 Ruff Interviews Walter
John Williams
By Howard Ruff
The Ruff Times
Dec 10, 2007
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 3 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 1 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.
Howard Ruff
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