The Go Go Years of 2013-2014 are about to begin, on the menu: inflation, less food & global unrest
A. The Magnitude of the Mess We’re In
16 Sep 2012, The Wall Street Journal, By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor
The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.
Where are we now?
• Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
• The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
• The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
• Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
• The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
• Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
• The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?
• The Fed’s policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.
• The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed’s Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury’s traditional debt management.
• This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.
• The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.
• Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It’s up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.
This is all bad enough, but where we are headed is even worse.
√ President Obama’s budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.
√ Under the president’s budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans’ health and the National Institutes of Health combined.
√ Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.
√ What does this spending and debt mean in the long run if it is not controlled? One result will be ever-higher income and payroll taxes on all taxpayers that will reach over 80% at the top and 70% for many middle-income working couples.
√ Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.
√ The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why an independent agency of government should have this power.
√ When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy. Are you surprised that so much cash is waiting on the sidelines?
What’s at stake?
We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar’s role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.
Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation’s greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt “foreign and domestic, was the price of liberty.”
History has reconfirmed Hamilton’s wisdom. As historian John Steele Gordon has written, our nation’s ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.
The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.
The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.
The authors are senior fellows at Stanford University’s Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.
B. Early 2013: Prepare For A Massive Food Price Surge; Up 175% from the Year 2000
19 Sept 2012, SHTFplan.com, by Mac Slavo
The after-effects of 2012′s summer drought are far from over.
According to a new analysis from Rabobank this year’s crop failure and premature slaughtering of pigs, cattle and other staple meats will lead to an average 15% surge in food prices in 2013.
It may not sound like much, but when you combine this with monetary easing that threatens to rapidly depreciate the value of the dollar and an already indebted U.S. consumer, we can expect even more participants to enter government nutritional assistance programs.
It’s more expensive than ever before just to stay alive.
The record US, and global, summer drought has come and gone but its aftereffects are only now going to be felt, at least according to a new Rabobank report, which asserts that food prices are about to soar by 15% or more following mass slaughter of farm animals which will cripple supply once the current inventory of meat is exhausted.
From Sky News: “The worst drought in the US for almost a century, combined with droughts in South America and Russia, have hit the production of crops used in animal feed – such as corn and soybeans – especially hard, the report said. As a result farmers have begun slaughtering more pigs and cattle, temporarily increasing the meat supply – but causing a steep rise in the price of meat in the long-term as production slows.
“Farmers producing meat are simply not making enough money at the moment because of the high cost of feed,” Nick Higgins, commodity analyst at Rabobank, told Sky News. “As a result they will reduce their stock – both by slaughtering more animals and by not replacing them.” Somewhat ironically.
Food prices are now being kept at depressed prices as the “slaughtered” stock clears the market.
However once that is gone look for various food-related prices to soar: a process which will likely take place in early 2013, just in time to add to the shock from the Fiscal Cliff, which even assuming a compromise, will detract from the spending capacity of US (and by implication global) consumers.
The “mass liquidation” of animals – which Rabobank said will pick up pace in the beginning of 2013 – will contribute to food prices hitting new highs.
The cost of pork is expected to rise at the fastest pace – by 31% by the end of June next year – while beef costs could increase by up to 8%.
“This record cost of meat and dairy will combine with already-high crop prices to increase food prices by 15% by the middle of next year,” Mr Higgins added.
This would see food prices reach their highest level on record, up by 175% compared to the year 2000.
But the report stressed that the current situation is very different to the crisis of 2008 – in which food stables of the world’s developing economies, like wheat and rice, were severely affected.
The bank’s research follows official figures that showed inflation had slipped back to 2.5% in the UK – closer to the Bank of England’s inflation target of 2%
But Mr Higgins warned that next year’s food price rise could push inflation in the UK higher, and so further away from the Bank’s target.
But inflation is only at 2% according to the CPI.
Ben Bernanke and his helicopter air force have everything under control, just like they said they would.
That 15% in food price increases doesn’t even include the new money that is sure to hit the system now that some $80 billion a month is being committed to maintaining the illusion of economic stability and recovery.
All the while American consumers, who assume everything is as it has always been, are going to be paying 175% more for food by summer of next year than they were paying in the year 2000.
The only investment strategy available to ensure that you don’t run out of affordable food as the US dollar loses value and climate effects deplete available food stores is to invest in hard assets today.
C. 17 Signs That You Better Start Preparing For A Nightmarish Global Food Crisis
August 9th, 2012 , The Truth, by Michael
A nightmarish global food crisis is coming. Even though about a billion people around the planet currently live on the edge of starvation, those of us that live in the wealthy western nations still have more than enough food to eat. But it will not always be that way. With each passing year, the global population goes up while global supplies of fresh water go down. And you need lots of water to grow food. The “breadbaskets” of the world, the United States and Russia, are currently experiencing horrible droughts that scientists tell us are part of a long-term trend. In fact, some are projecting that the United States will soon see the return of Dust Bowl conditions. So what will the rest of the world do when the topsoil in the heartland of the biggest food exporter on the globe dries up and blows away? Just remember what happened back in 2007 and 2008. Food prices rose rapidly and it sparked massive food riots in more than two dozen different nations. So what will things look like when there is a very serious shortage of food around the globe?
On Thursday, the price of corn hit another brand new record high of $8.28 a bushel on the Chicago Board of Trade.
Unfortunately, the price of corn is likely to go a lot higher because this drought never seems to end.
We just came out of the hottest July ever recorded, and the drought just continues to intensify.
At this point, more than 78 percent of the entire country (excluding Alaska and Hawaii) is experiencing at least some level of drought.
24 percent of the nation is experiencing “extreme” or “exceptional drought”. That number has risen by two percent in just the last week alone.
Things are particularly bad in the heartland of America. More than 69 percent of Iowa is experiencing “extreme” or “exceptional drought”, more than 81 percent of Illinois is experiencing “extreme” or “exceptional drought”, and more than 91 percent of Nebraska is experiencing “extreme” or “exceptional drought”.
So what happens if we have another drought like this next year?
This year U.S. consumers won’t notice a massive difference.
Yes, prices will rise as we burn through our reserves.
If things get bad enough, eventually the U.S. will cut back on ethanol production.
But there is not going to be starvation in the United States this year.
In other areas of the world, however, people are starving.
Just check out what is happening in Yemen.
And if drought conditions persist in the United States and Russia things are going to get a lot worse. The following is from a recent Reuters article….
The world could face a food crisis of the kind seen in 2007/08 if countries restrict exports on concerns about a drought-fuelled grain price rally, the UN’s food agency warned on Thursday, after reporting a surge in global food prices in July.
Oxfam spokesperson Colin Roche had the following to say after the latest global food price numbers were released….
“These new figures prove that the world’s food system cannot cope on crumbling foundations. The combination of rising prices and expected low reserves means the world is facing a double danger.”
So what happens if global reserves are wiped out by the drought this year, and next year we see an even worse drought?
Most people simply have no idea how incredibly vulnerable the global food system is.
The following are 17 signs that you had better start preparing for a nightmarish global food crisis….
#1 The United States exports more corn, soybeans and wheat than anyone else in the world by far. If Dust Bowl conditions return to the United States, there may not be any food to export in future years.
#2 Since June 18th, the price of corn has risen by more than 62 percent.
#3 The American Restaurant Association is projecting that the price of corn could surpass the $9.50 mark by the end of the year.
#4 Right now, approximately half of all corn being grown in the United States is either in “poor” or “very poor” condition.
#5 2012 will be the third year in a row that the yield for corn will decline in the United States. That has never happened before in American history.
#6 U.S. corn reserves were already near a 15 year low at the end of 2011. The drought of 2012 is going to make things a lot worse.
#7 The U.N. index of cereal prices rose by 17 percent during July.
#8 The global price of sugar increased by 12 percent during July. That price increase had nothing to do with the drought in the United States.
#9 In July, the FAO global food index increased by the most that we have seen in a single month since 2009.
#10 As I have written about previously, millions of fish are dying in rivers and lakes all over the United States due to the heat and the drought.
#11 Crop insurance losses are projected to shatter all-time records this year. In fact, it is being estimated that crop insurance losses could end up exceeding 20 billion dollars.
#12 In many countries around the globe, the poor already spend up to 75 percent of their incomes on food. Even a 10 percent rise in the price of food is enough to send many families over the edge. [This is why we are seeing the “Arab Spring” and revolts in mid eastern and east African countries. The people are unable to feed their family’s. Mr. Larry]
#13 Approximately 1 billion people around the world go to bed hungry every single night. So what will that number be if we have a major global food crisis?
#14 Somewhere in the world someone starves to death every 3.6 seconds, and 75 percent of those are children under the age of five.
#15 The United States is facing a long-term water problem. For example, the Ogallala Aquifer is the most important underground water source in the United States and it is rapidly being depleted. At one time, the Ogallala Aquifer had an average depth of approximately 240 feet. Today, the average depth of the Ogallala Aquifer is just 80 feet, and in some parts of Texas the water is totally gone. At the moment, the Ogallala Aquifer is being drained at a rate of approximately 800 gallons per minute. Once that water is gone, the breadbasket of America will lose the major source of water that it uses for irrigation.
#16 Sadly, the drought that we are facing this year is just part of a longer term trend. In fact, one team of scientists recently published a study that postulated that the western United States could be facing a “100-year drought”. [Google: “Anasazi Indians” and read why they disappeared from the US southwest circa 1250 AD- Mr. Larry]
#17 Some scientists are already projecting that it is already too late to avoid serious damage to crops next year. According to a recent article in the Guardian, some believe that the drought in the U.S. has been so nightmarish this year that it is going to take a “freak event” to avoid catastrophic damage to next year’s corn crops….
What matters now is whether there will be enough rain to get next year’s crops off to a good start.
“This drought isn’t going anywhere,” he said. “The damage is already done. What you are looking for is enough moisture to avert a second year of drought,” he said.
However, Svoboda conceded that might require a freak event, especially in the mid-west which has already passed its rain season. “In the entire corn belt, from Indiana to Nebraska to the Dakotas, we have already reached the maximum precipitation periods for year. From here on in, it’s all downhill,” Svoboda said.
“As far as widespread general relief for the whole region it would take a really freakish dramatic change to make that happen. That doesn’t appear to be in the cards, given the time of year we are in.”
Are you starting to get the picture?
This drought is unlike anything the United States has seen since the Dust Bowl days of the 1930s.
This is particularly true for the western half of the nation. The following is an extended excerpt from an absolutely outstanding article that was posted on preparednesspro.com….
A white paper I was reading recently showed Mexico as importing 80%+ of our vegetable produce. Now look at the map and see how Mexico is faring with this drought and intense heat. Needless to say this means even higher markups on our fresh foods as well. How about California? It provides over half or our fruit and nut harvests. Look at how they are faring on the Vegetation Condition map! In previous years over 48% of our corn crops went directly to the fuel industry along with another 10% going towards other corn products (some of which you’d never dream were influenced by the corn market). So in a drought condition like this, what little will there be left for our actual food needs?
Mexico is our biggest supplier of vegetables, only sharing a 2 to 1 portion of the lime light with Canada, though China does take a distant third (in dollar values, not pounds) In the fruit category, most of it comes from Central and South America, with only China (4th) to break up the Top 6 of Mexico, Chile, Costa Rica, Guatemala, and Ecuador. Hmmm…have you had a chance to see if there’s a drought problem in those countries too? Yup, there are.
Did you know that nearly three-fourths of our meat supplies come from the worst hit drought stricken areas?? Ouch! And we thought the high price of corn was going to kick beef prices sky-high? Imagine what will happen when they can’t get ANY food for their cattle.
Hopefully we will get some relief from this drought.
But what if that does not happen?
Let us hope for the best, but let us also prepare for the worst.
If you have not been preparing, you might want to get started.