.

Mike Gleason:

I want to start by talking about some of the examples you gave, paper currency disruptions and past history that you noted in your speech today. We have four great examples in history, the Roman Empire, France in the late 1700's, Germany in the 1920's and most recently, Zimbabwe. Let's first talk about Rome, the issues that they had, how they destroyed their currency and ultimately how it destroyed them as an empire.

Leonard Melman:

That's exactly what I want to do and I would also like to establish a repeating pattern of governments running out of money and making up for it by creating artificial currency and that's the one common thread between those four hyperinflations and others.

In the case of Rome, Rome was built on the wealth they brought in from other nations that they had conquered. The money went into the Roman treasury. The Roman treasury, in order to keep civil peace, bribed the poor citizenry with free bread and free circuses, the old expression bread and circuses. They could afford to do that as long as they were conquering other nations and robbing them of their treasury and depositing into the Roman treasury, but by about 250 to 300 A.D. they ran out of countries to conquer. There was no more treasury to import so they were limited in the amount of gold and silver coinage they could create.

They tried to solve the problem by watering down the value of their currency by incorporating other metals into their denarius and their sestertius coins.

Unfortunately the watering down became so evident that merchants and individuals didn't even want to accept the coins. The emperors then came in and ordered the acceptance at the penalty of death and the whole of Roman commerce began to grind to a halt. By the time Rome collapsed, the Roman denarius and cysterici were 99.8 percent filler and only 0.2 percent gold and silver. They were virtually worthless. And it was the entire breakdown of commerce and the inability to pay soldiers that left with the doors swinging wide open for the invasion of the Huns. That was the demise of the Roman Empire.

Then, of course, as I pointed out, that was followed by an enormously long period, estimates 800 to 1000 years, called the Dark Ages, when human material progress literally came to a standstill.

Mike Gleason:

It took quite a while for us to rebuild as a world and as an economy. The next example you had was obviously another great one there with France in the late 1700's when they destroyed their currency and ultimately lead to their demise.

Mike Gleason:

Germany in the 1920's is, of course, probably the most famous example. We are talking less than 100 years ago. World War I set that up and you mentioned Germany went off the gold standard to pay for the war and then after the war they had some real problems, didn't they?

Leonard Melman:

The worst of the problems was that the rest of the free world pointed the finger at Germany and say, "You are the cause of the war and you should pay us back for all of our expenditures," and at the Treaty of Versailles they assigned these huge reparation obligations against Germany which Germany couldn't afford with their own currency. The age old answer, they just they would create new currency and as that new currency filtered its way through German society, inflation began to bubble up.

Like most inflation, it starts off slowly, then accelerates and finally turns the corner into true hyper inflation. That occurred in Germany in late 1922 and throughout the majority of 1923.

Mike Gleason:

That was also very instrumental in Hitler rising to power which created a whole new set of problems.

Leonard Melman:

It destroyed the entire wealth of the typical solid German citizen who had saved for years to finance his retirement. He suddenly found himself with maybe having 100,000 marcs in his bank account but in the end that wouldn't even buy him a pound of potatoes. Instead of solid retirement, he was bankrupt, worthless and it created real ruptures within the German society and at the same time people who had been destroyed in that way were seeing wealthy industrialists who were able to pay off their entire manufacturing establishments with the equivalent of a pound of bread. That fostered class warfare and destroyed the solidity of the German society and Adolph Hitler moved into that turmoil in 1923. Got the publicity he needed and from then on his rise was spectacular.

Mike Gleason:

Decades of issues there throughout Europe and throughout the world as a result of Hitler's rise. The most recent hyperinflationary situation that we have is Zimbabwe within this past decade. Talk about their issues and what they faced and their ultimate demise as well as a currency.

Leonard Melman:

Zimbabwe was almost an ideal free market society when it was the country of Rhodesia under British rule and with Smith as their leader. It was a rock solid economy, incredibly productive, they were able to export food products and their currency was so well reknowned that one Rhodesian dollar was worth $1.59 U.S. Then the British influence in Rhodesia was over thrown, when Mugabe came in and he began to break up all of the farms, turned the land over to private farmers who couldn't produce anything. People started to go hungry, he started to create currency to pay for food for the whole pattern of government spending beyond their means and creating artificial currency to finance that spending took hold. Zimbabwe's inflation took off like an incredible cyclone.

Mike Gleason:

The $1 trillion dollars Zimbabwe notes I know are novelties now. They are out there in public and people just have them as representations of what can happen.

Leonard Melman:

They like to call their friends and say, "Hey, I struck it rich. I am a billionaire."

Mike Gleason:

Little do they know it buys almost nothing. In each of these situations and the reason we are talking about this history is of course it plays such an important role and maybe it doesn't repeat itself, but it certainly rhymes. In each of these situations we have governments creating paper money to pay for their debt obligations and bringing back on point, we have the same situation here now throughout the world and in the United States, and Europe and Asia where austerity measures are not very successful. There seems to be no political will to cut spending and we may have reached a point of no return yet again here in today's current society.

Leonard Melman:

Absolutely. It is that same pathway of government creating debt, being unable to pay on the debt, and then re-financing old debt with new debt at always greater amounts plus running current deficits which increase the amount of debt even faster in order to try to stimulate the economy but the lack of faith in the economy causes the economy not to be stimulated the way they want and you get into this treadmill. And, the U.S. right now as far as I am concerned, is in the treadmill of never paying off existing debt but only re-writing it into ever larger amounts that historically is a pathway to toward hyper-inflation.

If it appears to be limited at the moment, I believe that is because the economy has been has been internally contracting fast enough so that the full effect of all of this money creation hasn't been felt. But, we are starting to get glimmers of some economic strength and rather than something to be looking forward to I think that could lead rapidly toward this looming economic catastrophe just as the first glimmer of strength and the original Assignats creation stimulated France for a short term and then all of the negative effects of the money creation began to be felt. Then, a massive calamity ensued. That I think is the pathway that the U.S. is following right now.

Mike Gleason:

As you mentioned, it is usually not calm, it's not quiet, and it happens very quickly when we go off that cliff, ultimately.

Leonard Melman:

Once the faith of the public and the value of the currency they carry in their pockets begin to fade, that is when we will move so swiftly from controllable toward uncontrollable.

Mike Gleason:

For those of you who are listening to this podcast, that they're precious metals investors obviously it should give them a lot to think about. Certainly those with precious metals are going to fare a lot better in this type of environment.

Just talk about the role that gold and silver will ultimately play and why it is important to have protection against what could be facing us here.

Leonard Melman:

There are two protections involved. If we move toward hyperinflation then historically gold and silver do spectacularly well. If that is the case, the first reason for holding gold and silver and gold and silver mining shares is that, that rapid improvement, that rapid escalation in the price of gold and silver should result in marvelous opportunities for capital gains in the mining shares.

The second value of holding gold and silver to my mind is the more fundamental human safety. If we have an absolutely uncontrollable hyperinflation, then all commerce and industry based on dollar payments could vanish. It could deteriorate into something that cannot be relied upon during such periods of time and I think the private ownership of gold and silver which then can be used to accumulate lesser metals like copper and zinc could provide people with fiscal salvation in the fact that they would have the ability to buy the essentials of life whereas people that had all of their monetary wealth in paper currencies could find themselves facing starvation.

That's what would have happened in Zimbabwe, if Zimbabwe had been a major economy. But as it is they were able to appeal to the rest of the world for assistance and now they use the U.S. dollar as their generally used currency and so they have been able to hang on, but the U.S. dollar is entirely different, it's the reserve currency of the world.

Given the inter-connectiveness of the world with virtually all debts being settled in U.S. dollars, if that currency collapses the panic could become worldwide.

Mike Gleason:

As you mentioned in your speech, there is a very, very small percentage of people that own precious metals, can't remember exactly what the stat was that you gave, but is a miniscule part of society who actually has exposure to metals.

Leonard Melman:

Absolutely. Figure at 100 percent for all financial assets, approximately 99.4 percent in what might be termed conventional as such, only 0.6 percent are in precious metals related assets. Just imagine if enough people get frightened and part of my thesis is that more and more people are losing confidence in conventional economic and political leadership, and as they lose confidence, they will seek the safety of precious metals. Just imagine how incredible the rush could become if even three percent of that 99.6 percent tries to head into the 0.6 percent in precious metals investments, the price of precious metals could skyrocket beyond anything anyone would want to believe today.

Mike Gleason:

Absolutely. That's true and if we do see that rush, it could get quite interesting for sure.

This is excellent information. The historical aspect, of course, is so important and everyone should grasp it and if people want to find out more about the Melman Report, talk about how they can do that and get on your newsletter.

Leonard Melman:

Very simply. The Melman Report is a website which contains a few features.

First of all, I write commentaries on economics and politics and how they relate to the metals every Monday, Wednesday, Friday and those reports are called, Melman Minutes. There is some slight variation in schedule when I am traveling or I got sick or something of that nature, but that is normally when they appear.

Then I write periodic commentaries called, Melman Melmanias. Two I have written recently are on Grover Cleveland, who I personally regard as one of the great American Presidents, and a quotation from Ayn Rand's Atlas Shrugged which perfectly related to Barack Obama's comment on how nobody ever invents anything by themselves, it's all a collective.

Mike Gleason:

Excellent. I am sure our people will be sure to do that. Thank you very much. You have been very generous with your time. Thank you very much for joining us.

Leonard Melman:

My pleasure, indeed.

Mike Gleason:

This has been Mike Gleason from the Silver Summit in Spokane, Washington. Thanks for listening. We'll talk to you next time.



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