March 11, 2011
With China now mimicking the U.S. Bureau of Labor Statistics and taking steps to artificially manipulate their consumer price index (CPI) numbers as low as possible, it is likely that real price inflation in China is now closer to 10%. China was at least smart enough to raise interest rates last month by 25 basis points to 6.06%, while the Federal Reserve continues to leave interest rates near zero with there being absolutely no talk of the Federal Reserve ever raising interest rates again.
China will be successful at containing
inflation, as U.S. inflation spirals out of control and becomes the greatest
economic crisis in American history.
The Federal Reserve's QE2 along with China's destructive monetary policies, which artificially devalue the yuan, have led to a massive rise in China's raw material costs this year. NIA believes that in the upcoming months, Chinese manufacturers will raise the prices of their products that get exported to the U.S., to counteract rising commodity prices.
With most products used by Americans today
having been manufactured in China, this will mean Americans will soon see
massive price inflation in just about all consumer goods they use. NIA
projects that by the end of 2011, we will begin to see the U.S. CPI increase
by 4.9% or higher on a year-over-year basis, with real U.S. price inflation
rising north of 10%.
Their fear was, if the U.S. dollar was allowed
to decline too rapidly, prices of Chinese goods would rise in terms of U.S.
dollars and Americans would no longer afford to import them.
The same higher prices Americans were going to pay as a result of exchange rate appreciation, Americans will now pay as a result of inflation. For the Chinese, the exchange rate appreciation route would have been a much better route to take than the inflation route, because now the Chinese will also be forced to pay higher prices.
In the very short-term, China might actually
suffer more than the U.S. because they lack the social safety nets that have
been implemented here in America.
It was just announced a few days ago that the number of Americans on food stamps in the month of December of 2010 was a record 44,082,324, up 13.1% from one year earlier and 1.1% from one month earlier. That is more than 14% of the total U.S. population!
Combined with President Obama extending
unemployment benefits up to 99 weeks, American citizens are too busy and
distracted playing with their iPad 2s and gossiping on Twitter about
Charlie Sheen, to have any time to protest in Washington, DC.
It is like when you take wild animals into captivity and you feed them, teach them to do tricks and take care of them for a period of many years; if you just dump them one day back into the wild, it will be very difficult for them to survive.
Americans who have become dependent on
unemployment checks and food stamps will likely soon abruptly find out
that they must begin to fend for themselves without any help from the
government. The result will be many Americans turning into wild animals and
becoming so desperate that they will have to rob and burglarize their fellow
neighbors who were smart enough to prepare, or else they will risk starving
The U.S. budget deficit in the month of February
reached a record $222.5 billion or $2.67 trillion on an annualized basis.
With the Federal Reserve now monetizing our debt in full swing, a
complete and total loss of confidence in the U.S. dollar could be
The Federal Reserve can deny all it wants that
the U.S. is experiencing inflation, but with the cost to print a single U.S.
dollar paper note rising by 50% since 2008, massive inflation is here right
under Federal Reserve Chairman Ben Bernanke's nose. Every day that
goes by, China is quietly implementing more and more steps that expand the
yuan's use in cross border trade, in order to position the yuan as the
world's next reserve currency.
Americans will take to the streets like the
world has never seen before.
On Thursday, police in Saudi Arabia shot and
wounded three protesters. The price of oil rose by a few dollars per barrel
as soon as this news hit the wire, which shows just how nervous the world's
financial markets have become in recent weeks. The fact that the Dow Jones
has declined significantly in recent days, in our opinion means that the
odds of QE3 being launched
as soon as QE2 is over, are now much higher
than they were several weeks ago.
After all, with no QE3, the Federal Reserve will go from buying 70% of treasury bonds to being a seller of U.S. treasuries. NIA is 100% sure that foreign central banks aren't itching to jump back in to fill the hole.
While in the past, the private sector may have
picked up the slack, we believe individual investors will now be more
reluctant to jump into government bonds, especially with bond king Bill
Gross reducing the government bond holdings in his
Pimco Total Return Fund down to zero. The
bottom line is, no QE3 means interest rates will fly sky high and destroy
the phony so-called "economic recovery".
If Bernanke doesn't soon begin to leak out the strong likelihood of QE3, we could see the stock market decline by 1,000 points or more, which will force Bernanke into launching QE3.
If we see a major sell off in stocks, NIA doesn't necessarily think that precious metals prices will follow.
In fact, we could see gold and silver rise along with the Dow Jones falling. NIA projects the Dow Jones to gold ratio to decline to 6.5 in 2011. This means even if the Dow Jones fell to below 11,000, we still believe gold is likely to rise to around $1,600 to $1,700 per ounce this year, with silver soaring to around $42 to $44 per ounce.
NIA believes the worst decision any American can
make is to sell their gold and silver and go long U.S. dollars, hoping to
buy their precious metals back at a lower price in the future.