Sunday, June 20, 2010

2010 Inflation Report

Like most of you, I have not been fooled by the "official" stats being spewed out by the US government claiming that there has not been and will not be any inflation in the past couple of years. Though these fantasy figures, which exclude most things people actually need to live on week to week, were used to deny increases in benefits to Social Security and Disability recipients, they are simply not factually correct. Anyone who has been to the grocery store in the past year and half can attest to that, without even trying hard. Prices for actual household needs such as food and medicine have continued to climb. Dropping these items from the US official calculation for "inflation" was disingenuous, to say the least. My checkbook register isn't fooled, and yours isn't either, no doubt.

Here are excerpts from the 2010 Inflation report by a group that does its own statistical analysis. You have also no doubt seen the Shadow Government Stats posted here regularly - which clearly show inflation is far, far more than the "official" figure. I will focus these excerpts on predictions for the near future regarding inflation. There are also other issues related to US inflation that we have touched on in past posts that are discussed here. I will excerpt a few of these for context. The full document can be downloaded from the National Inflation Association website.

NATIONAL INFLATION ASSOCIATION
2010 U.S. Inflation Report
www.inflation.us
June 2010

...Today, the average American’s net worth (adjusted for real inflation) is down to year 1970 levels. In terms of income, average hourly earnings in the U.S. is now at a record nominal high of $18.99; but adjusted for real inflation, hourly earnings is now about half of what it was in the early 1970s. Americans have experienced a dramatic decline in their standard of living since 1970.

During the 1970s, it was possible for American college students to pay their own tuition by working part time, without student loans or any help from their parents. (Besides paying their own tuition, many students in the 1970s could also afford their own car and apartment.) Today, college students need to get deeply into debt and have their parents help pay their tuition; students can barely afford to pay for food and beer on their own.

The mainstream media today always makes the mistake of using changes in the Consumer Price Index (CPI) to determine whether or not the U.S. is experiencing inflation. The CPI gets reported on a monthly basis by the U.S. Bureau of Labor Statistics (BLS). NIA conservatively believes that the methodologies
used today to calculate the CPI, understate the real rate of price inflation by at least 3% to 4%.

If the CPI is to be believed, Americans today have about the same standard of living that they had 40 years ago. However, all Americans can feel their standard of living decline. The CPI today no longer accounts for the cost to maintain the same standard of living, it more or less accounts for only the cost to stay alive. Adjusted for the real rate of inflation, Americans should be receiving Social Security payments that are approximately double what they receive today.

One of the ways the BLS understates the CPI is through geometric weighting,
which provides a higher weighting to goods that are falling in price and a lower weighting to goods that are rising in price. If steak was rising in price but hamburgers were falling, the BLS will heavily weigh the CPI towards hamburgers. Maybe they are right that some Americans would substitute steak with hamburgers in order to save money, but that would mean a decline in their standard of living.

The BLS also uses hedonics to understate inflation, which account for the increased pleasure of goods. Many IMAX theaters across the country are currently charging $20 for tickets to see the new movie “Shrek Forever After”. This is an astronomical price increase for a movie ticket, but with hedonics, it’s possible the CPI won’t show any price inflation for this movie because it uses 3D technology...

...Based on the BLS’s latest CPI report, the current year-over-year U.S. price inflation rate is 2.02%. Taking into account how the CPI understates inflation, we believe the real rate of U.S. price inflation is currently 5.02% to 6.02%...

...We doubt that banks will want to keep their $1.045 trillion in excess reserves parked at the Fed for much longer earning 0.25% interest, when based on the real rate of inflation, those dollars are losing about 5% of their purchasing power on an annualized basis by sitting there. Eventually, these banks will be forced to seek a higher return than what the Fed is paying them. As these dollars get lent out and enter the money supply, they will multiply through our fractional reserve banking system, creating a huge surge of price inflation.

As price inflation begins to run out of control in the U.S., the Federal Reserve will be forced to raise the Federal Funds Rate. Most likely, when the Federal Reserve begins to raise rates, they will raise them only 1/4 or 1/2 percentage point at a time. Slow increases in interest rates will do little to stop price inflation. Interest rates will remain very inflationary until they reach a level that is higher than the real rate of price inflation.

The Federal Reserve needs to raise interest rates immediately up to 5.02% to 6.02%, but by the time they actually do so, we could already have a real price inflation rate of 10% or more...

...Today, it will be more difficult to stop price inflation by raising interest rates, because our country will have to deal with rising interest payments on our national debt that will ultimately have to be monetized. In April of 2010, the U.S. paid $22.48 billion in interest payments on our national debt for an interest rate on our marketable debt of only 2.498%. Just three years earlier in April of 2007, our total marketable debt interest rate was 4.963% (almost double). We will inevitably see our marketable debt interest rate rise back up to 5%, which will cause our annual interest payments on our national debt to rise above $500 billion or 23% of projected 2010 tax receipts of $2.165 trillion.

If the U.S. reaches a point where nearly 1/4 of projected tax receipts go towards just paying the interest on our national debt, it will be a danger zone that it must do everything possible to reverse from...

...By 2014, an outbreak of inflation could cause interest rates on our debt to reach 10%, which based on our likely marketable debt at the time of about $15 trillion, would equal interest payments of $1.5 trillion or 43% of projected 2014 tax receipts of $3.455 trillion...

...Americans are already taxed to the hilt. Any additional taxes runs the risk of driving further business out of this country and generating less tax revenues. But let’s assume tax receipts do reach 19% of GDP in 2014, how on earth will our GDP grow to $18.193 trillion?

With our manufacturing base continuing to rapidly deteriorate, any increases to our GDP will likely have to come from an increase in consumer spending (consumer spending would have to rise to 75% of GDP, from its current level of 71%). Considering that the average American peaks in spending at 46 years old and the last babyboomer will turn 46 in 2010, the U.S. economy is currently positioned to experience a significant decline in consumer spending. The only way it will be possible to increase consumer spending is through massive monetary inflation with further stimulus bills and quantitative easing from the Federal Reserve...

...So basically our GDP growth since 2000 has been fueled by inflation, inflation will lead to much higher interest rates and substantially higher interest payments on our national debt, and this will occur while the government raises taxes and Americans contract consumer spending, which will lead to the government trying to create more phony GDP growth through more inflation. This is an endless cycle of doom...

...Inflation does not create jobs. Although the official U.S. unemployment rate is now 9.7%, including short-term discouraged workers who gave up looking for a job, the real unemployment rate is 16.9%. If you also include long-term discouraged workers who haven’t looked for a job in over one year, 21.7% of Americans are now unemployed...

...Obama is effectively admitting that it will be impossible to achieve a real balanced budget again. He is trying to redefine a balanced budget as to not include interest payments, when interest payments will soon rise from a minuscule percentage
of the budget outlays to the largest part of it.

If this new commission does its job, it will have to recommend to Obama that the U.S. government cut its mandatory entitlement spending for Social Security, Medicare, and Medicaid, as the U.S. had a cash budget deficit in 2009 from entitlement programs alone. Beginning in 2010, between 1.5 million and 2 million Americans are expected to sign up for Social Security annually, compared to only 500,000 per year last decade. Babyboomers getting ready to retire need to assume now that Social Security won’t be there and even if they receive Social Security, the dollars they receive won’t have the purchasing power they expect.

Social Security’s peg to the CPI will eventually have to be severed. Even though the CPI understates inflation, the CPI will eventually start rising rapidly and a Social Security peg to the CPI will cause a downward death spiral in the U.S. dollar. NIA believes that retirement for most Americans will soon become a thing of the past, as the Social Security ponzi scheme comes to an end...

...The best way to determine the purchasing power of the U.S. dollar is the price of gold. Despite the huge rally this year in the U.S. dollar index, the price of gold rose to a new all time nominal high on June 8th of $1,252.10 per ounce...

...The U.S. dollar became the world’s reserve currency because it was backed by gold and the U.S. had the world’s largest manufacturing base. Today, there is no reason for the U.S. dollar to remain the world’s reserve currency and the U.S. is abusing the dollar’s reserve status. China is slowly taking steps to move away from the U.S. dollar and we could soon see China begin trading oil with Saudi states using
a new basket of currencies...

...In order for the U.S. to rebuild its manufacturing base, Americans need to increase their rate of savings. After the financial crisis of late-2008/early-2009, the first instinct of Americans was to start saving and the U.S. savings rate tripled to a high in May of 2009 of 6.2%. After the U.S. government interfered in the free market with bailouts and artificial stimulus bills, the savings rate plummeted in half to 3.1% in March of 2010. 43% of Americans now have less than $10,000 saved for retirement.

If the free market was allowed to function, it would persuade Americans into having a savings rate of 10% or higher. The Federal Reserve’s manipulation of interest rates to artificially low levels is preventing Americans from increasing their rate of savings to a healthy level. 20 years ago, senior citizens were able to purchase Certificates of Deposit (CDs) and live off of the interest they collected. With just $200,000 in a CD, seniors would earn $17,000 per year in interest income. Combined with social security, they had plenty of money to live comfortably.

Today, $200,000 in a CD would only earn $600 per year in interest income and $600 today only has the purchasing power of $150 compared to 1990. This means seniors are now earning 99% less interest income on their savings compared to 20 years ago...

...So we saw the Dow Jones rally to a high...in April of 2010 of 11,257.93. The mainstream media, still as ignorant as ever, began declaring that the U.S. is in the midst of an economic recovery. There were no jobs being created, with the unemployment rate remaining steady at a multi decade high, but the media declared that rising stock prices are a leading indicator for job growth in the future.

The media also declared that there was no inflation. Despite the Federal Reserve expanding its monetary base by 133%, according to the media there was no inflation because the government’s phony CPI only showed prices up 2.02% from a year ago (near the Federal Reserve’s price inflation target of 2%). The media was simultaneously mystified by rising gold prices...

...What if maybe, just maybe, the U.S. isn’t in the midst of an economic recovery and stocks are rising only due to inflation? After all, gold is the best gauge of inflation, not the CPI index. This would certainly explain why there are no jobs being created (except for temporary census jobs that add no production to our
economy and will be paid for with more inflation)...

...The bottom line is, the media has the worst track record in the world when it comes to predicting bubbles. The media sees gold at a new all time nominal high and they call it a bubble, without realizing that gold is still only trading for about 1/2 of its all time high adjusted to the CPI and 1/4 of its all time high adjusted for the real rate of inflation. Absolutely nobody in the media talks about how we actually have a government debt bubble and a dollar bubble...

...Ironically, gold will only become a bubble if the government eliminates most of its departments, defaults on its Social Security obligations, and shrinks the military-industrial complex, along with the Federal Reserve dramatically raising interest rates. Only if these measures are taken, and taken very soon (before a very noticeable outbreak of price inflation where the world pulls the plug on the dollar), will it be possible to prevent a total collapse of our fiat currency system...

...If we had to bet one way or the other, we would bet that U.S. politicians will never have the courage to make the tough decisions needed to save the U.S. dollar. Most likely, the Federal Reserve will become the U.S. treasury buyer of last resort and monetize our national debt, unfunded liabilities, and future deficit spending. In this scenario, gold prices could literally rise to infinity and there may never be a time for Americans to exit gold...

...In our opinion, another nominal crash in stock prices is very unlikely because
Washington is already calling for an additional $200 billion stimulus package, in addition to the $787 billion stimulus bill Congress passed last year.

While we certainly believe there is a risk of the Dow Jones declining by another 10% nominally, any further short-term decline in stocks will only encourage the Federal Reserve to leave interest rates near zero and implement additional quantitative easing. Therefore, we believe there will be a floor under stock prices at some point, but no floor under the U.S. dollar. Our next crisis won’t be a crisis of declining stock prices, but it will instead be a currency crisis...

...If the U.S. dollar was stable like [Dave] Ramsey thinks it is, gold would still be $35 per ounce. Gold rising from $35 to above $1,200 shows us that the U.S. dollar has lost over 97% of its purchasing power in terms of gold. His recommendation
to buy CDs is completely idiotic, when short-term CDs are paying only 0.3% in interest. If you buy CDs, you are guaranteed to lose about 5% of your purchasing power each year (based on the current rate of price inflation), which is why we are so confident banks will soon start lending their $1.045 trillion in excess reserves.

In regards to owning rental properties, Ramsey needs to look back at what happened to landlords in Wiemar Germany during hyperinflation. During the years 1912-1913 in Wiemar Germany before hyperinflation occurred, the average household spent 30.2% of their monthly expenditures on rent. By the third quarter of 1923, rents fell to just 0.2% of the average household’s monthly expenditures. At the height of hyperinflation in Wiemar Germany, households were spending 91.6% of their monthly expenditures on food, making it impossible for landlords to raise rents in any meaningful way. With a piece of fruit costing more than a month’s rent, landlords saw their real rental income evaporate...

...There is currently a huge shadow inventory of homes that have been foreclosed on but held off the market as banks setup the infrastructure necessary to sell them and wait for housing demand to recover (wishful thinking). NIA believes this shadow inventory is now up to approximately 2 to 3 million homes and many of them could begin hitting the market in the second half of 2010.

As the millions of homes in the shadow inventory begin hitting the market, those who have been patiently trying to sell their home for the past 12 to 18 months without receiving an offer that is acceptable to them, will rush to lower their asking prices in order to dump their homes as quickly as possible. Currently, about 1/4 of all mortgages are underwater, but as homeowners readjust their asking prices, the underwater rate could quickly reach 1/2 of all mortgages.

We estimate that between 25% and 50% of Americans who are underwater in their mortgages, will likely choose to walk away from their homes. Combined with many adjustable-rate mortgages that are getting ready to reset, the U.S. will likely experience a second wave of mortgage defaults in the near future...

...it’s possible that Real Estate prices will soon resume their downward spiral and won’t reach a bottom until they hit a new all time inflation adjusted low.

For anyone who is still not convinced we are already experiencing annual price inflation of at least 5.02% to 6.02% in the U.S. today, look at college tuition costs, look at health insurance costs - even the government admits these costs are rising out of control each year, yet nobody in the media connects the dots and says that it’s a result of the Federal Reserve’s monetary inflation...

...Inflation gravitates towards every part of the economy at different rates and times...On October 30th, 2009, NIA published an article entitled, “U.S. Inflation to Appear Next in Food and Agriculture”. Since then, wholesale food prices have been up 6 months in a row including a 2.4% increase in March, the largest monthly increase in 26 years. Some of the startling wholesale food price increases on a year-over-year basis include, fresh and dry vegetables up 56.1%, fresh fruits and melons up 28.8%, eggs for fresh use up 33.6%, pork up 19.1%, beef and veal up 10.7% and dairy products up 9.7%. Wholesale food price increases foreshadow price increases to come later in retail stores. With unemployment as high as it is, many retailers have been reluctant to pass along food price increases to consumers, but soon they will be forced to if they want to avoid huge losses...

...Our fear is that if we experience hyperinflation in the U.S., rather than politicians dealing with the root cause (their deficit spending and the Federal Reserve’s monetary inflation), they will instead implement price controls and force retail stores to sell food at government mandated prices. As experienced in Zimbabwe, when a government implements price controls to battle hyperinflation, it always leads to empty store shelves...

...Yugoslavia financed their budget deficit by printing money and saw their prices increase by 5 quadrillion percent, making it the worst case of hyperinflation in history. Similar to Zimbabwe, Yugoslavia’s government implemented price controls which led to empty store shelves, gas stations closing, thieves robbing hospitals of scarce drugs and selling them outside the same hospitals they robbed, and the government postponing turning on heat in state apartment buildings (where most people lived). In one hospital, 87 patients died in one month from having no heat, food, or medicine...

...Eventually the U.S. government will realize that you can’t solve problems that were created by too much debt, but getting deeper into debt at a much faster rate than before. When you have an artificial boom, there needs to be a recession. By trying to avoid a necessary recession by increasing government spending through borrowing and printing money, the U.S. government is only creating a currency crisis that will lead to the destruction of the U.S. dollar...

...Total U.S. defense spending in fiscal year 2010 is expected to reach $1 trillion, about 46% of projected U.S. tax receipts, and equal to the rest of the world’s defense spending combined. The U.S. now has 700 military bases in 140 countries around the world. Our military needs to be scaled back immediately if we want to prevent hyperinflation. The inflation that will need to be created to continue funding out of control U.S. military spending, will ultimately make our country less safe as a result.

The U.S. is currently in a brief period of euphoria where the government’s monetary inflation has created the illusion of an economy recovery, without the devastating effects of massive price inflation. The mainstream media is now working in collusion with the government to help sustain the current dollar bubble for a little while longer, without creating hyperinflation. The Federal Reserve is doing everything in their power to prevent deflation by debasing the U.S. dollar, but will have no possible way of containing hyperinflation, once it arrives...

...The U.S. has gone from being on a “gold standard”, which enforced discipline on U.S. politicians and made the government live within its means, to a “debt standard”, which has allowed for unconstrained government spending and the rapid debasement of the U.S. dollar. The only way for the government to sustain our debt standard is through inflation and the worst mistake any American can make is to underestimate Bernanke’s ability to create inflation. Creating inflation is the only thing in the world Bernanke knows how to do and is good at...

...If Bernanke decides to bypass Wall Street and directly inject Main Street with inflation, Wall Street will once again find a way to profit handsomely. No matter how inflation is created, it always transfers wealth from the unprepared middle class to already rich bankers...Americans need to prepare for hyperinflation now by getting their money out of the U.S. dollar and becoming their own central bank by buying gold and silver.


That's one way. There are, of course, other things that can substitute - nails, for example, or other reasonably affordable metal items. But the biggest way is to simply make your household as debt free and self-sufficient as possible (including a victory garden), and make your community the same by organizing co-ops, barter societies, community greenhouses and gardens, and interest-free loan societies to retire everyone's for-interest debt as quickly as you can. Any group of people can band together and do this, your block, your family and friends, your shul, your book club - all it takes is some initiative on your part. And even if a big monetary crisis never materializes (and that's a big "if"), you and your community will still be far better off living within your means, debt free, and downsizing your reliance on the consumerist materialism culture made for no other reason than the enrichment of the Robber Barons and their giant corporations.

Take these warnings seriously, class. America is not some mystical holy land, we're not special, and we have not overcome the tides of history at all. Every culture declines and falls, ours is no exception. Be ready or be roadkill, class. Those are your options.