Source: JT Long of The Gold Report (11/28/11)
Among the specters lurking in ShadowStats.com's Editor John Williams'
gloomy outlook for the U.S. are the demise of the dollar, hyperinflation
and the ongoing lack of political will to take sound corrective
measures. Still, as he tells
The Gold Report in this exclusive
interview, investors have options. Williams contends that turning to
gold, silver and strong foreign currencies would protect wealth and
position savvy investors to take advantage of extraordinary
opportunities likely to flow out of the turmoil ahead.
The Gold Report: When we talked in May, you predicted that
hyperinflation could be a reality as soon as 2014, something you
addressed at length in your
Hyperinflation Special Report. Have six months of euro debt crises, Middle East revolts and U.S. Treasuries' downgrading altered your outlook?
John Williams: Not
a bit. We still seem to be moving down that road to a relatively
near-term break toward hyperinflation. The most important thing that's
happened since we last talked was the global response to the U.S.
legislators' negotiations over the debt-limit ceiling and the deficit
reduction problems at that time. Clearly, no one controlling the White
House or Congress was serious about addressing the nation's long-term
solvency issues. That sparked a panic sell-off on the dollar against
currencies such as the Swiss franc, and of course gold, which made the
gold price rally sharply.
TGR: Did the politicos learn anything from those "negotiations," as you just described them?
JW:
Not at all. In fact, I'll contend that everything that's happened since
then has been just a playing out of what resulted in a complete
collapse in global confidence in the dollar. The ensuing rapid shift of
market focus to crises in the euro area was really more of a foil to
distract the global markets from the dollar. Following that horrendous
performance by Congress and the White House, the global markets
indicated a major loss of confidence in the dollar that had been coming.
I think that's now established and in place. The dollar is doomed to
lose its reserve status eventually, and any day now, we may see things
heat up again over the deficit negotiations.
TGR: What steps would we see on the way to the dollar losing its reserve status?
JW:
Probably the biggest thing would be heavy selling pressure against the
U.S. dollar, along with a spike in the stronger currencies such as the
Swiss franc. The more the pressure builds for selling of the dollar, the
more expensive and disruptive it will be for the Swiss National Bank to
keep supporting the euro so I don't think that intervention will last
long.
As heavy selling of the dollar develops against the Swiss
franc, the Canadian dollar and the Australian dollar, and the gold price
rallies, we'll see a very strong effort by those who are dependent on
the dollar--such as the Organization of the Petroleum Exporting
Countries (OPEC)--to have the dollar removed from the pricing of oil.
Along with that will come a movement to change the dollar's reserve
status.
TGR: If other countries start demanding payment in
alternative currencies, how can investors protect themselves against a
shift from the dollar standard?
JW: I'm not a day-to-day
timer in this. My outlook has been consistent that we're heading into
U.S. dollar hyperinflation, and the effective purchasing power of the
currency as we know it will disappear. If you're living in a U.S.
dollar-denominated world, you don't want to be in dollars--you want to
move to protect the purchasing power of your assets, your wealth.
To
do that, I look very specifically at physical gold, preferably gold
coins and silver, and assets outside the U.S. dollar. The currencies I
like the best are the Swiss franc, the Australian dollar and the
Canadian dollar. This is something you do for survival over the long
haul because you're likely to see all sorts of volatility in the short
term.
But once you ride through the storm, if you've been able to
preserve your wealth and assets in terms of their purchasing power and
to maintain liquidity--which the physical gold and the currencies will
give you--you'll be in a position to take care of yourself and take
advantage of some extraordinary investment opportunities that likely
would flow out of the turmoil ahead.
In the interim, I wouldn't
start betting that next week we're going to see the dollar do this or
that. This is a long-term hedge strategy, an insurance policy against
the hyperinflation that I view as inevitable due to the long-range
insolvency of the U.S.
TGR: Is that long-range insolvency also inevitable?
JW:
Severely slashing social programs such as Social Security and Medicare
would be the only way it could be avoided. I don't have any problem per
se with Social Security or Medicare, but you can't bring things into
balance without addressing them. If you look at the U.S. annual deficit
on a GAAP basis--generally accepted accounting principles--with
accounting for the year-to-year change and the net present value of
unfunded liabilities in Social Security, Medicare and such, you're
seeing a federal deficit in excess of $5 trillion per year.
Putting
that in perspective, if you wanted to raise taxes, you could take 100%
of people's salaries and the government would still be in deficit. You
could cut every penny of government spending, except for Social Security
and Medicare, and you'd still be in deficit.
You can't escape
the eventual hyperinflation if those programs are not addressed.
Originally, I was looking for hyperinflation by the end of this decade.
I've advanced it to 2014, and it may well come before that. I think
we're already in the early stages of going through what has to happen
for this to break.
TGR: But would politicians touch those entitlement programs in an election year?
JW:
No one wants this, but the federal government and the Federal Reserve
have backed us into a corner and there's no other way of escaping.
There's no political will to address the long-range insolvency, so they
kick the proverbial can down the road. They did that in 2008. They did
everything they could to prevent a systemic collapse by creating,
spending and guaranteeing whatever money they had to.
We're
coming to another point where we face risk of systemic collapse, and
we're likely going to see another round of quantitative easing (QE) as a
result. That also could pull the trigger for massive dollar selling,
moving us into much higher inflation. That will start the final process.
TGR:
One of your recent newsletters showed that annual core inflation had
risen for 12 straight months, ever since QE2. What would QE3 do to some
of the indicators you watch--gold, silver, commodities?
JW:
Gold tends to anticipate the inflation problems. All sorts of factors
hitting gold create tremendous volatility, but generally it will
continue to move higher as the broad crisis deepens. Then as we get into
the high inflation, it will start soaring. People have to keep in mind
that they're preserving the purchasing power of the dollars that they
put into gold. If gold gets up to $100,000/ounce (oz) as you start
breaking into the hyperinflation, and they bought gold at $2,000/oz, it
isn't that they made $98,000 per ounce. Instead, they've maintained the
purchasing power of the dollars they put into gold.
They've also
lost the purchasing power of the dollars that they didn't put into gold
or some other hard asset. That's a different view than most people look
at with investments, but this is not a normal investment environment.
Again, this is one where you batten down the hatches and look to
preserve wealth and assets, as opposed to trying to make money day to
day in the markets. Once you have your basics covered, then you take
gambling money and go play Wall Street's casino.
As to core
inflation, the Fed likes to ignore energy and food prices, using the
rationale that those prices are too volatile and don't hold over time.
Yet, oil is probably the most important single commodity in terms of
domestic inflation. Not only does it hit basic energy costs, but it also
affects the cost of transportation of all goods. Beyond what is defined
as basic energy costs, oil is also the basic raw material for many
products, ranging from chemicals to fertilizers to pharmaceuticals and
plastics.
As oil prices rise, the Fed just takes out the energy
component in so-called core inflation. But the inflation still spreads
to the broader economy. When they started to jawbone on QE2 in October
of 2010, year-to-year inflation on a core basis was at 0.6%. In the
consumer price index reporting of October 2011, despite a drop in the
gasoline prices, core inflation was at 2.1%. In response to QE2, gold
rose against the dollar and the dollar weakened against other
currencies. The weaker dollar, in turn, spiked oil prices. The higher
oil prices spiked gasoline prices and broader inflation, which still is
boosting consumer inflation in the U.S.
With the next round of
Fed easing, the dollar problems will intensify again. That will put new
upside pressure on oil and gasoline prices, further intensifying the
spreading broad inflation pressures in consumer goods and services.
The
Fed's mandate from the government is to try and sustain reasonable
economic growth and contain inflation. From the Fed's standpoint,
however, those are secondary to maintaining the solvency of the banking
system. Nothing in the outlook for the system has changed meaningfully
since the crisis in September 2008. The banking system still is in a
solvency crisis, the economy continues to worsen and we've had no real
recovery. The stopgap measures to prevent collapse of the system did
nothing but kick the crisis a little further into the future, and now,
we're coming to peak period of crisis again.
TGR: You've
repeatedly said that the global economic crisis is not Europe's fault
but part of a pending systemic collapse that started with the
manipulation of the U.S. financial markets--the moves you've been
talking about. What countries or sectors will suffer the most if the
crisis continues?
JW: The more closely they're tied to the
dollar, the greater the inflation impact will be in other areas, but
the runaway inflation I'm talking about will be largely in the U.S. and
for people living in a U.S. dollar-denominated world.
That's from
an inflation standpoint. Yet, it also will have an extremely negative
impact on the U.S. economy, and problems in the U.S. economy indeed will
have a global impact. The U.S. economy is still the largest in the
world, and you can't push it deeper into a depression without having
negative economic consequences outside the U.S.
But while the
global economic problems will worsen, systems can ride out bad
economies. We can't ride out a hyperinflation because the currency
becomes worthless. That's an ultimate crisis that forces a resetting of
the system.
TGR: Can Europe or China do anything to counteract what's going on in the U.S.?
JW:
Dump the dollar. China needs to delink from the dollar, and it will be
forced to do so. It's importing inflation. If China doesn't want that
inflation problem, all it has to do is cut its link with the dollar, and
oil suddenly becomes a lot cheaper.
TGR: But how practical would it be for China to sell off all the U.S. dollars and U.S. Treasuries it holds?
JW:
In terms of insulating itself against U.S. inflation, all China has to
do is delink its currency from the U.S. dollar. That's true of other
currencies as well. The Swiss franc is artificially linked to the euro
now, but because of the general weakness in the dollar, it's ironically
also intervening to support the dollar against the euro.
Whenever
major holders of dollar-denominated assets decide to sell those assets,
that will determine how large a loss they will take on the U.S.
currency.
TGR: Will the euro survive?
JW: I
wouldn't bet on a long-term survival of the euro, but I think it will
survive the current crisis as long as its survival is needed to prevent a
systemic collapse in the U.S. The Fed will do whatever it has to do to
keep Europe's problems from imploding the U.S. banking system. It can
create whatever money it wants to do that.
Long term, I would not
look at the euro as surviving in its current form. The loss of the
dollar eventually will force a reexamination of the global currency
structure. That might be a time when other currency disorders get
resolved and we may see the euro break up. It was never practical to
think that all the countries within the euro would be able to align
their economic and fiscal policies in a way that would enable them to
operate together. The euro was doomed from the beginning.
TGR:
Let's go back to gold. According to your research, the September 2011
high of $1,895/oz gold was below the historic high of $850/oz in 1980,
if the 1980 figure was adjusted for inflation. The $850/oz in 1980 would
have equaled $2,479/oz in Consumer Price Index--all Urban consumers
(CPIU)-adjusted dollars, or $8,677/oz Shadow Government Statistics
(SGS)-alternate-CPI-adjusted gold prices in 2011. Is gold underpriced if
you put it into that context?
JW: On that basis, yes, it
is. It also depends on when you measure it. My hyperinflation report
looks at what has happened to the dollar over a longer period. Since
President Roosevelt took the U.S. off the gold standard domestically in
1933, the dollar has lost 98--99% of its purchasing power. People tend
to forget that. But if you look at the gold price movement since 1933,
it actually has moved a little more than the government-reported pace of
inflation. My estimate of what inflation should be if we had consistent
CPI reporting shows that the loss of the dollar's purchasing power
against gold is the same as it is measured by the CPI.
So over
time--and this is true over millennia--gold tends to maintain purchasing
power, which means it holds its value net of inflation. Not that you'd
break a piece of gold down to a small enough unit to buy a loaf of
bread, but if you did, it also would have bought a loaf of bread in
ancient Rome.
TGR: For the same amount of gold.
JW:
Same amount of gold. Gold has a long tradition as store of wealth.
That's why--globally--gold generally has been viewed as such. It only
got bad press in the U.S. because private ownership of gold was outlawed
after Roosevelt's action. It became legal for Americans to own gold
again after Nixon abandoned the international gold standard. Yet, even
today, some on Wall Street discourage investment in physical gold,
largely because they cannot make a commission on it, as they do with
stocks and bonds.
Given the gold ownership limitations after
1933, those in the U.S. who wanted to buy gold turned to buying gold
stocks. But because of what happened in the 1930s--that's now two
generations or so ago--gold as an investment and as a hedge to protect
wealth lost some of what had been its commonly recognized value in the
U.S. Outside the U.S., almost everyone views gold as a traditional
hedge.
TGR: That's physical gold. What about
exchange-traded funds and gold equities in the juniors? Will those
investments also preserve wealth?
JW: I wouldn't count on
the financial system working as it should. I look at physical gold,
preferably sovereign coins, not only as a store of wealth, but also for
purposes of liquidity.
Gold stocks also should preserve wealth
over time, but I would look at them as longer-term holdings. There could
be periods of systemic failure with resulting interim liquidity issues.
TGR: You talked about hyperinflation coming as early as
2014, or even before that. But 2012 is just weeks away. What can people
expect next year in terms of the data you watch and maintain versus some
of the government-issued statistics?
JW: I can tell you
that the economy is weaker and will remain weaker than the government
reports. We don't have an economic recovery in place. We'll tend to see
higher inflation.
TGR: Something to watch out for. Thank you, John.
Walter J. "John" Williams
has been a private consulting economist and a specialist in government
economic reporting for 30 years, working with individuals and Fortune
500 companies alike. He received his bachelor's in economics, cum laude,
from Dartmouth College in 1971 and earned his masters in business
administration from Dartmouth's Amos Tuck School of Business
Administration in 1972, where he was named an Edward Tuck Scholar.
Williams, whose early work prompted him to study economic reporting and
interview key government officials involved in the process, also
surveyed business economists for their thinking about the quality of
government statistics. What he learned led to front-page stories in the New York Times
and Investor's Business Daily,
considerable
coverage in the broadcast media and a joint meeting with
representatives of all of the government's statistical agencies. Despite
a number of changes to the system since those days, Williams says that
government reporting has deteriorated sharply in the last decade or so.
His analyses and commentaries, which are available on his ShadowStats.com website, have been featured widely in the popular domestic and international media.
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