Captain's Log

Tuesday, April 22, 2008

The latest issue...

I didn't get the opportunity to write the log last week; as usual, too many tasks and not enough hours in the day.

We finished laying out the May 2008 issue around 2 a.m. on April 18 and sent if off to the printer for review. Our proofreading skills were not up to par at that hour, but we managed to squeeze in another cover-to-cover reading over the next few days and, hopefully, we caught all remaining errors. There is always something that seems to get by us.

Land closures...

The Forest Service is at it again, trying to place additional restrictions on miners in National Forests through proposed rule changes. And our legislators are wanting to turn more public lands into parks or wilderness. You'll see information about these items in the Legislative & Regulatory Update in the May issue.

A few random thoughts...okay, a lot of random thoughts!

I often wonder how long our federal government thinks it can get away with all this overzealous spending while they continue to tie up public lands, the only resource we have in America that can be used to create wealth. 

Think about it. Extracting minerals and metals from the earth is one of the few ways to create new wealth, a valuable commodity that didn't exist until it was removed and refined into a useful product. 

Let me give you an example. 

You go to your local hardware store and purchase a nozzle for a garden hose. That nozzle likely consists of a type of metal coupled with rubber and plastic.

The metal portion was extracted from the ground, refined and processed into a useful commodity. The rubber portion, if synthetic material, was made from petroleum, which was extracted from the ground, refined and processed into a useful commodity. If it was natural rubber, it came from the sap of a rubber tree, which was extracted, refined and processed into a useful commodity. You get the idea.

The same applies to plastic. In the early days, plastic was derived from the horns of animals or the sap of certain trees. Nowadays, plastics are another petroleum based product (like polypropylene and polyethylene).

The company (or individual) that extracted the raw materials that went into that nozzle created the original wealth, and each company (or individual) that has a hand in creating the finished product gets a piece of the pie by performing a service related to the original extraction of the raw material. A portion of that wealth is distributed during mining, transportation and sale of the commodity, manufacturing and distribution. Everyone takes a cut by adding their costs plus profit for their stage of the process, all the way up to the sales clerk (and the owners) at your local hardware store.

The price of the commodity fluctuates based on a number of factors, including the cost of labor, equipment, compliance, environmental remediation, and other commodities (like oil for fuel.) All of these people/companies/lawyers/government employees want a piece of the pie.

If you are not working in mining, it's likely you are not creating wealth but rather redistributing it. You are providing a service to someone in exchange for a fee. You can take your income and redistribute it to obtain a service from someone else or you can purchase another product that was created by mining.

This circle worked well for creating wealth in the United States for centuries. The process was "screwed up," for lack of a better term, by the federal government when it removed the Gold Standard and followed up with extremely restrictive regulations and outright bans on mining on huge swaths of public lands. 

The Dollar, the British Pound and the Swiss Franc had a specific commodity value attached to it, which prevented the governments from printing and distributing money at will. The US Treasury had to have sufficient gold on hand to equal the amount of US currency in circulation. 

The British government abandoned the Gold Standard in 1914 to fund World War I, but returned to the Gold Standard in 1925. They would abandon it again in 1931, followed by Sweden later that same year and the US in 1933.

In 1944, 730 delegates from 44 nations gathered in Bretton Woods, New Hampshire, and hammered out what became known at the Bretton Woods Agreement. The International Bank for Reconstruction and Development, the World Bank, and the International Monetary Fund were established to oversee currency stabilization and peg currencies within +/- one percent of the gold price. The price of gold was set at $35 per ounce. At the time of the agreement, the United States held roughly 80% of the world's gold reserves. So the US Dollar became the currency of choice. (Addison Wiggin, Bretton Woods Agreement, 2006.)

Though the systems did not allow for the appreciation/depreciation of gold, they did function well for nearly 25 years. The London gold market placed strains on the set gold price. Gold was trading near $40/ounce in London. The US was experiencing depletion of its gold reserves and abandoned the system in 1971. This change allowed the United States to print fiat currency as needed. 

In 1966, Former Federal Reserve Chairman Alan Greenspan pointed out how the Gold Standard kept government spending in check. 

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which—through a complex series of steps—the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion."
  
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value." (From Alan Greenspan on the Gold Standard, 1966.)

Nowadays, if a "crisis" of some shape or form arises, the government throws money at the problem, often in the billions of dollars. If a legislator wants to fund a pet project, the money is added to the national debt. Our country is trillions in debt—they obviously don't have the money in reserve for a rainy day. So, they print more.

The world has begun to take notice. Other countries are now shunning the US Dollar. They no longer have faith in the US Dollar—and faith is all it has to offer as a fiat currency.

Second, the United States is becoming irrelevant as a wealth producer as we continue to close off our public lands or regulate them to the point where it makes more sense to mine in other countries. Past miners made many environmental mistakes, putting profits over public safety and welfare, giving rise to the environmental movement.

We were the dominate country in the world for years because we extracted our natural resources, found new and innovative uses for them, then marketed the finished products at home and eventually around the globe. These products, which began as wealth created from mining, built our country and helped us achieve our current standard of living.

Lastly, the environmental movement took on its own identity—some might argue it has turned into a pseudo-religion. Vast organizations were created to capitalize on people's fears and extract funds for various causes. Some environmental complaints have been completely legitimate, while others have been "trumped up" to keep the cash flowing. (Think "An Inconvenient Truth.")

Today, environmental extremists have found their way into positions of influence as CEO's, public school teachers, government officials or heads of trust funds. More public lands are being placed off-limits and more layers of regulations are being enacted.  The cost of mining exploration, development and compliance has skyrocketed in the United States. 

I am by no means blind. Some of the changes brought about by the environmental movement were vast improvements. Many individuals and companies now reuse and recycle on a regular basis. (Ink cartridges, plastics, cardboard and paper—including unused copies of our magazine—are all recycled at our office.) This was brought about by education, and that education came from the environmental movement. But closing off every scenic view, forest and desert means we can no longer produce the commodities we need to maintain our standard of living.

The end result is that many US mining companies (and those from other industrialized nations) are mining overseas or south of the border. Easily accessible deposits have already been mined here. Less regulation, more lands open to mining and lower labor costs equals greater profits. 

But foreign exploration and extraction has hit another wall. Due to some questionable political decisions and other factors, Americans are not welcome in many countries today. Our opportunities for mining natural resources are being restricted to our closest allies. 

We are already suffering the consequences. We no longer have a steady supply of natural resources being mined in America. Our economy was built around natural resources, yet we don't have a sufficient source of oil and countless other commodities, and little to no influence over the price. 

Approx. prices over the past decade (USD):

In 1998, the median household income in the United States was $38,885. In 2006, the latest year that data is available, median household income was $48,201. If the year-over-year trend continues, 2008 median household income will be $50,530, an increase over the decade of just under 13%. 

As you can clearly see from the information above, increases in household income are not even close to keeping up with inflation.

Countries like China, Russia and India will soon become the new leaders in creating wealth. They are unencumbered by our regulations. Their lands remain open to creating wealth through mining. 

I'm afraid it may take a generation before many Americans wake up and realize the damage caused by the extreme environmental movement, our monetary policies and public land closures. 

Walking through a wilderness area may make you feel warm and fuzzy inside, but it won't put food on the table. Printing more money may temporarily fund our needs, but some day soon the Dollar may be nothing more than another piece of paper.

Scott Harn

Editor/Publisher