John Williams – Facing Systemic Insolvency & Its Consequences

It’s Rainmaking Time!®
Facing Systemic Insolvency with John Williams
Original air date: August 27, 2011
Host & Interviewer: Kim Greenhouse
Guest: John Williams, Shadow Government Statistics

Kim: Ladies and gentlemen, welcome to It’s Rainmaking Time! This is Kim Greenhouse. It gives me great pleasure to welcome John Williams to the show today. He is the founder of Shadow Government Statistics — Analysis Behind and Beyond Government Economic Reporting. He has this electronic newsletter service that exposes and analyzes flaws in current US government economic data and reporting, as well as in certain private sector numbers, and provides an assessment of underlying economic and financial conditions, net of financial-market and political hype.

Kim: He has a background as an economist. He talks about hyperinflation, about the real GDP, the deficit, the long-term liabilities on the obligations of our future of the United States of America, of the money supply, the Consumer Price Index, unemployment. Today in the conversation, we’re going to put together some of the things he said before. But this show is not only for people with heavy duty financial background and expertise, it is also for the layperson today, so that you have a frame of reference to see, and know, clearly what’s going on. Without further ado, ladies and gentlemen, welcome John Williams to It’s Rainmaking Time! Good morning.

John: Good morning, Kim. Thank you for having me.

Kim: It’s a pleasure. I’ve listened to several of your interviews, most recently since the S&P downgrade of the US Dollar. Kindly explain the GDP for everybody, and what constitutes the GDP, from the traditional government statistics to how you’re translating GDP.

John: Well the Gross Domestic Product, which is the basis for the GDP abbreviation, is supposed to be the government’s broadest measure of economic activity. I guess it is. It’s probably the most meaningless of its economic measures. It’s so heavily distorted with underlying assumptions and biases, it really is not worthy of the attention that it gets in the financial markets and the press, when it’s reported.

John: But consider for a moment, the number that they give you is an annualized quarter-to-quarter change in the level of economic activity, adjusted for inflation. The Confidence Interval around that — around their headline number that moves the markets — is basically plus or minus 3 percentage points. And that’s about average growth. So most of the time, you don’t know if the number really is a gain or a minus, and that’s with the numbers, as reported.

John: One of the big problems with the way it’s reported today is tied to the way it’s deflated — the way that inflation is applied to it. I’ll contend that inflation is significantly understated, due to changes in methodologies over time. And when you look to deflate the GDP — to put it into constant Dollar terms — the lower the rate of inflation that you use, the stronger the inflation adjusted growth rate is, and vice versa. So if the inflation rate is being understated, then the real GDP is overstated, and overstated significantly. I figure by minimally 3 percentage points.

John: But beyond that, there are tremendous gimmicks and assumptions in it. For example, the government imputes income for individuals. If you have a banking account, and the bank doesn’t charge you interest, or any fee, that’s considered interest income to you. And they put that in there as interest income. They also calculate — if you’re a homeowner — how much rent you’d pay yourself to rent your own house from yourself. That’s in there, in the income category. And of course, when you get into inflation, you’ll find that how much you increase the payment of the rent to yourself, for the house that you live in, is a major component of the inflation measures — the CPI. It’s just a nonsense number.

John: Over the decades, they keep trying to improve it, theoretically, and each time they change it, not only does it change the current history, but it restates economic history back to 1929, that never happened. I think a much better number in terms of getting an idea of what’s happening to the economy is looking at the payroll employment numbers, that the Bureau of Labor Statistics puts out on a monthly basis. There are some serious flaws with that, but over time, it gets adjusted and you get an accurate measure of what’s happening.

John: And contrary to all the press that the employment numbers have gotten, they don’t lag the economy, they’re coincident with economy. Employment moves up and down, as economic activity does. We got the impression — people got the impression it was lagging — and they make the case that it’s lagging, because the National Bureau of Economic Research — which is a private organization that, in its earlier days, helped to develop the GDP series — is the defining authority, as to whether or not we have a recession. And the last couple of times around, they’ve called the end of the recession extremely early, and with the result that the employment picture continued to worsen after the official end of the recession, so people say it’s a lagging indicator. Not so. It’s coincident, always has been.

John: Employment right now — just to put that into perspective — dropped. And my contention on the broad economy is that coming out of 2007 and the beginning of the breaking of this terrible systemic liquidity crisis that we’re in — the economy plunged. Plunged through 2008, into 2009, and then has been bottom bouncing for a period of time, and now is starting to head down again. You tend to see that in the employment numbers. The employment numbers never recovered. And in fact, the employment numbers today are below where they were 10 years ago. That’s how severe the decline has been. And that’s despite a 10% growth in the US population. So we are, right now, still in the midst of the worst economic downturn since the Great Depression.

John: Yet if you look at the happy numbers that come out of the Bureau of Economic Analysis every quarter, and you look at the happy call — which I’ll contend was virtually political — on the end of the recession in June of 2009 — you’d believe initially that the economy had fully recovered to the level it was before the recession started. Again, an indication of how poor quality these numbers are. Each year they go through a benchmark revision, where they have much harder data, and almost invariably along with the revisions there, you get lowered economic growth. And where a month or two ago, it looked like the GDP had fully recovered the level it was before the recession, after the last downside revisions, that has not happened yet. And in fact, the recession is much deeper than had been previously indicated, and you’ll continue to see that in future revisions. Eventually, the numbers will get more meaningful, but again, that GDP series is terribly skewed, in terms of academically-correct theories that are out of touch with reality.

Kim: The Bureau of Economic Analysis — are they the ones that came up with the criteria for the GDP and for unemployment statistics?

John: No. Bureau of Economic Analysis is part of the Commerce Department. They handle what they call the National Income Accounts, which were initially developed by the National Bureau of Economic Research, a private concern. After World War II, the government started publishing the numbers and adopted the model that had been developed.

John: Historically, the quarterly numbers on the GDP — it used to be called the GNP, Gross National Product — go back to the first quarter of 1947. So it’s post war. They have annual estimates that go back to 1929, but not on a quarterly basis. The GNP actually is the broadest measure of the economy, if you look at the National Income Accounts. The difference between it and the GDP is that the GNP incorporates the balance of trade in what they call the Transfer Payments — basically the payments of interest and dividends on stocks owned by people in the US, versus stocks and bonds owned by people outside the US. And when you’re in a net debtor status basis, the balance is usually negative. And so the GDP will tend to be more positive than the GNP. That’s why the numbers were shifted to the GDP from what used to be the GNP.

Kim: How interesting. How did you get into looking at government statistics, and how you could get accurate reporting with that?

John: Well I started as a consulting economist 30 years ago. I developed some unusual, unique models on predicting levels of economic activity. One of my early clients was a large, commercial airplane company. They had internally a model that they used for projections of sales, based on revenue passenger miles. That was their primary marketing tool. And the model was largely based on what was then referred to as the GNP.

John: I found that — well they were complaining that their model wasn’t working. I looked carefully at the GNP numbers and realized that there was a problem with what was being reported there, tied to terrible reporting lags in the trade deficit. So what I did was I corrected the numbers for them. The model worked with those corrections, and later the government did revise its GNP numbers to reflect that. But over time now, the government’s numbers have become so massaged and modeled again, they’re useless for forecasting what’s happening in the real world.

John: But I realized at that time they had to know what was going on with the data. And I talked with a number of clients I had, and people I knew had been involved in the system and looked into it over time. And what I found was there are basically two ways that the numbers have been misstated over time, effectively manipulated.

John: The first way is what most people think of when you talk about manipulated statistics. Modern economic reporting started after World War II. Before World War II, the only thing you had was a Crude Industrial Production Index, published by the Fed. Most people looked at the stock market as an indicator of what was happening in the economy. When the Great Depression hit, no one really had a good sense as to how bad it was until well after the fact. They knew things were bad, but they didn’t have any good measurements of what was happening. So by the late ’40s, these popular numbers that we see today had been introduced. It took politicians about a decade to really start playing with them.

John: As early as the Kennedy Administration, you saw some ways of handling discouraged workers — measuring discouraged workers — and not as part of the primary employment number. These were people who were unemployed, by every definition, except they hadn’t looked for work in the last four weeks, because they’d given up looking for work, because there were no jobs to be had.

John: Lyndon Johnson was noted for reviewing the GNP numbers, from the Commerce Department, before they were published. And if he didn’t like the numbers, he’d send them back to the Commerce Department, and keep doing so, until they got them right. In Richard Nixon’s era, he tried to play with the labor statistics, all sorts of things went on. He wasn’t successful. He had a lot of opposition in the Bureau of Labor Statistics.

John: The Washington Times caught the Carter Administration playing with the inflation numbers. The Reagan Administration, we started to see some major changes, largely in a methodological shift, which I’m going to get to. But you did have an incident at the time of the stock crash in ’87, when the trade data were overstated and then understated — and that was used to try and rally the Dollar. The Fed had to be involved in that, as well as the US Treasury. It had to do, again, with the flow of trade. But the weakness in the Dollar had been a key factor behind the stock crash. And this was aimed at trying to stabilize the system. It did help to stabilize the system.

John: You got into the Bush Administration — the first President Bush was up for reelection, against Mr. Clinton. And he had the problem of a recession. A senior person at the Commerce Department went to a very senior person in the computer industry and said hey look, we’ve got to get George reelected. Can you boost the reporting of computer sales to the Bureau of Economic Analysis, which was the agency that handled the GDP. They did. The reported numbers improved — the computer’s a very big portion of the GDP, particularly with the way the numbers are now deflated. And President Bush started talking about how the economy was improving, and people thought he was out of touch with reality. The average guy has a pretty good sense of what’s going on. It’s tough to fool him.

John: And then the Clinton Administration came along, and they were as masterful as the Johnson Administration, changing survey counts. They’d always have a reason for doing that. But for example, in the unemployment survey, which is done every month, and March of each year, they piggyback on that the poverty survey. Well in the March of the year before reelection, they reduced the survey from 60,000 households, roughly, to 50,000, eliminating largely 10,000 households in the inner city. Saying well we’ll model whatever the difference is there. And of course, you saw a big drop in inner city unemployment and the poverty rate went down. It was all just a careful manipulation of the data.

John: The Bush Administration number 2, Obama Administration — I have not seen some direct manipulations, as you had them before, there have been some suspicious times. But the biggest factor — and what’s caused really the divergence in government reporting and common experience in what most people believe is really happening — have been methodological changes.

Kim: Talk about those.

John: That is probably best seen in the Consumer Price Index. Now Consumer Price Index actually has been in existence, in some form, back into the late 1800s. But it became popular as a way of adjusting wages and such, as the auto unions negotiated contracts with a CPI measurement for wage increases.

Kim: Can you talk to us about what the Consumer Price Index is meant to do and meant to mean?

John: Very simply, it’s supposed to measure the change in prices in consumer goods and services. And as designed, and as reported — and I think the way most people think of it — it was intended as a measure of the cost of maintaining a constant standard of living.

John: Using very simplistic terms, they’d measure a fixed basket of goods. So they’d measure a pound of beef, a gallon of gas, a gallon of milk — whatever the price of that basket was. They’d then do the same thing the next year, and whatever the percentage change was there, that’s how much your income had to have gone up by, in order to have the same standard of living as you had the year before.

Kim: John, do you think that goods and services end up going through inflation, given that we use the currency that we do? Paper currency. Do you agree with that?

John: I think that we’re effectively doomed to inflation. In fact, I think it’s going to get a lot worse. If you look at inflation historically, before 1913, the Bureau of Labor Statistics — which is the entity that publishes the CPI — publishes the CPI since 1913. There is work that takes it from 1913 back to 1665, and the early American colonies.

John: And what you’ll see is that basically, from 1665 up to the point of the creation of the Federal Reserve in 1913 — its implementation in 1914, and up to the point where Franklin Roosevelt took us off the domestic gold standard — prices over almost 300 years were very little changed. You did have periods of high inflation, usually around wars. You saw that around the American Revolution, the War of 1812, Civil War, World War I. But those periods of inflation were always followed by periods of deflation, and that tended to bring you back to a fairly constant level.

John: For much of that time, that was due to the system being on a gold standard. The gold standard effectively imposed limits on what the governments could do and effectively controlled the money supply. But Franklin Roosevelt had a problem in the ’30s, faced with the Great Depression, wanted to spend a lot of money to buy the country out of a terrible economic downturn, if possible. He couldn’t do that under the gold standard, and that’s why he eliminated the gold standard, domestically. And the effect of — I’ll call it the debt standard — is what he put us on.

John: And ever since, administration after administration generally has expanded the amount of debt, the amount of money, and at a pace that effectively dooms you to perpetual inflation. And at some point, it gets out of control. Historically, over the last almost 2,000 years, there have been a very large number of fiat currencies where they’re not backed by hard assets, such as gold or silver. And most of them have disappeared into hyperinflation — virtually becoming worthless. Because the government’s always found it too tempting to print a little extra money, beyond what was backed by gold or silver, in effect, eventually making them fiat and just running wild with it.

John: But with the CPI — in the early ’90s, you had Mr. Greenspan, then Fed Chairman, and Boskin, who was head of President Bush’s — the first President Bush’s — Council of Economic Advisors, started putting forth a story as to how the Consumer Price Index overstated inflation. And if you asked them, well how does it overstate inflation, the answer simply was — well if steak gets too expensive, people will buy more hamburger. If they buy more hamburger, then their cost of living is lower, and that’s not reflected in the CPI.

John: Of course it’s not reflected in the CPI, because that’s contrary to the concept of measuring the cost of living, of maintaining a constant standard of living. And having to switch from steak to hamburger or chicken, because steak’s gotten too expensive, is not maintaining a constant standard of living. The average person wants a CPI measure that gives them a real estimate of what they need to stay ahead of inflation. And the old measure did it, but in the ’90s, they started changing the system over to a substitution-based system.

Kim: What does that mean?

John: Instead of measuring a pound of steak, in theory — and this is where they want to take it — people start buying more hamburger, because it gets more expensive. They reduce the weight of steak and increase the weight of hamburger in the CPI. So it reflects people’s behavior that’s forced by rising prices, as opposed to measuring what people needed to get, in the way of increased income, to maintain that constant standard of living — buying the steak, instead of having to be forced to buy hamburger.

Kim: Don’t you think that most money managers and investors have not taken into account — when looking at what types of assets to get involved with — the inflation model that you’re talking about?

John: Very few people look at the difference here, in terms of their investment models, or investment targets. And that’s a very serious problem. The reason they wanted to do this — and it was expressed at the time, and we even heard it again most recently, in the deficit reduction talks around the debt ceiling negotiations.

John: Back in the early ’90s, the idea is well if we can only reduce the reported rate of inflation, we can reduce the annual cost of living adjustments and social security — and with that, we can reduce the deficit. And it was a way that the people in Congress could move to reduce the deficit, without anyone having to do the politically impossible thing of voting against the deficit. That was the purpose behind it.

John: And I take great offense at that, because I think you’d be doing much better to just be honest with people — say hey look, we’re going to cut back on your cost of living adjustment, we can’t afford it — as opposed to putting out a phony CPI number, which is relied upon by other people for contracts, in terms of wage increases or rental increases, or for someone who’s looking to invest and says well I want to at least beat the rate of inflation. If you’re getting too low a number, you’re not meeting the pace of increase that you need to stay ahead of inflation. And that’s one thing that tends to puzzle people. My income’s going up, but I can only buy less with my income. I’m not staying even, I’m not getting ahead. That’s the reason.

Kim: Do you have something on your site, once people join your newsletter — do you have something that people can look at the correct inflation rate — some type of model? Because I know that most of the ones that they are using are wrong — really wrong.

John: My site is ShadowStats.com and I have alternate measures of the CPI, the unemployment rate and GDP. Now the graphs on that are publicly available. Anybody who wants to look at the headlines — in the current commentaries — we put out a weekly commentary — a lot of publicly-available information. But if you look at the headlines, we always put the current number in the headlines.

John: And what I do is — I try to look at the CPI net of the changes that have been made in methodology. I use the government’s estimate of how much these different changes have knocked off the reported level of the Consumer Price Index. And since 1980, it’s about 5 percentage points. There’s another 2 percentage points there, from things that they don’t think are methodological, and I’d argue that with them. Since 1990, it’s a little over 3 percentage points. So somewhere between — where the government’s currently reporting inflation at 3.6% — somewhere between 7% and a little over 10% would be what my estimates are, in terms of where the inflation would be, if you were still measuring the cost of maintaining a constant standard of living.

John: But there’s another element to the changes made here — they call hedonic adjustments, where they have mathematical models that reduce the rate of inflation, generally for quality improvements, that the average person has no idea that he’s enjoying. Quality changes are necessary adjustments to a number of prices. For example, let’s say you have an 8-ounce candy bar one month, and then the next month, it’s a 6-ounce candy bar, but it’s still in the same size package as the 8-ounce candy bar. In theory, the people who do all the surveying for the Bureau of Labor Statistics, will pick up that difference, and they’ll adjust the pricing accordingly.

John: On the other hand, the government — this happened some time back, and it was so egregious, they actually stopped doing this particular thing. But in principle, it’s the same thing that goes on in this simple example, so I’m going to use it. The government mandates a formula change to gasoline, to improve air quality. One instance, it added suddenly 10 cents per gallon to the cost of gasoline. The Bureau of Labor Statistics did not include that in the inflation rate, because it was deemed a quality improvement.

John: Well again, this is where academia perhaps diverges from the common experience. The guy that’s filling his tank of gas isn’t thinking oh boy, I’m paying 10 cents a gallon here, for better air. He’s thinking well, I’m paying 10 cents more per gallon to fill my tank of gas. Got to get to work. It’s what he’s looking at, out of pocket.

John: You have another example in the area of school textbooks. They have an extremely complicated model of estimating quality changes in school textbooks, including whether or not the textbook has a color picture in it, or black and white. The average student doesn’t care whether he’s got a color picture in his textbook. His concern is how much am I going to be out of pocket, to buy my textbooks for this semester? And then they do this in a number of areas — mostly where they have the ability to reduce the reported rate of inflation. You look at airline travel — if you’re going to do this consistently, I would think there might be an adjustment there for all the hassle that people have to go through, in terms of security at airports.

Kim: How about having to pay extra to put their bags on the plane?

John: Yeah. Well some of that they measure, but the stuff that you can’t put a direct measure on, they have models for. And they model the good things, which will reduce the reported rate of inflation. The bad things, generally, are not modeled, which would increase the rate of inflation, as they report it.

John: So when I’m talking a difference of 7 percentage points, based on what happened in 1980 — the way they reported things in 1980, about half of that difference is tied to their trying to move the CPI to a substitution-based measure. The other half is largely tied to hedonic adjustments, that the average person doesn’t consider, when he’s looking at what he’s out of pocket. And again, what do I need to spend, to maintain my standard of living? The average guy, again, is not looking at the nebulous quality improvements that some of the academics are looking at.

Kim: You are addressing systemic collapse. You are giving timeframes for this — that you’re seeing windows of time, in which we are in a state of moving into a collapse. You were interviewed on a show, and you talked about the fact that you can’t raise enough taxes, and you can’t cut enough government spending, to take care of our deficits.

John: Yep.

Kim: That was very scary, to me. Because it brought home that 99% of us are probably thinking that we’re going to be able to get out of this. But not being able to embrace those two elements. After listening to you, those two elements tell me that we are in a collapse now, possibly, or we don’t know we’re headed for a collapse.

Kim: But what really bothered me, as you said — I’m paraphrasing here, of course — we could have changed our future some years ago, but we didn’t. And now, we can’t change it. Talk about that. Explain it and distill it to the audience. I know that many people would say oh, that’s gloom and doom and everything. But there comes a point where you have to face a systemic condition that’s going on, that’s not being embraced. I think we’re all better off facing what we have to face, knowing what we need to know, and then moving in our decision quotient from there. Please go ahead.

John: Well I’m an optimist, at heart. I try to give the story as straight as I can, and unfortunately, things are not only not bright here, but as you indicated, in many ways, to a certain extent, hopeless. We have a very bad time ahead of us. On the other hand, there is good news in all that. It’s really bad news that they’re not able to fix the system. The good news is that if the individual knows what’s going to happen, he or she can prepare himself and get through it OK.

Kim: Before you start talking about that, can you explain why you have said that we can’t raise our taxes enough, or cut our spending enough, to balance anything? Explain that.

John: Yeah, I’m going to do that. I just wanted to give a little positive up front, before getting into it. What happened — again, back with Franklin Roosevelt, he puts us on the debt standard. And keeps expanding, and you get into the post-1987 crash period, with Federal Reserve Chairman Greenspan, and he recognized that we had a very major structural problem, that he didn’t have a way of addressing, at least not in a healthy manner.

John: The structural problem was that the average household could not stay ahead of inflation with income. And this wasn’t due to the misreporting of the inflation, so much as it was to a terribly explosive trade deficit, and a lot of higher-paying jobs disappearing offshore. If you look at income — average weekly earnings — they’re lower today than they were in 1973 — adjusted for inflation — that’s as reported by the government. If you look at average household income, or median household income, adjusted for inflation, the most recent reporting of 2009 — and it hasn’t gotten better — is below where it was before the 2001 recession.

John: And if you use the CPI for reporting, which is the way most people look at that, the median household income — the middle level of income, adjusted for inflation — is below where it was in 1973. The average guy cannot stay ahead of inflation. Now there’s a problem there, if you’re looking to have sustained economic growth, because income generally drives economic growth. And where the consumer accounts for over 70% of the GDP, if consumer income isn’t growing faster than inflation, a good forecast is that the economy’s not going to be growing faster than inflation. That’s fundamental.

John: The only way that you can get faster growth is — theoretically short term — either through debt expansion or savings liquidation. And we’ve had both. But what Greenspan did was he encouraged the debt expansion. And where we’ve been living on the debt standard — the whole debt picture — both at the consumer level, the corporate level, and certainly at the federal level — just exploded beyond control. In 2007, that came to a head. We entered a systemic solvency crisis. We had a collapse of the many elements of the debt structure in 2008, and yet the consumers’ income circumstances not improved. So the consumer’s restricted, in terms of income growth. He no longer has available the ability to borrow from the future, to make up for the shortfall in the cost of maintaining a constant standard of living. So there’s no way we’re going to see a rapid turnaround in this economy.

John: The other side is that Lyndon Johnson — who was a great manipulator of the data — in his Administration, they worked out the current reporting of the budget deficit on a cash basis — cash in, cash out. And the social security system, up until this year, had actually been generating a cash surplus — more was being paid in than was being paid out. Supposedly these funds being built up and held for future social security payments, but they were counted as part of the General Fund. So that the surplus in social security offset some of the deficit in other general accounts, and made the deficit look better.

Kim: Isn’t that an accounting fraud?

John: Yeah, but the federal government’s been doing it, and was approved by Congress. And it was not the first time they’ve done something that is counter to what you might do in the private sector.

John: And then, along came what were then the big 10 accounting firms in the ’70s — and said hey US government, you’re running the largest business on earth. You should have an accounting system that’s the same as used by large corporations — use generally accepted accounting principles. And after 30 years, they finally started publishing official generally accepted accounting principle statements. Well there was argument over whether or not they should show the annual deterioration in the unfunded liabilities for social security and Medicare, on a net present value basis. They put in a footnote. They don’t add it into the statement. They should be adding it into the statement, the same way General Motors used to, before it went under.

Kim: Please explain what an unfunded liability is, so people can be with you, on the same page.

John: Well it’s — in other words, a government commits to spending money, but it doesn’t — it hasn’t at the same time, put in place a mechanism to pay for it — or to fully pay for it. So that over time, the liability — the same social security and Medicare — is going to grow. But the payroll taxes that would cover that — or whatever has to be done in terms of retirement age — is not adjusted, so that the funds that will be covering it fall way short of what’s going to be paid out.

Kim: So the government’s taken on obligations for the future that it can’t deliver on.

John: Absolutely. And in fact, the most egregious element of this — and this is when I first started writing about hyperinflation — took place in 2004. The government revamped the Medicare program, put in prescription drugs. That package alone added roughly $8 trillion of unfunded liabilities to the government’s balance sheet. And at that time, the total federal debt was about $8 trillion. Effectively doubled the government’s obligations, at that point in time.

John: Now they’ve been playing games with the reporting here, but generally, what you’re seeing is the actual deficit, including how much deterioration we’re seeing in those unfunded liabilities each year. And again, the net present value brings it in to current Dollar terms — how much money do you need in hand today, to cover that obligation down the road? We’re seeing an actual deficit in the range of $4 to $5 trillion.

Kim: Is that per year?

John: Per year, yes. Annual deficit. That’s what can’t be covered. You could take 100% of people’s income and corporate profits and taxes — you’d still be in deficit. You could cut every penny of government spending, except for social security and Medicare, and you’d still be in deficit. It’s uncontainable, and it’s certainly not sustainable.

John: That’s what people have been talking about — that gave us all this big debate in Washington, and Washington showed they did not have the political will to even consider meaningfully addressing the problem here. The government does not have the ability to pay the obligations that it has already taken on, and that it is still taking on. Those obligations continue to increase. Most countries in that type of a position, historically, have done a very simple thing. And that is, when they get to the point that they can no longer raise adequate funds and taxes, they print the money. And you end up with the hyperinflation, and the currency collapses.

Kim: And we’re going to talk about that, because there’s a lot of confusion about what hyperinflation is, printing money, M3, and how the money supply has to do with inflation.

John: Indeed, there are a number of issues there. But in terms of the collapse, we got to a point — the debt system was collapsing. And in many areas, it actually did collapse. In August of 2008, September — that timeframe — with the failure of Lehman Brothers — a run on the banking system started. And when those hollering for help, saying oh, we’ve got to look for a big stimulus package here, or we’re going to see a collapse of the banking system — they weren’t kidding. The system was on the brink of collapse. Now we shouldn’t have gotten to that point, but we did.

John: Having got there, the Fed was in a position — and the Fed ostensibly is there to keep inflation under control and maintain sustainable economic growth. That’s fine, on the periphery. But their primary function is to maintain the solvency of the banking system. It’s a private entity, it’s owned by the commercial banking interest, or those related to it. The Fed was not going to let the system collapse, and neither was the federal government. I mean this is absolute failure, in terms of the government and the Fed, if it happened.

John: So what they did was they spent whatever money they had to create. They made whatever guarantees they had to do to keep the system from crashing. And it’s not just the US. It was on a global basis. The Fed can create an infinite amount of money, and they showed their colors at that time — they were not going to let the system collapse. There’s a cost to what they did, and that’s inflation.

Kim: But when you say the system, John, you’re really talking about the banking system, correct?

John: Yes. Basically, the banking system — if the banking system collapses, that’s your flow of money and credit. And the flow of credit has not returned. People still are able to get their money out of banks. That’s the difference of what happened in the ’30s.

John: In the ’30s, you had a banking system collapse. Many banks went out of business. And when those banks went out of business, the depositors lost all their money. There was no FDIC to give you your money back. So at that time, you had a grand contraction of the money supply, and you saw a deflation that would be measured in roughly the same magnitude. That’s something that Mr. Bernanke has sworn to not allow happen.

Kim: I was under the impression that a great deal of the bailout went to credit default swaps and banks directly, and derivative instruments.

John: Yeah. Well I mean it was spread where it was needed, to prevent the collapse. All sorts of things — I mean AIG, you wouldn’t think would come to you off the top of your head as something that you would have seen threatened in this, but they had the exposure on the credit default swaps. And they were effectively bankrupt, with what they had taken. If they failed, the banks that had the credit default swaps behind their instruments would have failed.

Kim: Are we on the Titanic, with respect to really embracing that Medicare and social security will not be here in 10 years, or less?

John: Well if what I think’s going to happen here is within that timeframe, you’re going to see — I think we’re on the brink of another threatened systemic collapse. And I would not be at all surprised to see some extraordinary actions from the Fed and even from the federal government, despite all the political rancor that you have there.

Kim: How would that manifest itself? Give us an example.

John: For example, you just had a large bank that had an infusion of capital from a very wealthy individual. That wouldn’t have happened, if the bank were not having some capital problems. The banking system basically is having ongoing solvency problems. That’s why you’re not seeing meaningful bank lending, meaningful growth in bank lending. The banks haven’t repaired their balance sheets.

John: And they say oh yeah, we’re looking for creditworthy people to lend the money to, but we can’t find them. That’s nonsense. There are a lot of creditworthy people out there. But the big problem is that the banking system is not functioning normally, because they’re largely insolvent. Everything the Fed has done has not solved that problem. Everything the Fed and the government have not done have not solved the economic problem.

John: The economic and systemic solvency crisis that we had blowing up several years ago are still in play. They kicked the can down the road, and now we’ve caught up to the can, and we’re up against a cliff, and not too much further that they can do to kick it. But if they feel that there’s a risk of systemic collapse — we’re talking banking system — again, I would fully expect they’ll do everything they can to prevent it from happening. It’s again, not just US, but global. If they know what’s happening, if they know where the threat is, they’ll find a way to prevent it from collapsing and threatening the rest of the system.

Kim: So bring us to 2014. What are you envisioning is under way in the next couple of years?

John: Well right now, in 2012, I figured things would come to a head about this time, and they have started to. The people in Washington —

Kim: 2012, or 2011?

John: 2012, not 2011. I’m operating a year ahead here, in my mind. What we’ve just been through — I know we’re in 2011. The government demonstrated that it does not have the political will to fix the system, and it would be extremely painful for them to do so.

Kim: How would they do it, though? That’s what I don’t understand. I’m lost. Explain it.

John: Well we’ve gone too far here. Again, some years back, this could have been done without too much pain. But increasingly, the government’s taking on the role of supporting society. It does not have the ability to support society — it’s trying to do it — basically because the demographics no longer allow it. We have an aging population that is looking to drain a lot out of the system in social security and Medicare, that was all set up for them. And you have a government right now that’s intent upon expanding the social programs. We already have the healthcare program in place. There’s just no ability to raise adequate funding to cover that, which dooms you eventually to hyperinflation.

John: And initially, I was looking at that towards the end of the decade. But because of the crisis, because of the way it was handled, the way it’s being handled now — I think what we’re seeing now will take us into a hyperinflation. I can’t give you precise timing on it. I put an outside time of 2014 on it, but I think we’re in the early throes of the factors that will do that.

John: Key here is the US Dollar. It is the world’s reserve currency. It’s not just the US money supply, but it’s US money supply and it’s also outside the United States. That’s not measured in the traditional money supply measures — about $7 trillion in cash sitting out there that could be dumped on the US overnight, if people lose confidence in the Dollar. And they’re losing confidence in the Dollar. That’s what we’ve been seeing the last couple of weeks.

John: If you look at what — in the wake of this great deal that was put together in Washington — and I use great facetiously — you have the Dollar basically seeing an extraordinary plunge. I mean you look at what happened to gold — and we’re seeing some profit taking now — but it’s the reaction in the gold. You saw a similar reaction in the Swiss Franc, until the Swiss National Bank came in and started doing all sorts of things to try and stall the Dollar’s rally there. And they were successful in doing that, for a little bit. But when you have the fundamentals in play, there’s very little that intervention does on a long-term basis. All the effects are short lived.

Kim: Do you think the downgrade was a synthetic act, or do you think it was organic and real? In other words, do you feel that that was a manipulated function, or that they’re reflecting the truth?

John: It’s not as it appears.

Kim: I’d like to know your take on it, at this time — to whatever you’re comfortable to share.

John: Alan Greenspan explained it. He says there’s no risk for US debt, because we can always print the money. That is the way the rating agencies traditionally look at sovereign states, and rating their debt in the sovereign currency. So on that basis, you would never see a downgrade from the triple A for the US Dollar. Now the rating is a measurement of a risk of default. And if it’s just the matter of the US running the printing presses, there’s no risk of default, therefore you have a triple A rating.

John: With the debt ceiling, though, and the threat that maybe the debt ceiling would not be raised, and that there would be an actual event of default, that risk of default went above zero. And so from that standpoint, whether it was risk of default in August, or risk of default the next time the debt ceiling comes up, they were justified in lowering the debt rating. It really had nothing to do with whether or not they were bringing things under control. Again, they can always print the money.

John: I feel for the people in the rating agencies. I have had an involvement in the industry, and I can tell you that the agencies don’t want to do harm by the rating. But from the other hand, they have to give the investing public their best assessment. It’s a very difficult balancing act. And something like the US debt rating — those agencies had to be under tremendous pressure not to lower the rating, not only from the federal government — I mean you’ve got the President of the United States calling the head of the rating agency. That’s a difficult circumstance for the rating agency. But also, the big consumers of the ratings and the best customers for the rating agencies — the banking industry — the banks were all pressing them not to downgrade. So it actually was a courageous action on behalf of S&P. It’s caused them a lot of difficulty.

John: I can understand what they did. But traditionally, without that debt ceiling deal, I don’t think you would have seen any downgrade. And the fact that they were really concerned about whether or not they were putting forth a sustainable deficit package, I think was more bluff and bluster than anything else. Because as long as they’re looking at the US being able to print the money to pay off the debt, it doesn’t change the rating.

Kim: There are two types of debt: the national debt and the public debt. You talked about the national debt being composed of public debt. Can you just —

John: Well the gross federal debt right now is running over 14 trillion. Of that, there’s a portion that is held by the public, and a portion that is held largely by the social security administration, for the funds that the government has taken from it, to use in general spending.

John: If you look at the accounting — even on the GAAP Statement, they tend to net out — because the social security administration is included in the government accounting. So one part of the government owing it to the other part of the government, so they net that out and don’t count it in the total. I would argue it should be counted in the total. Because those funds — people were paid in terms of taxes for social security and Medicare — that was the basis on which those funds were raised. And I think it’s reasonable for people to expect that they would be put into a trust fund and there to help pay them off, rather than just being ignored. They showed — again, in these negotiations — that they don’t have the political will to do that.

Kim: You’ve talked about the fact that basically this country’s bankrupt.

John: Yeah.

Kim: And for those people listening to a lot of different elements of what you’re saying, this is, I guess, where we start to embrace hyperinflation. And what is systemic collapse of the currency? I really want to leave people with the clarity that — and I’d like you to talk about this — that even those of us that have our investments and our assets denominated in US Dollars, have to rethink the way we’ve operated in the past. Can you talk about that?

John: Sure. Well eventually, unless the system can be brought into balance, and again I contend it can’t be. To do so requires slashing the social programs. Obama was right when he said the Republicans are trying to break the government social contract with the people. I don’t know what social contract exists there, but the basic financial numbers are such that the social programs that have been structured — what’s in place — has bankrupted the country. There’s no way the government can raise the funds to cover that.

Kim: Can I ask you to clarify one thing, because I’m a little bit confused? Just this one point. When you talked about how you can’t raise enough taxes, and you can’t cut enough government spending to balance anything, then what do we do, John?

John: What we do is we print the money to pay off the obligations. Either that, or you do the politically-impossible thing of slashing social security and eliminating Medicare, much as it’s known today.

Kim: Wouldn’t that ruin the confidence in the government, and in the Dollar, and in everything?

John: Well it’s the devil’s choice. Again, the political will is not there to do the slashing. We saw that. There’s good reason, from a political standpoint, that people want to avoid doing that, because there are a lot of people who are dependent upon that. And I think if someone talked honestly with the American people, and said look, we’re bankrupt. We’ve got to change these systems or everything’s going down the drain — that maybe you’d find a lot of people that would rally around that and be willing to sacrifice. Americans have in the past. We just have overspent.

Kim: When you say we’ve overspent —

John: But I don’t see that happening. I don’t see it being feasible to bring it into balance. And since that’s the alternative to printing the money, the way these characters work in Washington, we’re going to see the money printed and that dooms you, eventually, to a hyperinflation. It’s just a matter of when. It reflects a great loss of confidence in the currency.

Kim: Wouldn’t that be better, politically, to send us into hyperinflation, so that the American people don’t have to know that we’re bankrupt, and that there isn’t going to be a Medicare or a social security?

John: Well I think that’s the decision that’s been made.

Kim: It’s obvious.

John: All along, they keep pushing it — again the proverbial can down the road — kicking it down the road there. There is a day of reckoning here. They’ve always put forth the position that the US Dollar doesn’t matter. The deficit doesn’t matter, but it does.

John: There comes a day of reckoning. We’re going through that now. And what’s happened in the last six months is that we’ve seen the US Dollar lose its safe haven status. You look at the disruptions in the Mid-east, that normally would have created some flight to safety in the Dollar. The flight to safety was into gold and the Swiss Franc. In the wake of this debt deficit negotiation debacle, the Dollar has plunged. Global confidence in the Dollar has been largely killed, and it’s very difficult to get it back.

John: The Dollar here is heading a lot lower. What happens is, the Dollar declines in value. Oil, which is denominated in US Dollars, tends to go up in price. And the inflation that we’ve seen recently has been due to higher oil inflation, but not because of strong demand for oil. It’s because of the Fed’s policies of Dollar debasement — the quantitative easing.

Kim: What does the quantitative easing mean, in relation to what you’re saying? I don’t get that part.

John: Well the quantitative easing by the Fed is basically a policy of Dollar debasement. Bernanke defined it back in 2002. He said we can always prevent a deflation. He doesn’t want a 1930s-style deflation. And he said that the Federal Reserve and the central government could always, in concert, debase the Dollar and create inflation — both being the same thing. And the way you do that is with the quantitative easing. He’s pumped extraordinary amounts of cash into the system.

John: Now it hasn’t translated through to the money supply. Normally it would, if banks were lending money, but they haven’t lent the money out. They’ve lent it back to the Fed. The banking system’s largely insolvent. Yet the rest of the world sees this happening, they know that the long-term picture here is for a weaker Dollar. The Dollar is being sacrificed. They sell off the Dollar. They begin to dump Dollar assets. It intensifies, and now we’re at a point that you could have a massive decline in the US Dollar at any time. I’m not predicting it for any particular set point in time, but that risk is there. And along with that, you’d have heavy selling of foreign held US treasuries.

Kim: Who wins? Who are the winners, or who would be shorting the US currency and therefore, making a profit from the currency getting weaker and weaker and weaker?

John: It’s something that we’re doing. We’re debasing our own currency. So against the rest of the world, the Dollar’s declining. People who have their assets in the rest of the world are doing better than people who have their wealth denominated in Dollars.

Kim: So 401(k)s and other types of assets denominated in US Dollars are in a high-risk condition.

John: They’re losing long-term value here, as the Dollar gets debased, because that usually will be matched with inflation. Seeing the same thing with gold. It’s a leading indicator of where inflation is heading.

Kim: The problem with gold, for many traditional investors, is that they have a hard time looking at gold as a hedge against inflation, because of the fluctuations of the gold and the metals prices. Respond to that, would you?

John: I mean yeah, it’s volatile, and as is everything in the markets these days. But you go over the last seven years, and you look at the beginning of the year and the end of the year, gold has — in each year — outperformed the Dow Jones Industrial Average. Gold gets a bad name on Wall Street, because the average broker doesn’t make any commission on it.

John: And it’s the physical gold that people need to hold here as a hedge, and then hold it for the long term. Not in terms of day-to-day volatility. I’m certainly not looking at estimating any kind of short-term movements in gold or currencies. But over the long term, the Dollar’s going to become worthless. And if you have bought gold and moved into some of the stronger currencies, such as the Swiss Franc or Australian Dollar, Canadian Dollar, you’ll find that you’ve been able to preserve the purchasing power of the Dollar.

John: I mean in a hyperinflation — I’ve defined a hyperinflation very simply — as when the largest note in circulation, before the inflation — in this case a $100 bill — becomes worth more as toilet paper than as currency — that you have a hyperinflation. And under that type of a circumstance, there’s really no upside limit on gold, other than the downside value of the Dollar. The Dollar goes to zero. I don’t know where it goes. Let’s say gold goes up to $100,000. And say well I’m going to take my profits at this level. You don’t have any profits. What you’ve done is you’ve preserved the purchasing power of the Dollars that you put into the gold. What you lost is what you had invested in paper assets and Dollars, that are now virtually worthless. So that it’s not so much that you have a gainer here, it’s that you have a loser. And the loser is a guy that’s holding his assets in Dollars.

Kim: From your view now, what is the blind spot in the American conscious mind, that is preventing us from seeing clearly that we’re on the road to hyperinflation? What is preventing us from embracing this, in your view?

John: Generally, lack of people talking about it. You’re not going to get Wall Street talking about it much. Again, they always put forth a rosy picture to help sell their products. You did have some very healthy conversation that took place, from some people in the government, back during the debt ceiling debate. Not only focused world attention on the problem, but also for some domestic people. But a lot of people just couldn’t care less, until they find that they’re suffering financially, and wondering what happens. That’s always the case. But I think you’ll find a lot more people talking about it today than they were two years ago.

Kim: Now in an example you gave about Zimbabwe, as an example of a country that went into hyperinflation. One of the things you said, that I thought was interesting, is that they were still able to run an economy, because they had a black market. Talk about that — it’s what they were doing commercially that enabled them to continue, even during that horrible time.

John: They probably had the worst hyperinflation anyone has ever seen. If you took an original $2 bill and made a stack of $2 bills — in the last iteration of the currency, the stack of the new currency to equal $2 of the old would literally stretch from the earth to the Andromeda Galaxy — light years high. Not enough trees on earth to print the money.

John: Yet — this was over a period of a couple of years — and the economy continued to function, people were employed. The reason it was, that they had a backup to their system, in a black market in the US Dollar. If you want to get repaid in Zimbabwe Dollars and quickly convert it to US Dollars and stabilize it effectively, there you had a hedge against loss of purchasing power. Which in that type of an environment is sort of like what you had in the Weimar Republic in Germany. You could go into a fine restaurant one night, have a very expensive bottle of wine with dinner, and the next morning, the empty bottle of wine was worth more as scrap glass, than it had been the night before, filled with expensive wine. And that’s how quickly things change.

John: We don’t have a backup system in the US. And as such, this could be extremely difficult, extremely disruptive to our system, when it hits. And without a backup — even with gold as a backup — few people own gold.

Kim: Is silver a backup, too?

John: Silver’s a backup. Some of the stronger currencies we mentioned earlier are backups. But Ron Paul has introduced legislation to have gold treated as a currency, along with the Federal Reserve Notes, and that you can exchange Federal Reserve Notes for gold, at the market rate.

Kim: Do you think that they will allow him to get that passed?

John: No. But his thinking is good, in that if something like that were in place for a little while before hyperinflation hit, then we’d have a backup system and the effect on the economy would not be quite as dire. But without the backup system, you’re going to see disruptions to the food supply chain — grocery store shelves get empty. That’s the type of thing that leads to civil unrest.

Kim: I watched a conversation that James Turk and Edwin Vieira — talking about many, many different things. But one of the things that Edwin was talking about was that there needs to be legal facilitation on a state-by-state level, so that there is a backup system in place, on a state-by-state level. Do you think that that’s doable?

John: Yeah, it’s been moving through in some states. But it’s different circumstance in each state. Some that just make legal the face value of the coin, which is useless. I mean you need to be able to exchange the Federal Reserve Notes for the gold content — not — you have a one-ounce coin that’s marked $50, and it’s worth $1700 in gold — you’re not going to spend it as $50. And that’s why something that Ron Paul is pushing makes sense. You really need it on a national level.

John: But irrespective of that, people who own some physical gold effectively have their backup. And you don’t have a system set up which allows a smooth functioning in really difficult times.

John: So for someone looking to protect themselves in this environment, number one, I think you’ve got to look at preserving your safety and your wealth. In terms of the wealth, you can hedge the purchasing power of what you have in the way of your current Dollar assets with gold, silver, Australian Dollar, Canadian Dollar, Swiss Franc — hard assets — and I’m talking physical possession of the gold and silver.

John: If things indeed get as bad as I believe they’re going to, and the normal economic system, or the normal flow of commerce breaks down, it’s probably a very good idea to have a good store of commodities that you’d normally consume — as you would plan for a natural disaster. I mean I’m sitting on top of the Hayward Fault, which is not a good place to be in an earthquake. Yet I would have a store of goods — canned goods and basic necessities to get me through a period of time, in the event of a major earthquake, because it takes the government a long time to respond.

John: What we’re faced with here is potential of a manmade disaster, where you could be seeing several months before you even get a normally functioning barter system. Once it breaks, there are any number of ways this thing can go. But having not only goods for your immediate consumption and needs — for a couple of months — but also having some items for barter. I met a fellow one time, who’d been in the South American hyperinflation. And he said that the perfect small change he’d found was an airline-sized bottle of a high-quality scotch. The point is that whatever you get — get things that you might be able to consume yourself. In the event I am wrong, you consume it, you breathe a sign of relief. It’s not costly to do that stuff, but it’s good, basic common sense.

Kim: You know, the IMF wanted to make their SDRs the kind of world currency. And I know that there are many different agencies and organizations and governments talking about there being kind of a shift toward a one-world currency. Not to complicate anything, but if in fact this is the intent of the powers that be — both in and outside of the United States — I can see how hyperinflationary conditions would serve to be able to transition into something like that. I think it would be horrifying and horrible, but I can see — depending upon the game plan of those that run things — how that could happen.

John: I don’t think that will happen.

Kim: Tell us why. That makes me feel good.

John: Well look what’s happening to the Euro. When you work — I mean the people — and I know there are people who would like to see a one-world currency and one-world government. When you do that, you want to have the countries involved in healthy shape. I mean if the Euro were based on Germany and Holland and Finland and such, and didn’t have Italy and Portugal in there, it would be a fine, solid currency. But when they put it together, whoever thought that the Germans and the Italians could coordinate fiscal policy, didn’t know the Germans or the Italians. And as a result, I think the Euro is doomed for failure.

John: There was talk — some people were talking about the Amero — a currency union between Canada, the US and Mexico. With the way we’re going, I don’t think either Canada or Mexico would want to have their currency dependent on ours. You want the parties involved to be in good shape, to have a happy circumstance. Otherwise it disintegrates, as we’re seeing with the Euro. The Euro’s not going to last.

Kim: Do you agree the Chinese are holding a lot of our real estate here?

John: Uh-huh.

Kim: Do you think that the Chinese moves on our Dollar could send us into an accelerated hyperinflation event?

John: Well I would expect that what will trigger the hyperinflation here will be some substantial movement out of the Dollar, by a number of current holders, which could include the Chinese. The Chinese already have made a lot of moves in that direction, and certainly have been squawking about it. They also have significant political leverage with it, which they could use in all sorts of ways.

Kim: Do you think the Chinese currency could be the world reserve currency, possibly?

John: It may be, eventually. It’s not there yet. Where we go down the road remains to be seen. They’re still, to a large extent, tied to the US Dollar. And as long as they are, they’ll suffer some of our inflation. Oil prices go up, in Dollar terms, they suffer that, as long as they’re effectively tied to us. I mean they’ve been loosening it some, but I would expect you’d see that break free, and then it will be a matter of who’s picking up the pieces when — as the Dollar falls apart.

John: Right now, 80% of the global currency transactions involve the US Dollar. So however it goes, I do imagine you’ll see — you have to have a revamped currency in the United States, but also a revamped global currency system. I don’t see a one-world currency coming out of this.

Kim: OK, I just wanted to ask you that.

John: I would think if — whatever happens — and again, there are all sorts of possibilities as to what happens here, politically. And I’m not into forecasting that. And again, I can tell you we’ve got a problem, and it’s coming to a head. And it’s going to come to a head within a certain period of time. How it moves beyond that depends on a wide variety of factors. But a new currency system — I would be willing to wager — will have some backing in gold, in order to help sell it to the public.

Kim: And my last question to you — and I really appreciate you taking the time that you’re taking, to make things perfectly clear. How much do you think the loss of confidence in the US Dollar — in this currency — is going to have its weight in spiraling and accelerating the flight from the Dollar, from inside the United States, and also from outside the United States? In other words, how much weight does the now loss of confidence have of people fleeing the currency?

John: I think very significant. I can’t put a number on it, but that’s the primary — the loss of confidence in the Dollar now reflects loss of confidence in the US government and the US fiscal balances. If you look at major factors that drive a currency — the fundamentals — relative economic strength is a big factor. We’re still in recession, it’s getting worse. Interest rates — we’re as low as we can go, and Mr. Bernanke would like to make them lower, if he could. You see others trying to control their systems are actually raising rates, including the Chinese. The higher rate tends to make a currency stronger. Relative fiscal discipline — we’re at the bottom of the barrel on that. Relative trade balance — we’ve got the world’s largest trade deficit.

Kim: Can you just explain that last part of what you said? When you say we have the world’s largest trade deficit, what does that mean?

John: If we didn’t have the trade deficit, we’d be manufacturing roughly $700 billion more of goods in the United States. If we were in trade balance, the difference there is about $700 billion.

Kim: How is trade measured?

John: It’s imports versus exports. We’re importing an awful lot more than we export. And we’re importing things now that we used to make. We no longer have the manufacturing base that we had. That’s why you have the structural problem with individual income. This is due to the very poor trade policies, and so-called free trade elements in it.

John: This is, again, where I have an argument with academics. Great theories, but they don’t relate to the real world. The theory behind free trade is that you have two countries that are at full employment. One’s very efficient at making a certain product. The other’s very efficient at making another product. But they don’t trade with each other. You open up trade between them. What happens is that the countries that are most efficient at what they do will make more of those products. You end up with greater production over all, greater wealth, everyone’s happier. That’s the rationale used in justifying the so-called free trade policy.

Kim: What does free trade mean? I understand what trade means, but I don’t get what the free trade —

John: Well free trade means it’s unencumbered by government regulation — tariffs and such. We don’t have free trade. But the problem with the theory is it requires that all the parties be at full employment. We aren’t at full employment, haven’t been in decades, and neither have any of our major trading partners.

John: So that when you get a — say the NAFTA deal — North American Free Trade Agreement with Canada and Mexico — that type of a circumstance, the country with the low labor costs has the trade shifted to it. So all of a sudden, we have a big trade deficit with Mexico, that we didn’t have before. A lot of jobs shifting south of the border. With a trade deficit, we’re transferring wealth outside of the United States. A big deficit, in this type of a circumstance, basically is a way of redistributing global wealth, away from the rich country — in this case, the United States — to the rest of the world. And that’s what we’re suffering, from an economic standpoint. That’s why incomes are not staying ahead of inflation. That’s why unemployment is persistently high.

Kim: Don’t you think globalization is one of the roots of this outsourcing, and the trade deficit?

John: Yes. Well it certainly has exacerbated it. And when you have a trade deficit, and you owe more to the rest of the world than is owed to you, and you’re making it up with your currency, the general effect is that your currency gets weaker. Basic supply and demand.

John: But I was going down the list of the factors that affect relative currency strength. The other big factor is political stability. And a good predictor of how the Dollar’s doing, or will do, is the popularity, or approval rating, of the US president. That’s not doing too well, at the moment. So all those factors together would normally give you a down Dollar. And given the big shakeup that we had in confidence from this non-deal in Washington, was really very powerful in its impact, and destroyed significant confidence, and is going to lead to a much weaker Dollar in the not too distant future.

Kim: Are you doing a lot of traveling these days? Are you here a lot, in the US?

John: I don’t do that much traveling. I do some.

Kim: Talk about your site and some of the things that we can get, once we subscribe to your newsletter.

John: Well ShadowStats.com has a lot of material on it, for the public, including in the right-hand column of the home page, the latest edition of the hyperinflation report. The earlier editions are all available. We have archives and everything that’s been written on the site, if you want to see what’s been talked about before.

John: But what’s in the hyperinflation report, although it’s dated April, is still current in terms of what’s happening. Things have, unfortunately, been unfolding along the lines of what we’ve been looking for. We also have, on the site, articles on the quality of the different key statistics. I show graphs of the alternate measures, which includes estimates of unemployment, GDP, the Consumer Price Index. I also publish an estimate of the broadest money supply measure, M3, which the Fed no longer publishes. On a subscription basis, what you get is weekly commentary, which keeps you up to speed with what’s happening week after week, with the data and any unusual developments in the markets, as well as the hard data behind the graphs — the alternate measures.

Kim: I really want to thank you for joining us, and for taking your time to lay out the true conditions that we’re living in, and the attributes that we need to pay attention to, to protect ourselves and to be able to have a more prospering future, and also some things that are ahead that are difficult to face. I’m sure it’s not easy to be you.

John: As I started, I didn’t really start getting into the more negative aspects of this lightly. I’ve only been physically assaulted once, for my views. And that was by a nice lady, at a board of directors meeting at a bank in Maine. She was in tears, and picked up a jelly donut and threw it at me. She hit me in my chest — she had a pretty good arm. And the poor woman was in tears. She said all you have is bad news, bad news. What’s the good news here? And the bank chairman stepped in, and he said the good news is you know what’s going to happen, you can protect yourself.

John: And if there were a way I could see the government working its way out of the circumstance, I’d be yelling it from the rooftops. I just don’t see any way of this practically working out. So I’m talking more generally about how people can move to protect themselves, and ride out the storm. Because if they do, once the storm has passed — and it will pass. I can’t tell you exactly how things are going to end up. There are all sorts of ways that it can go. But as the system stabilizes, if you’ve been able to preserve your wealth and assets, and maintain liquidity, you’ll be able to take advantage of very unusual circumstances that will come forth.

Kim: John Williams, thank you so much for being on the show today.

John: Thank you for having me, Kim.