December 28, 2009
In 2009, we saw the monetary inflation created by the Federal Reserve's zero percent interest rates drive up the prices of U.S. stocks, without dramatically increasing the prices of U.S. consumer goods. We consider 2009 to have been a brief period of euphoria, before a rapid increase in the prices of food, energy, clothes and other necessities Americans need to live and survive. With Goldman Sachs and JP Morgan employees taking home record bonuses this month, it's only a matter of time before this money works its way through the system.
We saw an artificial boost in the U.S. GDP this year because of government stimulus spending. In our documentary 'The Dollar Bubble' we spoke about how the destructive 'Cash for Clunkers' program accounted for 42% of the U.S. government's reported 3.53% GDP growth in the 3Q of 2009. However, on December 22nd, the U.S. Bureau of Economic Analysis revised 3Q GDP growth down to 2.24%. After this latest revision, 'Cash for Clunkers' now accounts for the overwhelming majority of the reported GDP growth in the 3Q. Adjusted for real inflation, U.S. GDP is actually contracting today.
The current rate of U.S. inflation based on the U.S. government's reported CPI index on a year-over-year basis is 1.84%. However, it is our belief that the U.S. government's CPI index is understating inflation and real price inflation in the U.S. is already well above 5%. The CPI index is no longer calculated based on Americans maintaining the same standard of living, but is instead calculated based on an expected continual decline in the standard of living in America.
Decades ago, the CPI index tracked the price of a fixed basket of goods. Today, the U.S. Bureau of Labor Statistics (BLS) uses geometric weighting to decrease the weighting of goods that increase in price and increase the weighting of goods that decrease in price. The BLS also uses hedonic adjustments so that if a household appliance increases in price, they can justify it to being more energy efficient and say the price didn't rise, because you are enjoying increased pleasure from it.
With millions of baby boomers getting ready to retire, they all need to realize that although their social security payments may increase based on growth in the CPI index, it will not keep pace with real inflation. Retirees living on fixed incomes should calculate if they will be able to survive with less than half of the income they are expecting to receive. If they calculate that they will be unable to do so, they should seek at least some kind of part time work immediately so that they can accumulate physical gold and silver.
India is currently experiencing year-over-year inflation in food prices of nearly 20%. India's government has been denying that their 20% food inflation is coming from their record low interest rates of 4.75%. Instead, they are placing the blame on the weak monsoon season, which saw 23% less precipitation than normal levels. If India is seeing 20% food inflation with 4.75% interest rates, imagine how much food inflation the U.S. will soon see with 0% interest rates and a drought crisis in California that is worse than India.
California is our nation's number one state in terms of agriculture production. Rainfall in California for Water Year 2009 was down 24% from average annual precipitation. This was California's third consecutive year of below average precipitation. California's Water Resources Department is now estimating that in 2010, they will deliver only 5% of the water promised under their contracted allotments compared to the average of 68% over the past decade. Many California reservoirs are now at only 30% of capacity.
While the biggest financial concern for Americans today is making their mortgage payments, mortgage payments will soon be the least of their concerns. Within the next two to three years it is likely that the cost for the average American to fill their refrigerator with food for the month, will rise to a level that is higher than their average monthly mortgage payment. We could also see the average American need to work one full month of the year, just to afford their annual fuel cost to commute to work.
By the time inflation becomes the top story on the news each night, Americans will have already lost a great amount of their purchasing power. The mainstream media only reports on our current problems and is not smart enough to see the crises to come next. For every economic problem politicians try to solve by intervening in the free market, they create multiple new problems of even greater magnitude. Americans can only survive by staying ahead of the curve and anticipating the next threat to our economy, and the biggest threat in 2010 is inflation.
