November 16, 2010
Hyperinflation is Guaranteed if U.S. Stays on Current Path
The National Commission on Fiscal Responsibility and Reform released last week their 'CoChairs' Proposal' on how the U.S. can achieve $100.2 billion in domestic savings and $100.1 billion in defense savings in fiscal year 2015, for total discretionary spending savings of $200.3 billion. Combined with other steps designed to boost tax revenues, the commission's plan, if implemented, is expected to reduce the projected 2015 U.S. budget deficit by $400 billion to $372 billion. NIA believes it is very unlikely that our representatives in Washington will have the political backbone and courage to implement any of the commission's proposed spending cuts. The truth is, the U.S. is on a path towards exploding budget deficits in the years ahead, that could cause an outbreak of hyperinflation by the end of calendar year 2015.
Many people are asking us when exactly we expect our food price projections to be reached. We can pretty much guarantee you that all of our food price projections will be seen this decade. There is a very good chance of our projections being reached by the end of calendar year 2015 and a slight chance that they will be reached as soon as the 2012 elections. NIA's food price projections are very conservative. They are based on the current purchasing power of the U.S. dollar and do not factor in the likelihood of an outbreak of hyperinflation.
NIA believes that if the U.S. stays on its current path, we are guaranteed to see hyperinflation this decade. The only way it will be possible to prevent hyperinflation is if the U.S. government dramatically cuts spending across the board immediately and if the Federal Reserve raises interest rates from near zero percent (where they have been for nearly two years) to a level that is higher than the real rate of price inflation. Considering that the Federal Reserve still claims to fear deflation and just announced massive quantitative easing, we see very little chance of any major interest rate hikes taking place during the next six months.
Although the commission's proposal includes many large spending cuts including freezing federal salaries for three years (saving $15.1 billion), cutting the federal workforce by 10% (saving $13.2 billion), and eliminating 250,000 non-defense service and staff augmentee contractors (saving $18.4 billion); even if their proposal was implemented it would be too little too late. The commission's proposal calls for its cuts to be gradually implemented beginning in early 2012 and it includes absolutely no meaningful cuts to social security. The only proposed major changes to social security are raising the retirement age to 68 in year 2050 and 69 in year 2075. There is absolutely no chance of the U.S. dollar surviving past the year 2020 unless much more drastic spending cuts than the commission has proposed are implemented within the next twelve months.
The commission says that if we fail to implement their proposed spending cuts, we will likely see interest payments on our national debt reach $1 trillion by 2020. The reality is, NIA believes interest payments on our national debt are likely to reach $1 trillion in 2015. It is currently projected that our interest payments in 2015 will be $586 billion. However, this number is based on a projected 4.1% interest rate on our 91-day treasury bills and 5.3% interest rate on our 10-year treasury bills.
The yield on 10-year U.S. treasuries has risen in recent weeks by 41 basis points to 2.94%, up from 2.53% on November 4th. NIA believes it is likely the 10-year yield will rise back above 4% in the first half of 2011. By 2015, we expect the 10-year yield to be substantially higher then 5.3%. During the 1970s, the last time we had an inflationary crisis like the one we are rapidly approaching, yields on the 10-year bond exploded. When each of the agricultural commodities in our food inflation report reached their real all time highs in the 1970s, the average 10-year bond yield at the time of their highs was 7.47%. With the Federal Reserve likely to be forced to raise the Fed Funds Rate to around this same level, based on our projected public debt in 2015 of $14 trillion, our interest payments will likely rise to $1.046 trillion or 29% of projected tax receipts, and this is a very conservative estimate.
The Federal Reserve's monetary base currently stands at $1.9851 trillion and is projected to rise to $2.5851 trillion by mid-2011 due to the Fed's upcoming $600 billion in quantitative easing. The U.S. M2 money supply rose over the past week by $22.4 billion to $8.7862 trillion. This represents a $1.1648 trillion annualized increase, which would equal 13.25% monetary inflation over the next year. The M2 multiplier, or M2 divided by the monetary base, currently stands at 4.426, compared to a long-term average of 10. Based on a projected monetary base of $2.5851 trillion and a long-term average M2 multiplier of 10, the M2 money supply has a chance of rising as much as 194% to $25.851 trillion over the next few years.
In the short-term, if the M2 multiplier remains at 4.426, it is likely the M2 money supply could rise to $11.4416 trillion next year, up 30.22% from its current level. With the UBS Bloomberg CMCI Food Index currently up 30.5% from its low in August, it appears as though the market has already factored the upcoming 30.22% increase in the M2 money supply into agricultural commodity prices. Even if food manufacturing companies and retailers agree to accept 2/3 of these rising costs in the form of lower profit margins, Americans will still see about a 10% rise in retail food prices come early 2011.
The upcoming food inflation crisis and eventual hyperinflation will come as a direct result of our representatives in Washington trying to prevent a much needed recession by propping up Real Estate prices through bailouts, stimulus plans, tax rebates, and other wasteful programs. The only thing that our elected representatives care about is remaining in power. They only see our current problems and not the problems that will arrive next as a result of their actions. Their goal is to make the average American as dependent on them as possible through massive price inflation, so that the average American is forced to rely on entitlement programs just to survive.
It is important to spread the word about NIA to as many people as possible, as quickly as possible, if you want America to survive hyperinflation. Please tell everybody you know to become members of NIA for free.
|Please enter your e-mail address to receive the free NIA newsletter! You will receive our stock suggestions and articles in advance before they are posted on Inflation.us!