March 6, 2013; John Williams Exposes Government Lies

Weekly Commentary • Mar 07 2013
March 6, 2013; John Williams Exposes Government Lies
David McAlvany Posted on March 7, 2013

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: David, today John Williams joins us, and he is always fascinating because of his views on government statistics and their analysis.

David: This is particularly helpful because, when you go to the mass media, the view today is that we are actually in economic recovery. We have signs of that – December’s trade data was better, revisions to the 4th quarter retail sales, and we have home sales, auto sales, a couple of things that are picked out and they say, “Hey, look at this, this is great.”

He takes a different view and says, “Yes, but if you actually study that statistic, you find that there is a high degree of manipulation within that statistic, and it doesn’t say what you think it says. You have to look at the assumptions. You have to look at how they derive the conclusions that they are coming to, rather than just advertise those headline numbers.”

I love the conversations that we have had with John and would encourage anyone who is interested in getting to know him, in getting to know his work, to go to, where he publishes a weekly newsletter. That is, of course, a paid service, and you will want to, as we explore today, I hope, the issue of hyperinflation, get to his website and read his report, a very extensive report on hyperinflation.

Kevin: David, sometimes you have to have a mathematician to tell you that the math doesn’t work. There are a lot of things out there that just give a guy’s opinions, gut feelings, that type of thing. John doesn’t do that. He says the math doesn’t work, and let me show you why.

David: John, it’s great to have you back on the McAlvany Weekly Commentary. There are many things that for either a new listener or someone who perhaps hasn’t followed what is happening in the economy as closely as they could have, and of course we all have many, many things to pay attention to in life, and these are very important, but also very detailed issues. Where would you catch someone up? What is the big picture here? Let’s start with the macro issues, things that you think someone needs to know, cannot ignore, and has to have in front of them now as we move into 2013, 2014, and 2015.

John Williams: Number one would be that the economy has not recovered, and is not about to recover. The underlying basics with consumer liquidity show that the consumer has no ability to drive a sustainable growth in consumption. The reason people have seen in the headlines a reported recovery is that the government understates inflation. That is another very big point. Most people, when they try to estimate inflation, or look for inflation, are looking at it from the standpoint of setting investment goals, or what their income needs to change by.

Because of the inflation understatement, that affects the way the economy gets overstated. If you use too low of a rate of inflation in adjusting the economic numbers, the economic numbers get overstated.

The third issue, and these all combine into a rather unfortunate circumstance, is that when you look at gap-based accounting, the way that a major corporation usually would report its operations, the federal government is bankrupt and running an annual deficit close to 7 trillion dollars. That includes the year-to-year change in the unfunded liabilities, but that number, that present value, is the cash you have to have in hand today to cover the shortfall into the future. Nobody is looking at bringing that into balance, and if they don’t bring it into balance very rapidly, we will see the dollar collapse and we are going to go into a hyperinflation.

David: John, Stanley Druckenmiller, who is a retired hedge fund manager, really an extraordinary person, last week laid bare this particular issue of long-term liabilities, saying that the immediate debt obligations, we think of 16-17 trillion current debts, were insignificant compared to the long-term obligations of Social Security and Medicare. In essence, he was castigating today’s seniors for not pushing through reforms to avoid the direct transference from tomorrow’s seniors to the current class of retirees, saying we are so much on a path to perdition, this is just not sustainable. And I think you are looking at the same thing. The 6.6 trillion, that net present value, factors back into the equation, not just the spending deficit today in real time of 1.1 trillion, but our obligations of 6.6, as you say, close to 7 trillion.

So you are arguing the economy is not in recovery. What else would you focus on, for someone who is just coming into the conversation, as to issues that they need to understand? Perhaps you can come back to that issue of understated inflation and expand on that a little bit, because I think for most people, they are looking at tame inflation today. There really is no sign of inflation today, so why be concerned?

John: Let me just backtrack a minute to one other very significant implication of the weaker economy. Right now we have a sequestration in place. We have, in theory, some kind of budget negotiations going on between the parties. There are going to be negotiations, over-expansion of the debt limit. All those forecasts, going forward, on the budget deficit, Treasury fundings, are based on underlying economic assumptions, and if the economic growth is weaker than they are projecting, which I assure you it is going to be, all the budget projections get blown away, any hope of balancing even the cash-based deficit, what they are talking about with the sequestration is just a statistical error, plus or minus, given their underlying economic assumptions.

And here is where the problem comes in with the inflation. If we go back to the 1960s and before, to when the CPI was first used in the auto union contracts for purposes of cost-of-living adjustment, the concept there was to measure inflation in terms of what you spent out of pocket. That had never been an issue, and in terms of inflation, what was needed in the way of a cost of living adjustment to maintain a constant standard of living. What was the cost of living of maintaining a constant standard of living?

To do that, to come up with the estimate, the Bureau of Labor Statistics had, since it started its official publication of the CPI back in 1913, but also back in estimates in the 1880s and other indices that had been used back into the 1700s, even the 1600s. The way it had always been looked at was measuring the cost of a fixed basket of goods.

Very simplistically, let’s say they price out a pound of beef, a gallon of gas, a loaf of bread, if that was your basket, they would price it out this year, they would price out that same basket next year. Whatever the price of the basket had gone up, that was your inflation. That is how much your income would have to have gone up, or what your investment returns would have to have been in order to be able to maintain the ability to buy that same basket of goods, to maintain that existing standard of living.

In the early 1990s, Alan Greenspan, and the head of the Council of Economic Advisers, Michael Boskin, began putting forth the concept that the consumer price index, which was the government’s headline inflation measure, overstated inflation, and if only they could get a more accurate number, it would enable them to reduce the budget deficit, because a more accurate number would show lower inflation, and that would mean that it would reduce the cost of living adjustments on programs such as Social Security.

And why was the CPI overstated? Their rationale, simply, was, “Well, let’s say steak goes up too much in price, people buy more hamburger, and then if they buy more hamburger, their cost of living will be less.” Well, that is true. That is not a cost of living that is needed to maintain a constant standard of living. If you are maintaining a constant standard of living, you still have the ability to buy steak. You don’t have to buy the hamburger.

They were looking to destroy the concept of the fixed basket, and they did. Actually, before that, they had started to introduce nebulous quality changes in goods that people didn’t recognize, but which computer programs that modeled what they called hedonic quality adjustments would come in and say, “This product has gone up in quality, and therefore we are going to reduce the inflation on it.” The effect was to significantly reduce inflation on a lot of goods.

I will give you an example. I have a friend who just had to purchase a new washing machine after 30 years. She bought the top of the line Sears unit 30 years ago. The best she could do today, top of the line, would be to get a machine that would last 10 years. The fact that the lifetime of the machine has dropped significantly is not modeled into the pricing of the washing machines.

But the fact that it now has a digital display, in terms of time, as opposed to a knob that would turn back and show you how many minutes you have left, they have made quality adjustments based on that. And most of the inflation that has been seen, and just what it takes to buy a top of the line washing machine, is not there in the CPI numbers, and that is because of these hedonic quality adjustments.

So you aren’t getting the out-of-pocket expenditure with the hedonic quality adjustments, and because of changing the price index from a fixed weight index, we had a fixed basket of goods, to what they call substitution-based index. We have lost, since 1990, roughly 3 percentage points of year-to-year inflation, and since 1980 we are looking at something in the vicinity of 7 percentage points.

David: It is basically compounding against you negatively.

John: Yes, and in fact, had the changes not been made at the time that it was raised by Greenspan and Boskin, the changes that were made then to alter the payments of Social Security, that was done successfully from their standpoint, Social Security checks would be double what they are today. People think I’m kidding on that. I’m not kidding, and if you think about it, if you read the papers, if you look at the budget negotiations of this last year or so, not that there has been anything significant that has come out of it, but the one thing that they did agree on, and have not backed off of because of public protest, was to reduce Social Security cost of living adjustments by using a new CPI measure.

David: A new CPI?

John: What they did before did not make the CPI fully substitution-based. They have another measure they have been publishing for over ten years now, both the chain CPIU, which is fully substitution-based, and have introduced, would further reduce the reporting of the CPI. But unlike the current CPI, which once they report it, it is fixed, this one gets revised over two years.

I don’t see how they could physically really put this into place, but enough people have raised protests here that it was destroying the concept of the cost of living that they seemed to have backed off. But they have done this before. They did this back in the 1990s and there have been ongoing efforts back through the 1980s to reduce the CPI.

So putting this all together, what this means is that from the consumer’s standpoint, if you are living on something that is based on the CPI, if you are paying rent and your rent is escalated by the CPI, you are making out like a bandit. The landlord, on the other side, is having a difficult time. If your salary, or social security payment, or if you have targeted your investment return based on the government’s inflation numbers, you’re not keeping up with inflation, you’re getting hurt, and that is because you are using a number that is too low.

David: This also applies when you are talking about GDP, industrial production, if you are understating inflation, then aren’t you really playing with the numbers, almost over-stating GDP, industrial production? There is a ripple effect. And this gets to your point that the reported recovery is looking at a basic assumption that is under-appreciated. This is your point on inflation. They are claiming quite the opposite, that they are overstating inflation, and you are claiming that it is understated, and that makes their numbers look better, and that there is actually a motive for them to have their number look better, from a political standpoint.

John: It’s a matter of how they define inflation and the cost of living. They are defining it for the individual, using it from an income standpoint, that the individual is not looking for a measure of maintaining a constant standard of living. That’s nonsense. There is no value for an individual to an inflation measure that doesn’t do that. From an economic standpoint, the hedonic adjustments, in particular, have had a devastating effect on the GDP.

The GDP, as it is popularly reported, is adjusted for inflation. The idea behind taking inflation out is that when you then see the changes in the GDP, if you have taken out the proper amount of inflation, and if you have seasonally adjusted well, what you are seeing in the change is a measure of how the economy is actually doing. If you use too low a rate of inflation, and you understate inflation, it overstates the resulting inflation-adjusted growth.

When the U.S. first started using these hedonic adjustments, the rest of the world didn’t sign onto it, including Japan and Germany. The effect was that the U.S. GDP looked a lot stronger than what we were seeing in Japan and Germany. They have since moved to using it, at least partially, but they don’t use it in all those same areas. But part of the reason that the Japanese economy looked so bad relative to the United States was because they weren’t calculating their GDP on the same basis.

In like manner, if the U.S. had not introduced the hedonic adjustments we would have seen much weaker economic growth. And the difference it makes right now, allowing for two percentage points of understated hedonic quality-adjustment inflation in the GDP, you look at the formal GDP, the economy started turning down December of 2007, it plunged through 2008 into 2009. In the middle of 2009 it started turning higher again, and it actually fully recovered. It exceeded the level seen before December, 2007 back in the 4th quarter of 2011, and it just kept going higher and higher. It is now well above where it had been going into the recession.

What is funny about that is that you are not seeing that pattern with any other major economic series, and that is an impossibility if the GDP and the other series are accurate. They should move together. The GDP is based on other people’s reporting. And it’s just not there. If you adjust for the overstatement due to the hedonic quality adjustments, what happens is the GDP starts turning down early in 2006, and that is coincident when you start to see the problems in the construction industry, and it weakens into 2007, then it plunges through 2008 into 2009, does hit a bottom in the middle of 2009, but then it basically bottom-bounces, it is stagnant, at a low level of activity, it doesn’t recover.

I have a client who has sales that generally move very closely to the GDP levels, and that is not happening now. It used to, but we haven’t rebounded the way the GDP does. I showed him how the GDP looks when you adjust for the inflation gimmicks, and he said, “Yes, that’s our sales pattern.” We have not seen an economic recovery, and now the economy is beginning to turn down again.

There is a reason why we have not had an economic recovery. Aside from the mis-reporting, there are underlying fundamentals. If things don’t make sense in terms of what you are saying, and I can tell you that the average guy has a pretty good sense of what is going on, much better than the quality of what you see out of the government.

If you talk to anyone on Mainstreet, U.S.A., people who are out in the business world, they know how their business is going, they know if they are employed or unemployed, if their friends are unemployed or employed, and I think you will find that the general consensus is that the economy has been a lot weaker than the government has been reporting. Inflation is higher, unemployment is higher. It is all a matter of how the government defines it versus the common experience.

But here is the rub. Here is where you have something that has got the economy constrained, and nobody in Washington is looking at changing it, and that is consumer income. If you look at average weekly earnings, and this is on the production side, and this is averaged on a personal basis, this is per person, that peaked in 1972-1973, and we are down 10-14% since then, depending upon where you are looking at it. If you use my inflation estimates, which back out what the government has done, there has just been a general decline.

But as the government reports it, it is still in downturn, it leveled off, and now it is turning down again. As a result of that, as earnings fell, increasingly where back in the early 1970s you would be more inclined to have a household where one person worked, the husband going to work, the wife staying home with the kids. Increasingly, the households became households where two people work. They did that out of economic necessity. Of course, there were a lot of social changes that accompanied that, but this restructured our society.

And if you look at household income, again, using the government’s numbers out of the Census Bureau, as the Census Bureau last reported it – they report it once a year with the Annual Poverty Survey, so the most recent number they have is for 2011, adjusted for the Consumer Price Index, the CPIU – the median household income, meaning the middle level, is the same level it was back in 1967.

Some former census people have started a company called Sentier Research, and they now publish that number on a monthly basis, and what you will see is that whereas the income on a monthly basis fell through the recession, when the recession supposedly ended, the income kept falling. Now it is bottom-bouncing, but it’s well below where it was during the recession. Again, this is actually based on the broader annual numbers put out by the government, below where they were 40+ years ago.

The problem is that if income doesn’t grow, and I’m talking income adjusted for inflation, there is no way that consumption can grow. Unless there is sustained growth in income, there cannot be sustained growth in consumption. Income drives consumption. You can borrow a little bit of consumption from the future through debt expansion, and that’s what Greenspan encouraged for decades, encouraging people to take on debt, to use debt to make up the shortfall in their standard of living. That is what collapsed in 2008, but up through 2008, most of the growth that had been seen in the economy was based on debt expansion, not on healthy growth in income.

Now, after the 2008 crisis, consumers don’t have the borrowing ability that they once had, but they still have the income problem, and as a result, they cannot support positive growth in consumption. They can’t support a renewed boom in the housing industry, and until those areas are addressed, there is no hope of an economic rebound. So we have a lengthy period of time ahead of us where the economy is going to be down to stagnant, and that is very bad news for things such as the budget deficit, and in turn, for government borrowing, and for the government to borrow money, it needs to have good credit and people who are willing to lend it money, and when people look at the gap-based deficit, it is beyond containment.

Right now, the deficit for last year was 6.6 trillion dollars. In perspective, you have no ability to contain that. You can raise taxes, and take 100% of wages and salaries, and you’d still be in deficit. You could cut every penny of government spending except for Social Security and Medicare, eliminate the entire military budget, and you are still in deficit.

The conclusion from that is that you are not going to get out of this by raising taxes. In fact, I will contend that we are at that tipping point where the higher taxes actually become counter-productive where the revenues don’t rise with that because of what the higher taxes do to the economy in slowing the economy. And from a spending standpoint, they have to reorganize and make stable, to make financially sound, all the government social programs.

If they don’t, what happens is that the government will end up, as most governments do when they can’t raise adequate money through taxes or borrowing – and they won’t be borrowing here much longer, as they have been, unless the Federal Reserve does the lending, which the Fed has started to do – they will have to, effectively, print the money. And as they print the money, that creates inflation. How do you print the money? The Federal Reserve buys the Treasury debt.

We are getting to that point where we are very close to another crisis, one that is going to be worse than what we saw in 2008, and I think there is some risk of things getting very dangerous in the next couple of months. I’m not saying it’s going to happen in the next couple of months, but there is high risk there with the way the people in Washington are behaving. They are not doing anything to meaningfully address the deficit. If anything, they are sending a signal that they are not going to do it. Global markets have been patient, but they are running out of patience.

David: John, hyperinflation is a hot topic, and one which you have spent a lot of time digesting. You see this as a near-certain outcome. You have just given the underlying case, or built toward that. It seems that most people are concerned, given the amount of credit that has been created, that there might be a collapse in credit and that looks more like deflation.

Everyone has piled into bonds over the last several years. The tail risk, if you will, has been well insured on the deflation side, but on the inflation or hyperinflationary side, you are amongst a dwindling few people with a real concern there, and we would agree with that, that there are higher and higher probabilities of a super or hyperinflationary outcome. Is there anything else that you would want to add to the mix as you are building that case for hyperinflation?

John: Very simply, it is inevitable, barring the U.S. government working out a way of bringing its house into fiscal order. And from what we have seen in the people running the system at the moment, there is not a chance of that. They are not going to make any political decisions that will affect the major social perks like Social Security and Medicare – not going to happen.

So, without that happening, the system is doomed to hyperinflation. The question then becomes one of timing. Originally I thought this would come to a head at the end of the current decade. I have advanced my estimate in recent years to 2014. Next year, I still look at that. I view it as a virtual certainty. It is an aftershed effect of what happened in 2008.

People tend to forget 2008 now, but remember, we had a panic there, we had a crisis. The financial system was on the brink of absolute collapse. They were not kidding. They saw that happening, they created the circumstance. But once they created the circumstance, and looking into the abyss, not wanting to see the system fail, they created, spent, lent, guaranteed, whatever they had to do with money in order to keep the system from collapsing.

Those who look at deflation are afraid of a debt collapse. A debt collapse does not, per se, create deflation. What Bernanke had feared back in 2008 was, I think, something along the lines of a 1930s-style deflation, that resulted directly from the collapse of the banks. As the banks collapsed, depositors lost their money, but they didn’t have the FDIC then, so as their money disappeared, the money supply collapsed. The money supply dropped by a third over a period of time, it paralleled the pace of today’s inflation.

In today’s environment, where they made the decision in 2008 to do whatever was needed to prevent that from happening, they set in place a mechanism that effectively assures U.S. hyperinflation. We see the Fed today monetizing Treasury debt. The banks aren’t lending it out, but when they monetize the Treasury debt, it actually pushes that cash into the system.

What the banks do with that, then that may be something else, but right now, as that is pushed into the system, it is actually beginning to spike the money supply growth a little bit. You have a circumstance there where the rest of the world right now is looking very seriously at dumping their dollars.

Over the last couple of years, we have reached points of dollar panic and different things were done to stabilize the dollar, but the big holders of the dollar have been giving the U.S. the benefit of the doubt, giving them time to work things around, to find a way of making things stable, to assure them that the long-term sovereign solvency issue is not a concern for the United States.

The United States has not only not done anything in that area, it has actually made it worse. All the money spent did nothing to turn the economy. It did not fundamentally solve the banking system crisis. Our banking system is still in trouble. If it were not in trouble, it would be lending normally and we would be seeing extraordinary money supply growth where the Fed would be pulling the funds for the system.

The world, as I am looking at it, is viewing the U.S. waiting for some action that indicates the U.S. is going to be solvent in 10 years. It is not doing that, and as this terrible circus that is going on in Washington continues, I think you are going to see an extraordinarily negative reaction in the global markets’ dumping of the dollar, which in turn will be reflected in higher oil and gasoline prices continuing despite the inflation here. Dumping of foreign-held U.S. Treasuries and other dollar-denominated assets, all of which will give birth to an inflation that will push us into hyperinflation in 2014.

David: A question for you John. The idea that somehow the precious metals bull market that has grown over the last 10-12 years is over. Certainly in the minds of many investors, sub $30 silver, sub $1600 gold. Using the declining oil price today, whether it’s WTI or Brent, at least over the last several weeks to months, there is this idea that maybe inflation is tame, maybe there is no reason to be concerned.

If you look at the inflation-sensitive areas, bonds have still held up very well. We have seen a little up-tick in yields, but wouldn’t bonds be telling us that inflation was around the corner if those things were coming? In fact, when you come to the gold and silver market, you’ve suggested that if you adjusted for inflation, just using the CPI, the traditional standard measure, assuming that it had veracity, we wouldn’t have seen peak numbers, not 850 or 875, but we haven’t reached peak numbers until we have exceeded $2516 dollars, or for silver, closer to $146.

Help us understand what we are looking at in terms of a market dynamic. Gold has been in a correction for 16-17 months. The market is just about convinced that we are, in fact, in the context of an economic recovery, and of course, they will look at trade data, December’s trade data, revisions from 4th quarter retail sales. Pick and choose a few economic statistics: Increased home sales, auto sales, as evidence of the consumers coming back, maybe we don’t need gold and silver as an insurance policy against inflation, super- or even hyperinflation. Maybe you can just respond to that from your gut.

John: Yes, well let me put it this way. Gold is generally pooh-poohed by Wall Street more often than not because a lot of the people there don’t get a commission on its sales. I’m looking at physical gold, generally, for holding here, and if you look at it over the last decade, despite the current malaise, it has still has been a lot better than stocks.

The thing is that with gold, with any of these markets, you get a lot of short-term volatility. It’s an enemy of the state as far as the central banks are concerned. Anything they can do to knock it down in price, they will. I think that is why you had the last Fed minutes so worded to try to maybe hit gold and boost the dollar a little bit before you get into the market reactions that will follow the terrible budget problems ahead.

You raised a number of issues there, let me just hit them real quickly. In terms of Treasury yields, that is an absolute nonsense market right now because the Federal Reserve is buying all the issuance, or pretty much close to it, so it’s a rigged market. You have a very big buyer there that is your buyer of last resort and as the inflation does kick in, market forces will just get worse and worse, and the Fed is going to be buying more and more, and you are going to actually be seeing the Treasury yields rise.

Treasury yields are not keeping up with inflation. My goodness, you cannot get a safe investment that gives you a positive inflation-adjusted return. A T-bill gives less than the annual rate of inflation. You’d do better to go out and buy a basket of goods and hold it for next year because you will be making more money on that than you will buying a Treasury bill. That’s an unusual circumstance, it’s an artificial circumstance, and it is one that is directly rigged by the U.S. Treasury.

In terms of the gold market, that also gets rigged, but fundamentally, it’s the primary hedge against what they are doing to the dollar. Again, if you look at the underlying fundamentals, there is no way that I can see, possibly, and I would be very happy to have someone come forward and say, “Oh here, this is how they are going to do it.” There is no way that the government is not going to be effectively insolvent in the not-too-distant future because of the terrible obligations it has that it is unable to fund.

And the government is not going to file for bankruptcy. Governments don’t do that. What they tend to do, and in fact what you are beginning to see them do, is rather than that they just print the money they need to meet their obligations. With that, you will see inflation rising irrespective of how it is reported by the government. Their measures will be rising, as well. The average people will be seeing it. It isn’t a big problem at the moment, I’ll grant you that, but it is going to become one. Everything is in place for this to take off.

Again, when I said that debt collapse is not deflationary, I didn’t quite complete that thought. Very simply, when you have the government doing what it is doing, when peoples’ bank accounts are guaranteed, and they pull back off of unlimited guarantees by the FDIC, but if you have another crisis they are going to put that back in play so people don’t lose the money in their bank accounts. You are not going to have a money supply collapse that you had back in the 1930s.

The debt collapse does not collapse the money supply. If I am a bank and I lend a few million bucks, if the system is working normally, and it’s not working normally at the moment, but that would create 10 million dollars’ worth of money supply as it is lent out by the banks. It boosts the money supply some, but you are not getting the full effect at the moment.

Nonetheless, the fellow that borrows the money goes under, the bank wants its million dollars back, it can’t get it back from the guy that no longer has it, and it can’t pull that cash out of the system. It has no ability to do that, so that it doesn’t implode the money supply the way the loss of bank accounts did back in the 1930s.

What happens is you don’t get money supply growth, so that the banks take a charge on their balance sheet that restricts their ability, in theory, to lend money, so they cut back on lending, which we have seen, and that cuts back on money supply growth, but it doesn’t collapse it. So we have been through a period of slow growth, it is actually beginning to pick up some now, and that is more tied to the Fed actually buying used Treasuries than anything else.

David: Just a qualification because I see lots of projections in terms of GDP growth statistics, housing starts. Are we in recovery, or are we not? When it comes to individual asset classes, there are some analysts who see the Dow going to 5,000, other analysts who see the Dow going to 30,000. These are folks with some degree of education, backing their opinions, and coming with very different opinions.

Using your alternate CPI, going back to 1980 as the base year, we mention $2516 as a new high for gold, or just a match for the old high. Using a more realistic inflation adjustment, you’ve gone as high as $7,711 for gold, $565 for silver. We aren’t even talking about getting to those numbers just because we are in a hyperinflation. Those would just reflect a catch-up for the inflation already in the system. Is that what I understand that to be?

John: What you have to keep in mind, and this is true with gold, it’s true with stocks, and it’s true with the money supply, is that you don’t necessarily see an immediate one-on-one relationship here. If you go back since the founding of the Fed, the U.S. dollar, based on the CPIU, has lost somewhat in excess of 95% of its purchasing power. If you use my numbers, it has lost over 98%. In the same period of time, the dollar against gold has lost 98% of its purchasing power.

So from that standpoint, it has acted over the period of a century, as a pretty good store of wealth versus what I think the actual inflation is. You had a period of time when Americans couldn’t own gold, gold has been manipulated, the price was fixed at certain times, but you will see that the gold has been anticipating a problem here in inflation. I cannot tell you what it is going to go to, precisely, with any given inflation rate, but I can tell you it is going to go a lot higher.

Whether you get gold today, whether you got gold at $1500, or at $2000, $5000, or $10,000, it will still be a buy because as the hyperinflation hits, what will happen is that it will hit $100,000, it will hit a million, God knows what it will hit. But it’s not that you’re making money on that. What you are doing is preserving the purchasing power of the dollars that you put into gold. When we are in an active inflation market there tends to be more movement, it depends on when people will get in.

If you look at the stock market, it also is something of a hedge against inflation. So in a hyperinflation, sure, I could see the Dow at 30,000 or 100,000, but if you adjust it for inflation with the kind of economy that we are in, you would be looking at a negative return after inflation adjustment. So I am not at all a big fan of stocks, at least in this current environment.

For the foreseeable future we do not have a sound economy. We have a government that, effectively, is the elephant in a bathtub of sovereign solvency risk, and the rest of the world knows it. It is just a matter of when the markets respond, and I think we are about to do some things in Washington that will bring the problems to the fore in the global market.

David: John, just to summarize, it sounds like the economy is not in recovery. The downturn arguably began the second or third quarter 2012, what some would argue is a double dip, and the covering over the economic statistics and the distortion in the numbers, whether it is industrial production or GDP, many of these things tie back to this inflation issue, understating inflation and skewing the world around us as a result, so that we don’t really understand what is happening.

It is almost as if we are looking at the world as you could the Treasury market. It is all, to some degree, rigged, because the statistics that they use to compute growth have been rigged, themselves, and so the reality is different. It is very different. What is apparent is not real, what is real is not necessarily apparent today, and that is where an investor has to apply some degree of wisdom in anticipation of those realities coming to the fore. Is that accurate?

John: That is accurate. I would add, however, that I think the average person has a pretty good sense of reality. Again, they look at the world around them, they look at their business, they look at their community, and they find that what they are seeing is not in line with what the government is saying. Go with your gut. You are seeing the reality out there, the government is having problems reporting it in a meaningful way. They do a good job of surveying generally, but some of the underlying definitions that are designed to make things look a little better politically move it away from the common experience.

David: John, let’s go ahead and come back to this conversation as we get into 2014, maybe as we head toward the end of this year, and as 2014 represents a period of time when you see transition ahead, major transition, I think it is helpful to appreciate the social and cultural ramifications of a hyperinflation and we would like to explore those with you more as we get toward the end of the year, and look forward to your contribution to our listeners’ understanding, and the perspicacious actions which they can take in what is a truly challenging time.

Thank you, John, for joining us today and we look forward to our next conversation.

John: My pleasure. Thanks for having me.

Kevin: Boy, David. So many things were covered. But something hit me when he was talking. He said that if Greenspan had not messed with the way they look at CPI, right now the payments for Social Security would be twice what they actually are. No wonder people are running out of money before they get to the end of the month.

David: And it is also an issue because we have not addressed Social Security and Medicare, and it is almost by skewing the numbers, obviously we look at our current Social Security issue, our current Medicare issue, as unsustainable. We would have been forced to deal with this long ago if it had not been manipulated out of view. The reality is that we have a fiscal disaster ahead of us.

When we talked with John today I mentioned that Stanley Druckenmiller said that yes, this is an issue. This is a major issue. Our long-term liabilities are going to kill this country, and kill this economy. We have to address it. The kicking the can down the road has really been accomplished, in large part, by the manipulation of appearances, the manipulation of the statistics, which give us a sense of calm, give us a sense that government is in control, when in fact, they are completely out of control, and that, I think, is John’s primary concern.

We are at a tipping point as we move into 2014, 2015, 2016, where the public, national, domestic, and international, see that the king has no clothes. We have had this problem for a long time, but again, statistics have allowed us to paper over the issues. No longer, says John Williams.

Kevin: That child says that the king has no more clothes on, the child being the rest of the world. He said, “$5,000 gold, $10,000 gold, that is still a buy. You have to understand, that’s not the issue. The currency is collapsing.”

David: In the context of hyperinflation, as you go from 5-10, 10-20, 20-100, in terms of a per-ounce price for gold. Remember, an ounce of silver, in the context of the German hyperinflation, when from 1 mark to 2, to 3, to 5, to 10, ultimately into the billions of marks, and for anyone who was trying to time an exit, this is where getting out completely was not prudent.

We have always recommended a reduction strategy, not an exit strategy. Why? Because in the context of a currency extinction event, which is what a hyperinflation really constitutes, you must have insurance through the duration of that event.

Kevin: And as a reminder, we would encourage our clients to go to and look at the Hyperinflation Report. John updates that on a continual basis. And like he said, this is, in his view, an inevitable outcome.

David: As you mentioned, Kevin, there is the Hyperinflation Report, and he also just opened to the public a look at how the quality of government statistics has been compromised. If you don’t have an understanding of that, you must spend some time chewing on that issue to appreciate where we are today, and where we are going tomorrow.

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