January 18, 2012; Interview with John Williams of Shadow Statistics

Weekly Commentary • Jan 20 2012
January 18, 2012; Interview with John Williams of Shadow Statistics
David McAlvany Posted on January 20, 2012

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin:  David, today, of course, we are going to have John Williams on.  He is probably the best statistician – I know that doesn’t sound exciting – with government numbers, probably, that is out there, who is not bought off by the government.

But before we go to that, we have Bert Dohmen on the line.

David:  Kevin, I think the importance of the conversation with both of these gentlemen today.  One is really a preview of coming attractions, and in our conversation today with John Williams we will look at inflation, not only the inflation that he sees nascent in the system, but hyperinflation, and his time scale has been rolled back.  It is not 2014-2018, a four-year window, but he would suggest that it is 2014 at the outside, likely imminent.

He is releasing a report this week which I think every listener should get their hands on, but as a preview of coming attractions, we have these various triggers which may cause significant problems, not only in our financial system, but ultimately may be that which ignites the hyperinflation.

Kevin:  Yes, you have to look outside of the United States, possibly, for a trigger that is going to cause something within our own borders.

David:  That is why we are going to be talking to Bert Dohmen.  He has done a special report on China and the frailties within the Chinese economy, and that is going to be aired in a couple of weeks.  But also as a preview of coming attractions, we want to have a conversation with him because we have a new GDP statistic out this week.  Fourth quarter 2011 GDP was running at an 8.9% number and there have been a variety of responses to that number as it has been released.

Kevin:  David, that sounds like an excellent seminar with Bert Dohmen coming up.  I’m sorry that you couldn’t make it, but you are actually going to be in New York at the time.  You can’t be two places at once.

After that, today, I’d like to go, if we could, to John Williams.  This is a man the government loves to hate because of the statistics.  He takes their numbers and he brings about the real conclusions, instead of the altered conclusions, and really, is reporting like an economist probably would have, or a government statistician would have, reported 20 or 30 years ago.

David:  Kevin, you find that economics is very similar to philosophy, in the sense that the work that you are doing is based on certain assumptions, and if you are not regularly checking those assumptions, the work that you are doing may, in fact, be flawed.  That is what we find him doing, as an economist.  I love it, Kevin, he has the focus of a bird dog, and it’s beautiful to watch.  Frankly, I’m glad not the bird dog in this instance, because there are so many statistics and so many assumptions that go into government statistics.

Kevin:  A lot of detail.

David:  I’m glad he’s the man for the job, and that’s why we want to entertain the conversation today.  What are the numbers telling us about hyperinflation and our current economic malaise?

Bert, we are looking forward to spending an hour or so in coming weeks to talk about issues relating to both China and Europe, and really, the world economic picture.  I know between now and the time we get to spend together and have that conversation on the air, January 21, 2012, you are going to be at the Intercontinental Hotel, where you will be doing a closed-door seminar for only 100 people.  I wanted to bring this to our listeners’ attention, because it is a rare opportunity to have both fundamental and technical insight from someone with your experience, 35 years of writing and research in the investment field.

Bert Dohmen:  David, thank you very much for the introduction and for mentioning the seminar.  It’s in the city of Los Angeles, California, people are flying in for this three-hour seminar, so we are very happy about that.  It’s the first one I’ve done in about ten years, and the reason I am doing it is that I think the timing is absolutely critical.  It is very much like 2007.

I never wanted to write a book, because it is very tedious work, but in 2007 I said we are going to have an event like 1929 next year and people have to be forewarned, so I wrote a book called, Prelude to Meltdown.  Right now, this seminar is very similar in urgency and that’s why it’s important.

The focus, of course, has been on Europe all this time, and the crisis over there, and that is far from being resolved.  But they will be able to kick the can down the road.  Greece will probably exit in some way or another, maybe just suspend their membership, and so on, but the real problem, in my opinion, will come out of China.  China’s problems are way underestimated.

We got a report today, for example, on China’s GDP.  It came in at 8.9% for last year.  8.7% had been expected, so this is now bringing out all the China bulls – fantastic GDP growth.  But, if you look at the real numbers, the last quarter was the worst GDP growth China has had since the depths of the financial crisis in the second quarter of 2009.  It’s the worst.  If you take a look at the real estate crisis, they are down at 50% in many of the big cities.  Sales are down 60-70% of real estate.  They are pretending everything is well, and China is going to be the locomotive of the world?

China is going to be the neutron bomb of the world economy.  When demand from Europe dries up, China is going to be in desperate trouble.  The exports will just really shrink, and the Chinese companies are already in deep financial trouble.  They are not making money.  They cannot get any loans from the banking system anymore to finance their continuing operations.  That is the real big problem ahead.

David:  This is a great time to be talking about this, because following the Chinese New Year, we will probably have an indication of what kind of policy measures will be put in place by the politburo, either in support of the economy or if they are attempting to navigate a soft landing, so to say.  But as you said, Bert, 8.9% on GDP, you end up overstating GDP if you are understating inflation.  On the ground, inflation is assumed to be between 10% and 15%, and that would actually put their GDP at a very low level, not even 8.9%, maybe even 1-2%, depending on how high their actual rate of inflation is, perhaps even negative.

Bert:  Absolutely, David, you are so right.  The inflation adjustment is totally phony for the GDP numbers in China, as it is in the United States, but if you look at the real numbers, the growth of electricity consumption, that’s a free market rate in China.  That shows you that China, right now, is already in a contraction.  If you look at manufacturing numbers out of China, China is already in a contraction.  GDP numbers includes governmental spending.  The government is pouring so much money into fixed investment, this is a huge part of economic growth over there.

So the deeper the recession goes in China, I guess the more apartments the government will build which will remain empty, and that is the problem.  You have to say:  What is the GDP number made of?  Is it the private sector?  No, the private sector part of the economy is at 33%.  It is shrinking.  It is going down.  The companies are letting their people go, companies are going out of business, and China is going into a recession.

David:  Bert, we are on the edge of some really interesting things.  2012, 2013, 2014 serve to be very interesting, very promising if you are on the right side of the trends.  We want to explore China with you in depth next week, but also want to take the opportunity to underscore, Century City, the Intercontinental Hotel, January 21st, your three-hour seminar.  For anyone who is interested in attending, the cost will be $195 per person, and you can contact Bert’s office at 310-476-6933.  Obviously, Bert, we have a lot more to talk about and we look forward to that conversation in the next few weeks.

Bert:  David, it’s always a pleasure to speak with you, because you are one of the most knowledgeable people in the business.

David:  Thank you.  We look forward to seeing you, and I’m sorry we couldn’t be there for the Century City presentation, we would have loved to have been there, but we will make it on the next one.

Bert:  Very good, David.  All the best to you and to your listeners.

David:  John, it’s great to have you with us.  As we begin 2012 we look at a number of factors which are fairly critical.  When we look at economic reporting, and the data that is coming out of our different government agencies, there are a few things that stand out here at the beginning of the year.  15.3 trillion is, roughly, our gross domestic product.  It is also our national debt, but that is not the sum total of our liabilities.  We are now at 100% of GDP, and that is one thing that we want to look at today, some of the big picture issues in terms of our economy, and what some of these economic statistic imply as we look at 2012, 2013, 2014.  We are above 90% on the debt-to-GDP level.  That has always implied a lower growth environment moving forward, carrying that much debt.

That’s not the only issue.  We have a lot of things to cover with you today.  We want to talk about the deficit, of course.  We want to talk about the real deficit, the gap-based federal deficit.  We want to talk about employment statistics, where we are, and where you see us going.  Some comments on bank lending, and whether or not that will improve, or if we are just going to be stuck in the mud, in terms of velocity.  And then maybe just a little bit on the depth and duration of the contraction we have been in, contrary to some perhaps at the NBER who would say we are clearly out of the recession.

We want to cover some of these big-picture points, and have you shed some light for us on the importance of statistics and what they tell us today, as signs and signals of what lies ahead.

John Williams:  Well, that’s quite a bit, and I am happy to help wherever I can.  Where do you want to start?

David:  Let’s start in with the federal deficit.  In 2010 it was 1.299 trillion, and then in 2011 it was virtually the same, 1.294 trillion, and you have pointed out that the gap-based federal deficit is quite a bit higher than that.  What is the difference between the headline number that we see advertised, the 1.2, 1.3 trillion number, and the gap-based deficit?

John:  The gap-based deficit is based on generally accepted accounting principles, where the government’s operations are reported as a large corporation might report its operations.  This has been in place now for pretty much well beyond a decade now, in which the Treasury has been publishing these reports.  It came out of the efforts back in the 1970s, what were then the big ten accounting firms and Congress, to bring the federal government’s operations under better control so people could understand what was happening.  Despite all the efforts, the government accountability office, still called the GAO, which does the auditing, won’t sign off on the statements because of problems with auditing of the defense department and Homeland Security.

But as it puts all the numbers together, there is an area which is not widely followed, but it is extremely important in terms of whether or not the nation is solvent, and unfortunately, the nation is not, at least not on a long-term basis.  The issue is in terms of the unfunded liabilities for Social Security, Medicare, and such.  The way they handle it in the financial statements is that they show the numbers as estimated by the various trust funds, but they reflect it in terms of net present value.  Where you have a shortfall of, for example, 20 trillion dollars net present value, that is how much cash you would have to have in hand today, earning money on that going forward to cover that liability.

In terms of the year-to-year change, which would effectively go to the income statement, or would be the net deficit or surplus, depending upon which way it went, instead of being in the area that the government reports for the cash deficit, I think it is in around the 1.3 trillion range, which is extraordinary, in and of itself.  We are seeing annual deficits right now of 5 trillion dollars.  That is with all the annual change reflected there on an accounting basis for the deterioration in Social Security and Medicare.

David:  If it was 1.3, you would say that is really not a sustainable trajectory.

John:  1.3 certainly is not.  5 trillion is beyond any hope.  To put that into perspective, if you wanted to, for example, bring the system into balance for one year, let alone make it solvent going forward, you could not raise taxes enough to eliminate the deficit.  You could take 100% of everyone’s salary and wages and you would still be in deficit.  On the spending side, you could cut every penny of government spending except for Social Security and Medicare, and you would still be in deficit.

I get a lot of comments like, “Why are you targeting Social Security?  I paid into it.”  I fully appreciate the feelings.  I paid into Social Security, too.  The problem is, the system has been expanded by the politicians beyond anything that is sustainable.  They cannot conceivably raise enough taxes, or balance the deficit, with the existing political limits on spending, going forward.  We are insolvent.  We’ve gotten to a point that the government cannot fund its operations, or borrow enough to fund its operations.

We actually saw that in this last year, a very unusual time where the Federal Reserve, with its Quantitative Easing II package, actually bought, in net Treasury securities, more than the Treasury issued for public consumption, so that the Fed, effectively, in that period of time, fully monetized the federal debt.  That is working through the system – very, very inflationary, and we have, unfortunately, a lot more of that ahead.

But if the government can’t have normal auctions, if it cannot raise the funds from people who want to lend the money to the government, domestic or foreign, it will most likely do what almost every other country in that type of circumstance has done, and that is, to print the money they need to meet their obligations.  That becomes very inflationary – hyperinflationary.

David:  That brings us to the point of a report that you put together about a year ago, a hyperinflation Special Report, in 2011.  You have updated that with a few data points, and are doing a new release here in the next few days.  I will be quite frank.  If anyone who listens to our weekly commentary has not read The Special Report because you don’t subscribe to Shadow Government Statistics, you are a little out in the cold without a jacket.  This is called necessary reading.

The idea, within the 66-page report, which is about to be re-released with all the updates, is essentially, that we are moving toward hyperinflation, and I think, argues, very effectively, that this process which has begun over the last ten years, and became a virtual certainty by 2004, has been accelerated as a result of the financial crisis, and Washington, D.C.’s tinkering with the system, unfortunately, not very effectively.

Maybe you can speak to the acceleration of the process, and some of the dots you are connecting that would imply the inevitable circumstance of hyperinflation here in the U.S.

John:  Sure.  Before we had the financial crisis that broke in 2007 and 2008, the system was headed for hyperinflation by the end of the current decade, perhaps by 2020.  That was just the way the government’s obligations were lined up.  We were seeing deficits still averaging 5 trillion dollars a year on a gap accounting basis, completely unsustainable.  By 2020 we would have been at a point where the government would have had to print the money to meet its obligations.  There is no way it could sustain that with borrowing.

We had a circumstance develop in 2006-2007 where the economy started to turn down sharply, particularly in the housing area, which helped to trigger a financial crisis.  The economy helped to trigger the financial crisis, the financial crisis exacerbated the downturn in the economy, and we saw almost a collapse in economic activity going through the year 2007, into 2008, even to 2009, and it has been pretty much bottom-bouncing since, irrespective of the official pronouncements out of Washington.

But in August/September of 2008, the people in Washington realized that they had so loused up the system that they were on the brink of a systemic failure, that the banking system was going to collapse if they didn’t do something.  They weren’t kidding about that.  We shouldn’t have gotten to that point, but having gotten to that point, they had to do what they had to do and put forth all sorts of emergency spending, lending, guarantees – they created whatever money they had to in order to keep the system from failing.

I will contend that they will continue to do that so long as the markets will let them get away with it.  The problem is that the cures that they put forth did nothing to resolve the problem.  It bought them a little time in terms of systemic stability, but the systemic solvency crisis continues.  The banks are not healthy.  The big banks are still in trouble.

We have another crisis that is brewing here.  The U.S. economy did not recover.  It, in fact, is still bottom-bouncing, and it is about to turn down again.  All these factors will keep the Fed and the Treasury, the federal government, trying to pump money into the economy, doing some form of stimulus, providing liquidity to the banking system.  The costs of all that are very inflationary, and that has accelerated the process whereby, if you look over the last year, the actions taken by the Fed, by the federal government, did a lot to kill global confidence in the U.S. dollar.

Looking back to the events in July/August of last year, they had the negotiation over the debt ceiling, and the inability to come up with a deficit reduction package or the willingness to actually take the political steps necessary to slash the social spending, which is effecting a looming national bankruptcy.  As that fell apart, the rest of the world was watching the United States, and if you look at the market reaction, this was even before the downgrade of the U.S. Treasuries, there was panic selling of the dollar.  The Swiss franc was soaring, gold was soaring, and that is one of the prerequisites to having hyperinflation – a loss of confidence – a loss of confidence in the dollar.

Then there were all sorts of market interventions.  I would contend that the crisis in Europe was a real problem, but there was a lot of effort made to focus market attention on the crisis in Europe as a foil – efforts were made to curtail the rise in gold prices.  The Swiss National Bank moved, at least for a short period of time, to tie the Swiss franc to the euro to effectively prop the euro, and to effectively prop the dollar.

It is an unstable, very volatile situation, that could break apart at any time, and as it does, there are a number of things that could push it over the edge, such as renewed Fed action, which is a virtual certainty, just a matter of when it hits.  But you will start to see this circumstance move very rapidly to a higher inflation, and then as the confidence in the dollar continues to shrink, into a hyperinflation.

A lot of people say, “Oh, my goodness, how can you have inflation with a weak economy?”  Indeed, we have a weak economy, and there are a lot of problems with what is being reported, but if you look at something as simple as payroll employment, despite all the problems with the reporting of the series, and I am happy to talk about the problems of the reporting issues, it is probably the best quality broad economic statistic that the government publishes.  Just don’t pay too much attention to the month-to-month changes.  It is much better than the GDP, and it is a coincident indicator of economic activity.

If you look at what has happened there, it plunged in late 2008 and 2009, and pretty much it has been bottom bouncing.  It has moved a little bit higher, but it is far from having recovered the level that it was before the official recession started in 2007.  I am talking about the level of payroll employment, the number of jobs that people are being paid for on company payrolls.

David:  So, when we look at the employment statistics as they are issued, the U3 and U6 numbers, and of course, you do a reconfigured number there, which also factors in discouraged workers, short-term and long-term discouraged workers, what is our real picture?  Are we closer to a 1973/1974 era of unemployment?

John:  Yes, if you go back to the way the numbers used to be estimated, though it is impossible to fully reconstruct it, I think we are up around 22% unemployment.  There have been problems going back over time, but you would find that it is probably about as bad as we have had since the great depression, which would take you back into the mid 1970s recession.

There is a very important point on the payrolls that I would just to get in here, and that is that the current level of payroll employment, the most recent reporting, is well below where it was in December of 2007 in the recession.  It is also well below where it was at the beginning of the recession in 2001, ten years ago.

The payrolls today are below where they were a decade ago, and that is despite a 10% growth in the population.  There is no way you can look at that and think of it being a normal economic circumstance.  It’s not there, it’s an absolute catastrophe.  There are all sorts of game-playing and hyping by Wall Street and the politicians, but we are going through a major structural change.

It has a long way to play out, and looking at the issues that we were discussing very briefly in terms of the deficit and the spending, a lot of the forecasts, going forward, on the federal budget deficit, for example, are based on assumptions of underlying economic growth.  We are not going to have that, so the deficit is going to be a lot worse, the funding needs of the Treasury are going to be a lot worse, and all this combines together in, really, a perfect storm for the financial markets.

David:  What you have just said is precisely what we see real-time in Greece.  It was just a few months ago that they had resolved the Greek debt issue, they had a 50% haircut, which was done on a “voluntary basis,” and now they are finding that growth in the economy, that was one of the assumptions that you just said we have, as well, was not as robust as needed, as expected, as factored in, and 50% is not going to be enough of a haircut.  Maybe 60%, I’ve even heard numbers as high as 75%, and this is the issue.

They did buy themselves 3-4 months through the jawboning and through the exercise, but ultimately, nothing on a structural basis was changed.  They didn’t increase their revenues, they didn’t decrease their expenses, and they still have a massive amount of debt as overhang, and that really does sound a lot like us.  Although we are not Greece, our numbers and the circumstance we are in are similar.

John:  Yes.

David:  Too much debt overhang, revenue deficiency, and spending that is out of control.

John:  The big difference is that Greece can no longer print drachmas.  We can, and still do, print dollars.  Within the European Union there are ways in which you can behave and you can’t just issue, willy-nilly, a domestic currency when you no longer have a domestic currency.  You get into the issue of the way the credit rating agencies look at this.

Normally, a credit rating agency would not give anything less than a Triple A rating to a sovereign debt issued in the currency of the sovereign.  The rationale behind that is that the sovereign always has the ability to print the money to pay the debt, and the credit ratings are based on risk of default.  On that basis, in theory, there should have been no downgrade to the U.S. Treasuries.

The reason we had the downgrade was not because we have put ourselves in a position of long-term insolvency for the U.S. government.  Indeed, we have done that, but it was that with the debt ceiling in place, and the threats of default and the fighting over that, and the risk of default was no longer viewed as zero, in which a country could just print the money, but that you could actually have a formal default.  That is why we had the downgrade in the U.S. dollar.

But the U.S. dollar is still a currency where we have been able to, and always can, at least as things are currently structured, print whatever money we need to meet our obligations.  Greece does not have that opportunity.  The situation in Europe is an unhappy one.  I don’t think the euro ever should have been put together.

The people who thought that Germany could align its fiscal policies with Greece and Italy and France just didn’t know the countries involved.  There was a strong desire among some to get a unified currency, but we are seeing that circumstance fall apart at this point in time.

In many ways, if you broke the euro into its constituent currencies, you would probably find the euro, recombined, would be a lot stronger than it is now.  The markets are overly discounting the cost of Greece on the European system, but that will resolve itself.  I am not a specialist on the euro circumstance, but I can tell you with virtual certainty, that if there is any event that currently is foreseeable, and there has certainly been enough time to work through all the different scenarios that may come from this, the Fed has been looking very carefully at what could bring about a domino effect in the system that could bring down the U.S. banking system.

The Fed will do whatever it has to do to prevent the collapse of the banking system.  If it has to bail out Italy, it will bail out Italy.  Mr. Bernanke has the ability to do that.  But the U.S. Treasury doesn’t, and the U.S. Treasury right now is probably under some political constraints.  But if we end up with the type of circumstance that we had following the Lehman collapse in 2008, I think even there we would find Congress moving to prevent a systemic collapse, that is, a failure of the banking system, and an absolute failure for the Fed.

It is not a circumstance anyone in Washington wants to see, but there is nothing they can do to fundamentally fix it.  All they can do is kick the proverbial can down the road.  I think we are going to have one more attempt here at kicking the can, but in doing so, we are also going to be collapsing the dollar, and that is going to accelerate the process toward hyperinflation.

David:  You have picked a time frame of 2014-2018 and have begun to shrink that a bit more toward the 2014 horizon?

John:  I put 2014 as an outside timing of this.

David:  As an outside timing.

John:  I would contend that we are actually through some of the early stages of it.  Although we are not seeing the inflation, we have passed some of the benchmark things that have to happen for this to play out, and that, very specifically, is the global loss of confidence in the U.S. dollar.

David:  Let me focus on two things here, because, first of all, this is just repeating what I said earlier.  If listeners aren’t willing to invest a few dollars in the report at your subscription service, there are some things you need to do.  I would suggest you order Adam Ferguson’s book, When Money Dies.  In this book you see the historical side of a hyperinflation.  It is not so much the economic, but the social, political, and cultural changes that one experiences in that context, and I think that is worth knowing what it looks and feels like. How you get there, in terms of the economics – that’s where you need to fast forward and look at this from 2004, or the 2014 or 2020 inevitability, which you just described, and now, all of a sudden those puzzle pieces being in place for it to be a present tense reality.

Again, if you are not going to go to shadowstats.com and spend $89 for a six-month subscription, $175 for a one-year subscription, have this report and all of the other resources that come from shadowstats, what you are doing is limiting your ability to thrive and survive, in what is an absolute catastrophe.

Please do not trivialize the interview with John Williams today, because this is a look ahead at something that we would agree with John is a virtual certainty.  The question is timing.  We don’t know when, but we certainly see this moving, and there is an acceleration that is taking place.   As one of our guests from Europe has said, “Crisis compresses time,” and things which have taken ten years to occur before are now happening within months, and within quarters, and will ultimately take place in weeks and days.

That is the nature of hyperinflation, as confidence is lost, and as there is a crisis, it is the psychological crisis, in which the telltales are in the currency, and you can see what is happening by the devaluation of the currency, but it is actually a psychological snap.

John:  I can’t argue with anything you just said there.

David:  John, in light of this, we look at two things:  First of all, we know that you can still go to shadowstats.com and read the past copy, if you will, the special commentary #357, your Hyperinflation Special Report for 2011.  Please take the time to read the 2012 version, as well, but the general public can go and read the 2011 version now.  Maybe you can bring this into perspective.  Sometimes we look at Germany as an instance of hyperinflation, but what about Zimbabwe?  That is a little bit more present tense.

John:  There are lessons from both, but one of the remarkable things about Zimbabwe is that it had probably the worst hyperinflation that any nation has ever experienced.  Take the two-dollar bill from the original currency, and then go through all the iterations and lopping of zeros from the notes that they had over time, 100-trillion dollar notes.  I don’t think they went to a quadrillion because no one knew what a quadrillion was.

But if you were to come up with a two-dollar bill in the last version of the currency and make a pile of those that equaled the original two-dollar bill, that pile would have stretched from the earth to the Andromeda Galaxy, literally light years high.  There are not enough trees on earth to print it, just absolute devastation in terms of the currency’s value.

The hyperinflation, however, took place, and accelerated, over a period of a couple of years.  At that same time, the economy still functioned, although there were problems, and people worked, but the way they survived, the way the economy continued to function, was that they had a black market in U.S. dollars.  If you were paid in Zimbabwe dollars, you could immediately convert them into U.S. dollars.  You did that, and had a store of wealth, and you could operate off of that.

The problem in the United States is that we are dealing with the world’s reserve currency, the largest economy.  We have no such black market in the United States.  We don’t have a backup to the dollar, at least at this point in time.  Without that, we would see a much more rapid and devastating impact on the economy.  We would see disruption in supplies to grocery stores, food deliveries, and if we’ve got the food off the shelves in the grocery store, that’s about as fast a way I can think of to start triggering civil disorder.  It becomes a very dangerous situation.

What I am about to cover is not at all political.  The gentleman, Dr. Ron Paul, who is running for the presidency on the Republican side of the primaries now, introduced legislation in Congress – at least the man is thinking – that would make gold legal tender, that it could be treated as a currency, so that you could take Federal Reserve Notes and exchange them for gold at the ongoing exchange rate without any tax consequence.  If something like that actually were put into place, you would then have a functional backup for the dollar, for the Federal Reserve Notes, which are going to go through this hyperinflation.

That, in many ways, would mitigate some of the immediate devastation that you would see in the economy.  It would actually be a plus for the economy, if something like that could be put into place, but I don’t see that happening.  I just mention it because this is something that has arisen in the last year and is new since I last updated the hyperinflation report.

David:  It would certainly represent a challenge to the monopoly status of Federal Reserve notes and regarding all of those dear-hearted, wonderful Federal Reserve bankers, I don’t know that they would be super-enthusiastic about that competition.

John:  That’s putting it mildly.

David:  (laughter) John, like books, there are ideas that need to be tasted, others chewed, and others yet digested, and here we are looking at inflation and the consequences, socially, politically – real decisions that have to be made in light of the things that are in the pipeline already.  These are the things that we really need to ruminate on.  Join us next week as we continue the conversation on these same issues and explore them further with you.

Kevin:  David, what a fascinating interview so far.  I can’t wait to hear what is going to be said next week, but I think the thing that we have to focus on is that he is saying that hyperinflation is a “fait accompli.”  It is something that will occur, that the government has already pre-programmed into this economy.  I think the thing that numbs us to hyperinflation is just how quickly it can hit.  You can go from a state of almost zero inflation to a state of hyperinflation, such as in Germany, and ultimately, in Zimbabwe.

David:  Kevin, I think there is a remarkable similarity with hyperinflation, that snap event that occurs, and what we see in the debts markets.  Oftentimes, what you will see is perfect stability, and ideal pricing, interest rates at all-time lows, signifying that there is no risk in the system, just before you have a snap in interest rates, and all of a sudden you can go from a 2 to a 10, in terms of an interest rate.  That is what we have seen in the debt panics all throughout Latin America.  There is that interesting component where something changes, and it really is more of a psychological event than one that is even monetary.

Kevin:  David, this reminds me of the tragedy that is occurring in Italy right now, with the cruise ship that sank.  If you have ever been on a cruise ship, it is as if you are in another world.  You don’t really feel like you are on a boat at all.  You can barely feel the rocking of the boat, you have all the food that you need, you have your room, you’ve got light, you’ve got entertainment, and what happened in Italy is, that just suddenly changed.

David:  In fact, they thought that somebody was making good decisions for them, when in fact, the captain of the ship prioritized his own survival over the obligations that he had as “captain.”

Kevin:  He made bad decisions, and then he abandoned ship.  I’m not saying that Ben Bernanke is going to abandon ship, but he sure is making bad decisions.

David:  It does point us to one thing, Kevin.  In the context of hyperinflation, and John, this is where we would like to take the conversation next week, it is in the direction of an individual understanding their responsibility and the choices that they have to make in order to do well, survive, and thrive, in a period of time of incredible stress and chaos, brought about by economic and financial mismanagement.

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