Dec 7 2007 4:29PM
I’m interviewing Dr. Walter John Williams, we call him John. He is a PhD in economics, and the editor of Shadow Government Statistics, a newsletter that is subscribed to mostly by money managers, bank managers, etc. to tell us the truth behind the government statistics that have been manipulated by various methods of reporting. I heard him speak at the International Investment Conference in San Francisco in November, and was very impressed – I’m always impressed with someone who mostly agrees with me.
HJR: John, your following is pretty sophisticated? Right?
WJW: Yes, mostly professional investors – money managers. We publish an analysis of the government statistics: where they are right, where they are wrong, and the implications if they are wrong, which is generally the case. In fact, what has happened over the years is that changes in method-ologies have been implemented in reporting the key statistics, with the effect that economic statistics seem stronger than real growth, and inflation numbers tend to be weaker than reality, enough so that GDP (Growth Domestic Product) is overstated by three percent; the unemployment rate is really up around 12 percent as most people would look at it, and the inflation rate is now topping 11 percent.
HJR: This is very different from the published government statistics. I’ve been very interested in the inflation statistics because it has a direct effect on the investments I’m recommending, particularly gold and silver. If inflation was as low as the government claimed, that would pull some the props out from underneath the gold market.
As you know, I am a bull on inflation. I believe it will get a lot worse. I heard you say last night that you thought we are headed for an inflationary depression. I haven’t dared say that. I guess I want to be more acceptable to the world than I should, I guess. But you are unafraid because you have statistics to back up everything you say.
WJW: We already have inflation in place. The government is reporting 3½ percent inflation officially, but if you go back to the way it used to be reported before the era of Alan Greenspan and Michael Voskin, that methodology has it up around 11 percent. That is as of today (November 20, 2007). We are seeing inflationary pressures from oil and some from the money supply. The Fed stopped reporting M-3 measure of the money supply in March, 2006.
We primarily use the Fed’s numbers because they still publish most of the components, and I put together M-3 as it would be reported on an ongoing basis. Right now that is up over 15 percent. The less time you saw money grow that high was August, 1971 when Nixon closed the gold window.
The big problem with inflation is the fiscal improprieties of the federal government. Starting back at beginning of this decade, Congress mandated that the federal government publish financial statements on the government’s operations along the lines U.S. corporations have to do, using Generally Accepted Accounting Principles (GAAP). Weapons are put into inventory and expensed, and buildings are capitalized as assets and depreciated.
They also are accounting for two major items, Social Security and Medicare, in terms of the unfunded liabilities there, and the year-to-year change, discounted for the current value of money that really put forth remarkable statistics when you look at it. In 2006, the official deficit was close to $250 billion, now it is being reported as $162 billion for 2007. In terms of the GAAP statements, the way a corporation would look at it, we don’t have the 2007 numbers yet, but 2006 showed an actual deficit of $4.6 trillion. If the government wanted to balance its books, let’s say it raised taxes 200%, and took 100% of everyone’s wages, corporate profits, etc. the government would still be in deficit. It’s beyond containment from a standard fiscal approach.
The other side of it in terms of the political aspects, if you were to slash the spending that is causing the problems, you would have to severely slash Social Security and Medicare. These are the programs that are so severely underfunded. No politician would even consider talking about this; it’s political suicide. There is no feasible way to approach it by raising taxes. So effectively, the federal government is bankrupt! In terms of total obligations, it has a negative net worth of roughly $54 trillion, which is four times the level of GDP. Big governments generally do not go bankrupt. They can repudiate their debt, but the preference is to increase the money supply and pay off in very cheap dollars.
As the Federal Reserve continuously monetizes the federal debt, the rapid growth of the money supply causes rapid growth in inflation which becomes hyper-inflation. I would define a hyper-inflation when the largest currency note prior to the inflation (in this case it would be $100 bill in the U.S.) becomes worth more as functional toilet paper than as currency. Then you have a hyper inflation.
HJR: It’s not very functional toilet paper, because it doesn’t absorb water well. So it isn’t even any good for that. When I heard you speak at dinner, you mentioned David Walker, the Comptroller General of the U.S. who reported the unfunded liabilities. I wrote about him in my new book. For my subscribers, I’d like to define that term: Unfunded Liabilities means liabilities for which there is no dedicated income and no assets to support it. He said at that time that if we were to meet those obligations starting today, it would take $440,000 from every American family to do so. He was testifying before a very poorly attended subcommittee meeting of the House of Representatives. As you listen to the debates of both the Republican and Democratic parties, no one is even daring to touch on that issue. My personal opinion is that you have to be mad to want to be President, and whoever does get elected for the next four years will probably go down for 50 to 100 years as the Hoover of the 2000s, because he couldn’t stop the juggernaut.
I have also assured my subscribers that if they are now getting Social Security they will probably get it until they die. But it’s the under-50 crowd, especially the under-40 crowd, which is paying into it who will never see it, or it won’t buy anything when they start receiving benefits.
One member of our party last night that said we should simply cut government spending, getting rid of waste and stupid things government spends money on. My comment to that was that wouldn’t even begin to touch the real problem, which is the unfunded liabilities because they dwarf anything we can do to make government meaner and leaner. They are already meaner, but need to be leaner.
The problem we face is beyond the ingenuity of human leadership, but we will someday have to pay the piper with no money to pay him. I used to worry about how we could stop the government from spending money, but it isn’t the discretionary spending the government votes on every year that is the problem, it’s the automatic entitlement programs that are unfunded. Now we have a huge wave of baby boomers going into Social Security. I think now we will probably get our Social Security, but it won’t buy anything later because it will be worthless.
WJW: Howard, I completely agree with what you said; I couldn’t have expressed it better. Let me just take it a step further and that is into the hyper-inflationary depression. I contend we are already in a recession, and see the depression coming. GDP numbers have modified over the years, it’s now very difficult to reflect a recession, at least as it was traditionally defined as two consecutive quarters of negative inflation-adjusted GDP growth. In fact, the 2000 recession has been revised away by the Bureau of Economic Analysis, using that definition.
You can see this in a number of statistics. Even the growth in payroll employment, although it is over-stated, is only at 1.2 percent. Every time the growth in payroll employment has dropped below 1½ percent, you have a recession in place.
We have had a very weak economy for years primarily because of the structural changes tied to the deterioration in our trade position over the decades where significant production jobs are moved off shores; basically U.S. wealth and income has been transferred offshore.
In the 1970s, the man of the house would support his family, and the wife would stay home with the kids. Today you may have two or three people working in a family to try to make ends meet, and they can’t keep their income growth up with the pace of inflation. That is being partly reported by the government, and it is worse than the government is reporting because they understate inflation.
HJR: Whoever comes up with the current inflation numbers has never bought a tank of gas, never had a medical problem, etc. Everywhere you turn, the things excluded from this data are the things real people have to deal with.
Let’s move to what we should do about this on an individual basis. Your letter is written for institutions; my letter is written for the average middle-class American, not even for Wall Street investors, although a lot of them subscribe.
The only inflation hedge that has always worked is gold and silver. We are in a commodity bull market, and I’m sure there are a lot of other kinds of mining stocks that would be profitable during that time, but the average guy can’t have a couple of tons of copper dumped on his porch, which he would have to do if he bought a copper contract. But he can go to a coin dealer and pick up gold and silver bullion coins and take them home.
By a process of elimination, that is what I have concluded. If you are more sophisticated, there are some things you might do that don’t include gold or silver, but gold or silver is the safest best of all.
WJW: You weren’t kidding that you like people who agree with you. Indeed, gold is the primary hedge and there is where the average person should have his holdings. Bullion coins are the best bet. They are portable and liquid.
HJR: I watch the TV financial interview shows, and everyone is worried about the falling dollar relative to other currencies. They suggest lots of ways to hedge, but they ignore gold, as Wall Street always does. The safest best is to go to a coin dealer and buy some gold and silver coins, and keep it simple. At this conference here in San Francisco, there are more than 300 gold-mining companies, and they all have great stories. A lot of people are trying to figure out which one is going to be the big hit, which one they should buy.
The odds are about five to 95 against them when they do that. If you want to invest in gold or silver-mining stocks, put a list of them on the wall, throw darts at them, and invest in the holes; buy ten and create your own little mutual fund. The odds are then that you might catch a big one.
In the last bull market in the ‘70s, the ones that performed the best towards the end of the bull market were the holes in the ground surrounded by liars, because they didn’t have any numbers to define their growth possibilities. If you know a lot about a company, then you’re somewhat limited about what the price can be, but the holes surrounded by liars have no limitations. So keep an eye on them. But that is towards the end of the bull market, if there is an end to this bull market.
By Howard Ruff
The Ruff Times
Howard J. Ruff, the legendary author and financial advisor, has remained in the public eye for more than a quarter of a century. He is founder and editor of The Ruff Times Financial Newsletter. This E-Letter is appeared in the December 7, 2007 issue of The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio. (You can learn about it here). The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world.