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Warning From a Real World Economist

 

By Tom Dyson     
June 29, 2006

 

John Williams is an economist. Not the academic sort, mind you. He works in the real world.

Imagine how valuable accurate economic forecasts would be to a large company. Business decisions would be so much easier. Thinking about a new factory? Here’s what your sales and profits are going to look like next year. Want to borrow ten million dollars? Here’s a chart of next year’s interest rates. You’d save a fortune.

This is what John Williams does. Companies hire him to predict economic statistics like interest rates, inflation and growth.

Tough job, I’d say.

Williams is a private consultant with his own business. If he gets his forecasts wrong, he doesn’t eat. Simple as that. His reputation is everything. There’s no academic theory in Williams’s work. It’s being right that counts.

Lucky for Williams, he’s good at what he does: he’s been in business for twenty-five years now.

Be warned – what you are about to read may shock you. We present this view to provoke thought and to challenge mainstream opinion.

A couple of weeks ago, a friend sent me the transcript of an interview with John Williams. He wrote: “Tom, if you don’t read anything else this week, read this.”

To be a successful economist, you have to use government statistics. Government stats are an economist’s bread and butter. The thing is, according to Williams, you can’t take them at face value. Governments massage their statistics for political reasons. So in order to make accurate predictions, you have to know how the government puts its numbers together.

John Williams has dedicated twenty-five years to this dismal task. 

“The longer I’ve looked at the numbers and the statistical series as they’ve evolved over the decades, the more that I’ve started finding things in the numbers that most people do not see.”

What has happened over time is that the methodologies employed to create the widely followed series… such as GDP, the CPI and the employment numbers, all have had biases built into them that result in overstating economic growth and understating inflation.                 

Real unemployment right now – figured the way that the average person thinks about unemployment, meaning figured the way it was estimated back during the great depression – is running about 12%. Real CPI right now is running about 8% And real GDP probably is in contraction.”

Williams says these adjustments occurred in very tiny steps over the years. As far as he’s aware, the first major adjustment was made during the Kennedy administration when they stripped out discouraged job seekers from the unemployment statistics. Adjustments have showed up in every administration since.

The Consumer Price Index gives a good example. “All in all, if you want to peel back changes that were made in the CPI going back to the Carter years, you’d see that the CPI would now be 3.5% to 4% higher. The difference that it makes is significant: if the same CPI were used today as when Jimmy carter was president, social security checks would be 70% higher.”

So far, none of this will come as much surprise to you. Everyone knows politicians fudge the numbers. But here’s the point I want to make:

For the last 25 years, Williams has trawled through all the Federal government’s reported figures, statistics and financial reports. He’s untangled their adjustments, redefined their fixes and reversed their exclusions. He’s even built a business on his reputation for accurate forecasts.

At the end of everything, Williams comes to two conclusions, one good and one bad.

The bad news:

The federal government is absolutely broke. And not just broke, but on the hook for trillions dollars it will never have.

So far they’ve managed to hide the problem by selling the debt to foreign investors and massaging the numbers. At some point in the next ten years he says – when enough people realize what happened - the whole smokehouse will go up in flames. When it does, investors will dump their U.S. securities. Financial institutions will fail. The Fed will print more money and the market will spiral into some sort hyperinflationary depression the likes of which has never been seen.

The good news:

If we’re able to protect our assets through the rough times ahead, we’re going to see some of the greatest investment opportunities in history. 

Here at DailyWealth, we take Williams’ warning with a pinch of salt. Others may take it more seriously. It doesn’t matter. The investments Williams would use to protect himself from the financial Armageddon he predicts are the exact same investments we write about every day: Natural resources, rare collectibles and precious metals.

He sees a financial meltdown; we see a young bull market in real asset investments. Same result.

Good investing,

Tom Dyson

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