Hold On To Your Hats - Taking Hyperinflation For A Test Drive - Interview With John Williams

John Williams is a private consulting economist with over 25 years of experience. He runs the website Shadow Government Statistics, which keeps alternate measures of economic indicators like unemployment, money supply, the Consumer Price Index and others. John seeks to keep the government honest by maintaining the rigorous statistical methodologies he believes they have abandoned.

John had a conversation with Benzinga’s Alex Schiff about Alan Greenspan, hyperinflation and the economic Armageddon to come.

This interview is available as an episode of the Benzinga Podcast.

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Q: Can you tell our listeners about ShadowStats?

A: I am trying to bring to the public's attention how a broad series of economic reports, specifically the Consumer Price Index, unemployment, and the Gross Domestic Product have strayed from common perception over the years due to methodological changes. I try to put forth an economic perspective that is accurate as possible and free of hype.

Q: What can you tell us about last month's jobs report?

A: The gain was primarily driven by the hiring of temporary Census workers. Come June, we will see a substantial contraction in the payroll numbers. It is a temporary distortion. If you look at the numbers excluding the Census workers, payrolls only gained 20,000 jobs for the month. In many ways, the numbers are misleading. The biases that have been built in over time have tended to put upside strength into the employment figures and GDP figures and put a downside bias into the inflation numbers. We are heading into an intensified downturn here. We are not in a recovery.

Q: Do you think the economy has resumed growth?

A: No. I think the economy fell off of a cliff, then it flattened out, and now it is about to fall off of another cliff. There was a little bit of a bump from some short term stimulus effects, but nobody from the standpoint of the government or the Federal Reserve has done anything that addresses the fundamental issues outside of consumer liquidity. The average household is not staying ahead of inflation. Unless income grows faster than inflation, there is no way that you can have sustained economic growth. One of the temporary fixes to this problem, which has been around for awhile, is through debt expansion.

One way that Alan Greenspan was able to stimulate the economy when he was Fed Chairman was to encourage and stimulate debt growth. What you have seen over much of the last decade or so, is that most of the economic growth has been driven by debt expansion. Now you have had a collapse of debt expansion. Consumers cannot borrow, they cannot increase their borrowing much on average, and their incomes are not growing. Therefore, economic expansion is not going to happen. The reason I am saying that we are in a downturn now is because there are some fairly good leading economic indicators and one of the best ones is M-3, which the Federal Reserve stopped publishing a couple of years ago. M-3 is one of the broadest measures of money supply and liquidity.

I still track M-3 for ShadowStats as most of the component numbers of M-3 are still made available by the Fed. If you look at the inflation adjusted year over year change in M-3, when that turns negative it is as sure a signal as you will ever get for a downturn in the economy. Very simply, if broad liquidity is contracting the economy will contract as well. You strangle the economy. People cannot spend money that they don't have or that they can't borrow. M-3 went negative on an inflation adjusted basis, year over year, in December of 2009. There is a lead time here - six to nine months - and we are in that time frame right now.

The numbers going forward are generally going to be disappointing to market expectations. This has terrible implications for a number of factors such as the federal budget deficit. We are going to see economic contraction as opposed to expansion, which means the deficit will become a lot worse. There will be continued problems, and whether the federal government is forced to bailout states that are in bankruptcy, or put forth new employment programs, or even re-enact the politically unpopular support of the banks, it will further negatively impact the budget deficit. The next step is for the U.S. Dollar to weaken significantly, and that in turn will become inflationary. As the dollar weakens, oil will move higher. Oil is the dominant commodity in our economy in terms of the cost of things. As oil prices rise, inflation will also rise. Inflation will not be driven by economic strength, but rather monetary distortions.

Q: So you see more of a commodity driven inflation, much like the 1970s?

A: That is the early part of what comes ahead for us here. Oil prices have pulled back as a result of the recent European crisis, and the corresponding strength in the dollar. The problem long term, however, is that the U.S. is really the elephant in the bathtub in terms of sovereign solvency. Its not solvent. We are at this point long term bankrupt and I don't see any way of avoiding the traditional cure that country's take when they can't meet their obligations, and that is starting up the printing presses and printing up the cash that is needed. I see a hyper inflation down the road.

Q: So you believe that we are absolutely headed towards a hyper inflationary scenario?

A: Yes. Its just a matter of time. The deficit is unsustainable and really uncontainable. What needs to be done in order to bring the system into balance is to slash Medicare and Social Security. But no one has the political will in Washington D.C. to do that. Investors will begin selling dollars and dumping dollar denominated assets. Foreign central banks and domestic citizens will become increasingly reluctant to buy Treasuries. We will end up in a circumstance where the Federal Reserve will have to step in as the buyer of last resort, monetizing the debt, and that in turn will eventually trigger hyper inflation.

Q: Your viewpoint is underrepresented in the mainstream media. Do the mainstream commentators just not see it coming or do they just not want to say it?

A: There are a number of people who see it. The general argument against what I am saying is that the government really can change the system, therefore, you don't need to account for it and the government will take care of it at some point in time. I talked to people in the prior Administration, and this has been an ongoing problem for a long period of time. Their general response was that the problems were too far in the future to worry about. That is the kind of response that you get from Washington.

Q: What can investors do to protect themselves?

A: The best long term inflation hedge is gold. I would recommend physical gold, sovereign gold coins. You don't have to have all of your assets in gold. You can have some silver, and foreign currencies. I like the Swiss Franc, and the Australian and Candian dollars. I think that the hyper inflation will take place primarily in the United States.

Q: Now that we have the heavy questions out of the way, this last question we ask all of our guests on our podcast. Benzinga is a very fast growing, but still quite young company. If you could offer Benzinga one piece of advice for the future what would it be?

A: The fact that you are talking to me, shows that you are open to giving your readers non-consensus viewpoints. I would certainly continue to do that. I would be inclined to avoid the Wall Street hype.