CW 251: Factual Distortions in Governmental Reporting of Economic Data with John Williams

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Who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors. Welcome to the Creating wealth show. Thank you so much for joining me. This is your host, Jason Hartman, and this is episode number 251 with we've got a great show for you today. This guest that we have is famous. Many of you have heard of him and he is none other than John Williams of the famous website shadowstats.com which for many, many years now has been debunking government statistics and really telling us the real story behind them. A lot of very credible people use his website and I think you'll find the interview to be quite interesting. So a couple things before we get to that. First of all, I keep forgetting to mention this, so I'm going to mention it on this show. Podcasts are such a great med for both the producer and the host, yours truly, and you the listener, because they are asynchronous. So I can produce them when it's convenient for me. You can listen to them when it's convenient for you. It is a beautiful, beautiful thing. It's the same as email being asynchronous, text messaging being asynchronous, versus the olden days when we used to actually talk on the phone. Remember that? That is synchronous communication. And synchronous communication, of course, requires both or all parties to be there at the same time. But one of the things that we miss out on with podcasting because it is asynchronous is we miss out on the opportunity to take calls like a radio show. And I get a lot of calls from listeners and our investment counselors, of course, get lots of calls from you listeners and we try to help you as best we can with all of the various issues that are involved in our investment careers and our wealth creation plans. But it would be great to have call ins for the show. So I thought, well, maybe we should, should do some live shows from time to time. And then I thought that just blows the whole idea of being asynchronous and the convenience of that for both you and I. So I thought let's do this instead. If you want to call and talk to me, we will record the conversation just like on a radio call in show. And if you want to have some of it off the air, so to speak, not recorded, we can do that. And you don't have to divulge too much information. Just assume it's like any live radio show with a financial advisor, whether it be Rick Edelman or Dave Ramsey or whatever, where people call in and I will do the same thing. We'll record the conversations and then we will play them on a later podcast. So you know, just mention your first name, be somewhat general about the information you give and I'll be glad to answer your questions and we will play them on the show. So what is the number you ask to call in to call into the show? Well here it is. Write it down. It's 949-200-8009. Again, that number is 949-200-8009. That will be the call in number. You can talk to me and we will play your spot on a future show. One of the great things about questions and you know when we held our Meet the Masters of Income Property Investing event a couple weeks ago, when you have a question it's usually the same question many, many other listeners have. So you're actually being a great contributor to the show and the richness of the show and the content for other people when you call and ask questions and get them answered because many other people have the exact same questions. This is different of course from posting a question on our Facebook page where it's only a one way conversation and many times you sort of answer the question or you need clarification etc. So please use the call in number and we will play it on future shows. So a couple of news items before we get to John Williams, our Guest today from Shadowstats.com first of all, you're going to love this one folks. Bank of America. Yes, bank of America may well be the most hated company in America or at least possibly the most hated bank in America. Well guess what, they just gave their CEO a big fat raise at shareholders expense. Bank of America gave its CEO a pay package worth $7.5 million last year. That's six times larger than in 2010. The raise came while the company's stock lost More than half its value. And the bank lost its claim to be the biggest bank in the country. So again, remember, you know, in the Creating wealth home study course or in the Creating Wealth Live seminars that I do, the Creating wealth in Today's Economy boot camp, I share some interesting snippets from Lou Dobbs, great book, War on the Middle Class. And we talk about how the shareholders are getting completely burned while the executives, the board of director, the CEO and all the other C level employees are making out like bandits as they are basically screwing the shareholders out of their money. So here's a great example of that. Bank of America, the CEO gets a huge raise and I'm sure the board of directors and all of the C level employees, the coo, all the other C level people, all the other execs got big fat raises. Well, the company's stock lost half its value. So Brian Moynihan, his pay package included a $950,000 salary, $6.1 million in stock, and $420,000 in use of the company's private jet and tax and financial advice. Again, what a total scam in this economy. Six times larger than in 2010 as the company's stock lost half its value. Now listen, I'm a capitalist. I wouldn't mind if Moynihan got a big raise if the shareholders were getting a commensurate return on their investment and also the taxpayers, because of course B of A took lots of bailout money. And don't be fooled by when you hear that this bailout money has been paid back. Folks, it's never that simple. There are so many little dealings under the table that are going on with that. I've read lots of articles about that. V of A may pay back the bailout money from TARP and the other omnibus bailouts, but at the same time, what they do is their various counterparties, the people who are in business with them, they get bailout money and they don't pay it back. This is like the way Enron. It's basically similar to the way Enron. Remember good old Enron, the way they use those SPVs. Remember hearing that term during the Enron debacle days? SPVs are special purpose vehicles. They would set up other entities just to hide and bury losses so they could lie about their income. And this, this whole bailout payback stuff, it's the same basic scam as that from what I've read and understood. Okay, John Burns, the real estate consultant, we had him on the show, I believe if memory Serves me correctly. That was like show number, episode number 133 or something. John Burns is out with interesting things. He has a Burns Home Value Index. And his latest newsletter said home prices have been rising for three months, but nobody has been telling you. And it says that over the last three months, prices are up in 90 of 97 markets they analyze. The average price increase over the last three months was 1.1% or a 4.5% annual rate. Now, you know what's interesting about that, just right there, folks, is that S and P K Shiller, the most widely used index, ridiculous S and P. I don't like S and P. Okay? I really need to get someone on the show so I can debate the whole subject with them. But they only do 20 markets and this is only 90 of 97 markets they analyzed. And again, we're in a country where we've got 400 markets. All real estate is local. So again, much more comprehensive right here than Case Shiller by a factor of five. So right there it tells you a reason that it's so important. But one of the interesting things here is when you look at these statistics, they're. They are always lagging so much. And really, Burns goes on to explain it. I've talked about it on the show previously, but he says, why are prices of other indexes so far behind? Well, the Burns Home Value Index calculates home dip values based on prices as they are set. And remember what they mean. There is, and this is my commentary, they are set because the ultimate appraisal on a property is what is known as a meeting of the minds. When a buyer and a seller come together and form an agreement in a free market capitalist system, that is the real value right there. That is the most accurate appraisal you'll ever have. You can have 10 different appraisers go out there and give a completely different opinion. But a knowledgeable buyer who shops around and a knowledgeable seller who wants to sell their property and understands the competitive forces going on in a free, open, capitalist marketplace. Those two parties, when they come together and have a meeting of the minds, that is the holy grail of appraisals, folks, right there. So what he talks about here is nearly all other indexes are based on purchase transactions. When they close, which is typically about two months after the purchase contract was negotiated, then it takes one or two months for that closing price data to be reported or compiled and reported. And the slowest index of them all is good old S and P Case Shiller, which is about Four to six months behind the eight ball. So when you read those statistics in the widely quoted media and the Wall Street Journal wherever, you're basically looking at stuff that happened four to six months ago. Usually at least five or six months ago. Usually. So you got half year old data and again S and P. Only 20 cities, I mean ridiculous, totally incomplete. Only 5% of the overall market in the United States of America. Totally ridiculous. Folks, you know I've been talking about how we have been struggling, strugg struggling. The biggest problem in my business the last several months has been lack of inventory. Lack of inventory. Well, I am so happy to report that we have had a slight break in inventory. We've got some good inventory again on our website. This just happened in the last five or six days really A couple of my favorite markets now, Atlanta, St. Louis, if you look in those markets, you go to Jason hartman.com, you look at the properties section, you will see right now in say Atlanta for example. And I'm going to sort these properties just based on the status of the property. And what do I mean by status? Well, I mean what is for sale, what is in escrow, what is closed, what is sold, etc. And if you see we have got 1, 2, 3, 4, 5, 6, 7 properties, that's again not much. Okay, but seven properties right now in the greater Atlanta market where we have got good ROI projections on these properties where you can get 20% plus in many cases on ROI, in some cases 30% plus annual projections. You'll see these are very conservative assumptions we use and I talked about that on prior shows. So again, go to the website, talk to your investment counselor at my company and we will be happy to help you folks. It's the curse. We as middlemen brokers have our referral network. We either have too many buyers and not enough inventory. That's the problem we have nowadays. Or the most common problem over the past couple of years has really been we'd like more clients, more buyers and we've had nice supply of inventory. So again, it's never just right, it's never a perfectly balanced thing. But right now, in the past just five or six days, I am very happy to report we have had some good increases of inventory and a lot of this inventory is exclusive to us. You won't find it anywhere else because I am financing the deals and other clients of ours are financing the deals for our providers to go and buy and rehab those properties so that they can provide them to you. I've been on our local Market specialist in every market. You know, we deal in many markets across the country to really, really provide inventory. It's been our biggest challenge over the last few months. Okay, interesting article here on Poor Richard's blog. Poor Richard, of course, that refers to Benjamin Franklin, right? If you remember. Well, talking about economic collapse and really collapse of the dollar. Collapse of the dollar really would be in many ways good for us as investors if we're following the plan that I've outlined on prior shows. Because what does that mean? Well, what it means to us, of course, is that we want to denominate all are liabilities in dollars or in any currency that is being debased or that is deteriorating in value. And the dollar is one of those. Now one of the important things to understand is that because the US dollar is the reserve currency of the world, there's certainly a movement away from that. And I'm going to share a couple of those points in this article here. But because it is the reserve currency, when transactions occur in international trade around the world, they need to be denominated in dollars because we are the reserve currency. And what that does is it causes the dollar to be artificially strong. Well, why is that? Well, think about what happens here. If you're trading oil, if say Brazil is trading oil with, gosh, give me an example, France. So Brazil is trading oil with France, for example, and they both have currencies that are not the dollar, obviously, but they need to exchange that transaction into dollars in order to conduct international trade. And what does that do? It sucks up dollars. Dollars are always in demand. And currency, just like any other commodity, is governed by the laws of supply and demand, the most basic fundamental laws of economics. Supply and demand. If you know nothing else, just know supply and demand, because that tells you most of the story. There's more to it, of course, but supply and demand is the most fundamental rule of economics, obviously. So as these dollars are soaked up for international trade to occur, it artificially strengthens the dollar more so than it would be strengthened if it were not the reserve currency of the entire planet. So what does this mean to us? Well, we've got this artificially strong dollar, right? And there are many people in the US who think that it would be good to see the dollar decline in value, not just US investors who pile up long term, fixed rate, investment grade debt against packaged commodities, of course, my term. Because then we take advantage of what I call inflation induced debt des and we've got the commodities that are traded globally, okay, the supplies, the building materials, that build houses and apartment buildings, the sticks and the bricks, so to speak. And then we've got the dollar that is depreciating in value and we financed it at 30 year fixed rates that we won't pay off until 2042 if we borrow it today. And this is a beautiful thing because our debt is constantly being attacked by the devaluation of the dollar or by inflation, whichever way you want to look at it. So in this article it talks about 10 reasons why the reign of the dollar as the world's reserve currency is about to come to an end. And I'll just share with you a few of these 10 points, or maybe all of them, depending on how quickly I do this. Okay, number one, China and Japan are dumping the US dollar in bilateral trade. Well, they're not the only ones, folks. There's a lot of movement of other countries. And why would they do this? Well, in one way, it's a way to, you know, sort of stick it to the man. And when I say the man, I mean in this case being America. Right, The US. And it's also a way to protect oneself as other countries protect themselves against the radically ridiculous, irresponsible spending that the US government engages in. You know, Ronald Reagan said to say that the, that the US government spends money like a drunken sailor would be an insult to drunken sailors. Reagan was so great in his humor and his wit. Right, but he's right. I mean, just in the past, what, three years since Obama has been president, we've racked up what, another $4 trillion in debt? I mean, this is insanity, folks. It's completely insane. It's ridiculous. But again, as we talk about on the show, we can exploit the heck out of this as investors. Okay? So it's not all bad. Philosophically it's bad. But with our plan, we're going to make it work for us. It's going to hurt most people, but it's going to help us. Number two reason, the brics. What are the brics? Brazil, Russia, India, China, South Africa. Okay, the brics plan to start using their own currencies when trading with each other. So the five major emerging economies of the brics, okay, they are going to use their own currency and they are going to see a lot of pressure from the US government because think about it, the US government wants to perpetuate its irresponsible scam, right? Or I'll be nicer and I'll say scheme or something. Be nicer than that, I'll say plans. How's that so they don't like this. The US Government does not want countries to trade outside the US Dollar. And so they're going to pressure these countries through economic hit and men, military pressure, maybe trade pressure, etc. Etc. To use the dollar. But the fact is, we will see who wins the game. It's going to be an ongoing battle, in my opinion. Okay? It's not going to be like these countries are going to suddenly be able to trade in other currencies. The US Throws its weight around, it's going to exert a lot of pressure over them. However, remember, the movement is away. There's a lot of pressure on the US to correct its bad, irresponsible ways and to get more responsible. And one of the ways to pressure the US Is to trade outside the dollar as the reserve currency. Number three, Russia and China have a currency agreement. They have been using their own national currencies when trading with each other for more than a year now. Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years. And both nations seem determined to break the power that the US dollar has over international trade. 4. The growing use of Chinese currency in Africa. Who do you think is Africa's biggest trading partner? It isn't the United States, it's China. In 2009, China became Africa's biggest trading partner. And China is now aggressively seeking to expand the use of Chinese currency on the African continent. Okay, so this is happening all around the world, folks. As people watch the drunken sailor called the US government, especially the leftist liberal side of the US Government, being the drunkest of all. Okay? But hey, the conservative Republican side ain't much better nowadays either. Okay? I always say people talk about the past. They talk about Democrats of the past like John F. Kennedy. John F. Kennedy, by today's standards would look like a total conservative, at least fiscally. In fact, the conspiracy theorists, many of them believe that, you know, one of the reasons he was assassinated is because he wanted to get rid of the Federal Reserve. Okay, so there's one for you to ponder. Number five, the China United Arab Emirates deal. China and United Arab Emirates have agreed to ditch the US Dollar and use their own currencies and oil transactions with each other. The UAE is a fairly small player, but it is definitely a threat to the petrodollar system. Number six. Now this isn't going to surprise anybody. Iran. Iran has been one of the most aggressive nations when it comes to moving away the new US Dollar in international trade. Obviously that's not going to Surprise anybody? Number seven, the China, Saudi Arabia relationship. Who imports the most oil from Saudi Arabia? It's not the United States. Rather, it's China. So again, they're trading outside of the US Dollar. Number eight, the United nations has been pushing for a new world reserve currency. The United nations has been issuing reports that openly call for an alternative to the US Dollar as the reserve currency of the world. So again, look at all this pressure, folks. Ten points here. I got two more for you. Number nine, the imf, the International Monetary Fund, has been pushing for a new world reserve currency. The IMF has also published a series of reports calling for the US Dollar to be replaced as the reserve currency of the world. Number 10. And finally, most of the rest of the world hates the United States. Okay? And unfortunately, I agree with this, with my own caveat on it, and here's my statement on that before I just share a couple points of the article. If they hate us so much, why do so many of them want to come here? And why do so many of them want to be us? It's not really hate, it's more envy, maybe. And the US Is in a very powerful position to be able to spend irresponsibly. And listen, I don't like it. I don't think it's fair. I don't think it's fair to its citizens, its taxpayers or other countries around the world. I think the US is basically using its bully pulpit a lot and taking advantage of other countries with its spending. It's ridiculous. But listen, it's the way it is. I'm not going to do anything to change it. I can't do anything to change it. The only question I have. The only question you have is how do you invest? To protect yourself and to make this work for you, you do it with prudent income properties, denominating your liabilities in dollars in a depreciating currency and your assets in things. Things matter. Currency matters a lot less. As inflation hits, global sentiment toward the United States dramatically shifted. And this should not be underestimated. Decades ago, we were one of the most loved nations on earth. Now we are one of the most hated. I guess it's kind of like bank of America that I mentioned a moment ago. Okay, if you doubt this, just do some international traveling. And having been to 64 countries myself, I tell you, last time I was in France, they were not very nice. Last thing, we've got to get to our guests. But I thought this was interesting, if not a little depressing. There was a Wall Street Journal article that talked about gray divorces. Well, gray divorces. What is that? That is an article talking about how people over age 50 are seeing a massive increase in their divorce rate. Now, this is. This is kind of sad, frankly, but it's a fact of life and in a positive way. You know, I guess what this means is people are living longer, but not just. It's not just about the length of life. It's about the quality of that life. I mean, people who are 50, 60, 70 years old, 80 years old are enjoying tremendous health, wellness, feelings of optimism, feelings that they can do things and they can be active, and they have the world as their oyster. It really is. You know, I read a really interesting article a couple days ago that said that ski resorts are increasing the age at which they will give senior discounts and senior ski passes. And the reason they're doing this is that the senior skiers are too healthy. In other words, they were issuing. This is what the article really was saying. Okay, this is reading between the lines. Here's the subtext is that they would sell passes to senior skiers, people over a certain age. Maybe it was 60 or 65 or whatever it was. Maybe it was 55, I don't know. But these senior skiers, thinking they wouldn't use them very much and they wouldn't ski that often, but the reality was they were skiing a whole heck of a lot because they're healthy and they're active. So the world is changing right before us, folks, and it has huge implications to the way we invest, and it has huge implications on the housing market. Why do I share this article about gray divorces? Well, the divorce rate of people over 50 has more than doubled in the past two decades. And what does this mean if it's more than doubled in the past two decades? It means instead of needing one residence, they need two. The household size is getting smaller, but the number of houses consumed doubles because you have two parties living separately rather than two parties living together. And in 2009, more than 600,000 people over the age of 50 got divorced. And, you know, there's an interesting chart here, and it just shows in 1990, how many people over 50 got divorced in 2009. And the projection for 2030 is it will almost double again. So tremendous, tremendous implications on the housing market. Tremendous implications for the price of all those building materials, those packaged commodities that I'm always talking about, and. And the tremendous implications on demand for those materials and for the finished product and housing. It's just an Amazing, amazing time for real estate investors. Okay folks, listen, I've talked too long. I've got to get to John Williams, our guest today, Shadowstats.com and we will be right back with his interview in just a moment. Be sure to visit jason hartman.com Take a look at the properties, take a look at the products there. Oh hey, one more thing and we will have this on the website soon. But many of you like physical products and we've always sold our products digitally but we have physical products that were debuted at the last Meet the Masters event of two of our best selling products, the Creating Wealth Home Study course and the Meet the Masters of Income Property Investing event. And those will be on the website soon in a physical product format where we'll actually send you a big box with the CDs and the cases and the workbooks all printed out, beautifully illustrated and you'll have those in hard copy if you want. So those will soon be available in addition to of the digital versions that are available today on jasonhartman.com Anyway, we'll be back with John Williams in just a moment.

Now you can get Jason's Creating wealth in Today's Economy home Study course. All the knowledge and education revealed in a nine hour day of the Creating wealth bootcamp created in a home study course for you to dive into at your convenience. For more details go to to jasonhartman.com.

My pleasure to welcome Walter John Williams to the show, otherwise known as John Williams commonly and I've been wanting to get him on the show for a long time. I'm a big fan of his website shadowstats.com where he really looks at the truth behind the government statistics. There's an old book entitled how to Lie with Statistics and I think the government does a pretty good job at that for many reasons and many of the motivations they have for doing so. And today John and I are going to talk about unemployment, the real unemployment rate, we're going to talk about the real inflation rate and then a fantastic report he just finished entitled Hyperinflation 2012. John, welcome. How are you?

Fine, thanks Jason. Thank you for having me.

Well, it's great to have you on the show and you're coming to us from beautiful San Francisco today, I guess the People's Republic of San Francisco that it is. Well, good. What's going on out there? What is your focus@Shadowstats.com nowadays?

Well, I've been a consulting economist for 30 years or so and found early on that I had to have a Pretty good understanding of what was actually being reported in the government statistics. Some terrible quality problems that were popping up in some of my early work quality in terms of the government's numbers. And I got to know the series pretty closely, talked with people in the industry, looked at the history, all sorts of issues with how the numbers had been adjusted over time. Basically you had two types of manipulation in the government data that were the popular numbers that were introduced after World War II very quickly found themselves being manipulated, occasionally with direct games being played by the politicians, but more frequently with methodological changes being put into place which tended to increase the level of economic numbers and to reduce the level of inflation. Quick examples of both factors. Back in the Lyndon Johnson era, Johnson was noted for reviewing the GNP numbers. It's called the GDP today, the broadest measure of the economy. He didn't like the numbers that were prepared by the Commerce Department. He'd send them back and keep sending them back until they got them right. In the first Bush administration, George Bush was up for re election. The economy was in trouble. Senior person at the Commerce Department went to a senior person in the computer industry, asked that computer sales be boosted in terms of reporting to the Bureau of Economic Analysis, which prepared the GDP reporting. The numbers were so altered, the GDP improved. George Bush looked as though he was out of touch with reality. And there's an important point there because I find that the average person has a pretty good sense of what's really happening in the economy, irrespective of the numbers out of Washington. And that's always a good thing to think about. If it doesn't make much sense, doesn't sound right to you, and it's coming out of Washington, it probably is not right. So the. On the other side, you go back to when the various series were introduced, people really didn't have too much trouble with them. But increasingly, what's been reported by the government seems to be moving away from the common experience. Most people think that inflation is hard. Most people think that unemployment is higher, and there's a reason for that. And again, this has to do with the methodological changes. You take unemployment, for example. If you went around the country and asked every person whether he or she was unemployed, the person doesn't have to think, he'll say yes or no. And if you work out an unemployment rate based on that, you get a much higher number than what the government reports. What the government reports in terms of its headline unemployment number is one of six levels of unemployment that the government publishes. They call it U3, in order to be in the headline unemployment number, you have to be unemployed. You have to be actively looking for work, having looked for work in the last four weeks, and of course willing and able to take a job. If you haven't looked in the last four weeks, the government counts you as a discouraged worker as long as you've looked to work in the last year.

So those people, what you're saying, John, is that they fall off the rolls, they fall off the statistics, they're not counted anymore. There can be millions of people unemployed that just aren't being tabulated, right?

That's correct. Well, they are calibrated to a certain extent, but not in the headline unemployment number. If you're not in the headline unemployment number, you're also not counted in the labor force, which has been noted as declining. The reason the labor force is declining is that people indeed have been giving up looking for work because they can't find jobs, or what the government historically has called discouraged workers. But back in 1994, they changed the definition of a discouraged worker to that being someone who had been discouraged for less than a year. If you'd been discouraged for more than a year after 1994, you were no longer tracked at all. And the narrower measure of discouraged worker, what I'll call the short term discouraged worker, the government publishes in its current broadest measure, which includes the headline unemployed. It includes what they call marginally attached workers, such as as the short term discouraged workers and those who are working part time for economic reasons. They want a full time job, but they can't find a full time job. So that where the unemployment rate is running somewhere around 8.59% on a headline basis, it's in the 15, 16% range with the level of U6. The government's broadest measure, if you add back in those people who are no longer being counted as long term discouraged worker, and I estimate that it's my number, it's not the government's number. You get up to 22%. And not surprisingly that pretty much accounts for the decline in the labor force or for the decline in the labor force is a percent of population. Again, people are. The reason that the headline number has been declining to a certain extent has been because people are just moving off the rolls of what would normally be counted because they can't find a job, but they're still unemployed as far as they're concerned. They want a job, they're willing and able to take it, but they've given up looking for it because there Are no jobs to be had?

That is a very sad situation. Now. So are you saying that the real unemployment rate then, John, is about 22%? Is that the number I should pick out of one of those?

Well, it's a matter of definition, right?

Sure.

The government's definition for U3, they do survey it and have a reasonable estimate of it. I'll contend that 22% is a lot closer to what you'd get if you went around and just asked people if they were unemployed. And that's pretty much the way unemployment was viewed back in the days when they put together the estimates for the Great Depression. I put out a number, say 22, 23% unemployment right now. It varies depending on the month.

Well, that right there is exactly the reason I was asking you, because as a point of comparison, you hear stats that say things are much better now. This is not a depression, because during the Great Depression the unemployment rate was around 26%. But back then we didn't have a world full of independent contractors like we do now. And even before I became familiar with you, I just intuitively knew this because my current businesses employ lots of contractors. But an old business that I sold back in 2005 had lots and lots of independent contractors as real estate agents. And John, I can tell you that a lot of those people, we do the 1099s and they would go a year earning very little, sometimes no money at all, at least, least from my company. They were doing other things on the side at times, but. And they weren't even counted as unemployed. I couldn't believe it. So what is the comparison number then? When you compare unemployment today to back in the Great Depression, is it, are we about the same or a little better?

We're not there yet as I view it. First of all, I mean the 26, 25% estimate, which is supposed to be the worst that was year being 1933, that was estimated well after the fact. The government didn't start serving unemployment until 1940. It was constructed from all sorts of surveys, including the U.S. census of 1930 and people applying for Social Security. It's a guess, but that number at that time, 27% of the population worked on and you'd go out in the country and you'd live with Aunt Mabel and you'd work on the farm and at least you ate, you survived. But it was a very difficult time. Today, less than 2% of the population working population lives on farms. So you look at the non farm unemployment rate from the Great Depression, which is also Estimated that's estimated up around 35%. I think that's probably more of a comparable number for what I'm looking at here. But this is certainly the worst we've seen in the post World War II era. And there are also all sorts of measures that indicate this is in many ways developing as a worse downturn than the Great Depression. I contend it's already going on longer than the first down leg of the Great Depression. We been, we've been in an economic contraction for almost five years now. If you take the initial downturn in the economy to plunge and then I'll contend we've been bottom bouncing ever since, but we haven't had an economic recovery. That's all a game that's played with inflation. And that's another very important area. Probably more important from an investor standpoint, that is in terms of economic growth, usually it's adjusted for inflation. You don't want to reflect growth in something that's just tied to rising prices. You want it to reflect physical volume.

Right. So what you're probably going to lead into there is that when inflation statistics are misrepresented. So is the gdp, right?

Yes, it is.

Yeah. Yeah.

Very number of other measures as well.

Right. John, before we get to that, I just want to ask you one more thing about the unemployment situation. And this is one that I think is incredibly hard to count and to just even get one's. Maybe it's impossible to get one's head around it, but that is the underemployed, where you see highly qualified people with educations, even advanced degrees working at. I don't mean this in any kind of condescending way, but working at sort of menial jobs like they're just underemployed. I mean, they're working at Starbucks when they've got expensive student loans and a big education credential, but they can't get a real job in their field in a corporate setting because the jobs just aren't there anymore. What about the underemployed?

It's a horrendous circumstance. You're not going to get any actual employment numbers on that. But as a guide, I'd look at something like there are numbers that are published by the Census Bureau each year tied to the poverty report on household income. And if you look at median household income as it was reported for 2010 and adjusted by the Consumer Price Index, the official CPI, median household income in 2010 was not only below the level of household income coming into the 2007 recession, it's below where median household income was in 1969. This is horrendous, and it's one reason that we're in such a deep and protracted recession.

Well, the other thing to understand about that is that in 1969, that household was probably only the mail was working and. And mom was home with the kids and the kids weren't growing up as juvenile delinquents. So, you know, you had a better quality of life. It wasn't just quantitative, it was qualitative, right?

Yes, very much so. And that's with the government's numbers. Household incomes were not. Still aren't. Despite more people working in the family, the household still is not keeping up with inflation on average. They used to make up the difference with debt expansion, but that's no longer available as it was. And again, until those issues are addressed, you're not going to have an economic recovery because the consumer is the driving force behind our gdp. The weakness in the income there reflects the underemployment that you refer to. One other number that I can toss at you is in terms of payroll employment. This is the. There are two big numbers that come out each month from the government. One's the unemployment rate. The other is how much payroll employment has changed. This is what companies report to the government in terms of the number of people they're writing employment checks to wages, salaries and such. Payroll employment. Today, again, it hasn't recovered. I mean, the economy's not recovered based on that. It's below where it was going into the collapse that started in late 2006 or into 2007. But again, it's below where you were at the beginning of the 2001 recession. Payrolls today are lower than they were 10 years ago. That's total payroll employment in the United States. Yet the population's growing by 10% in the same time frame.

Right. So really, it's a double whammy. The payroll numbers are lower, but the population is higher. So you've got a double differential there. Right.

Well, it's just another measure of how severe this downturn is. There's no recovery, nothing. The government's going to do nothing the government's done and certainly nothing that it's talking about is going to have major impact here. It's going to take decades, really, for this to work around. I'll get back into that a little bit later.

Right, right. In the decades coming, have huge entitlement obligations that the government simply cannot afford to pay. So we'll get into that. But you know, John I gotta say, as grim as all this news is, it's kind of odd. And see, I don't have the perspective of living in the 30s or the 50s or realizing what it was like in the 60s or even the 70s. But it's just. I don't know, it's hard for me to equate this because when I look at old movies and I look at old TV shows, you know, I try to think. It's not really representative, but it is somewhat representative how life was back then. And then I look around today and I have friends and associates and acquaintances of all ages, of all economic, socioeconomic levels. And this is just very anecdotal, and I know it's maybe not your thing, but I just wanted to run it by you real quickly. People that are unemployed or underemployed, I see nowadays they have a house full of gadgets. They go on vacations, they go get massages at the spa, they have a closet full of nice clothing and they drive a reasonably nice car. It's hard for me to equate that things are so bad. And yes, I know there are tent cities. I know that there are homeless people. I completely understand that. But I don't know, I just. I have trouble kind of reconciling that in my mind. I agree with you statistically, certainly.

Well, there are people who are doing well, but that's.

But those aren't people doing well. Those are people.

I mean, you'll always have people who do well and always have people who are suffering. Problem is that the numbers are shifting towards those who are suffering and rather markedly so. And you've got to watch out for those who are really enjoying themselves but have nothing of substance behind them.

Yeah, well, that's true.

They're the ones who are going to be hit very quickly as things continue to.

Yeah. Hurt the most. No savings, no assets, no investments. The other thing I didn't mention is those same people, unemployed, underemployed, they're going out to dinner.

Well, from that standpoint, I mean, there are a couple of measures. One of the most important ones is the. What they call income variance or dispersion. And the idea is that if you look at how income is distributed when it's strong in the middle, you tend to have a strong economy. Reason being that the middle class consumes strong.

Well, they consume, you know, like 70% of the S&P 500. So it's a big deal. Yeah. Middle class is so important.

But you have the. What we've seen now is We've seen a continual divergence here. It's at a record and no one's ever seen anything this extreme in the United States where you have a concentration at the top and the concentration at the bottom and the middle class is being squeezed. And that is actually bad for the economy in that the middle class is the powerhouse of consumption. What usually happens with that is you get into the markets and system is just left to itself. The extreme divergence will lead to very speculative financial markets. The markets crash, the economy falls, incomes get redistributed, and the middle class builds up again. I don't know the way the government's moving its taxation, how easily that will be done. But the problem is that those who are currently enjoying the fruits at the top of the ladder have to keep in mind that unless the middle class resumes its consumption, you're not going to have positive economic growth going forward. You're not going to have a positive financial markets, you're not going to have a government that can continue to support society. And unfortunately, what ends up here is that we end up with a, actually a hyperinflationary Great Depression, which destroys most of what the average guy, even the wealthy have if they're not well protected.

Yeah. And I think what we're moving into is we're moving towards society that is more and more of a banana republic. I hate to say it, but you see it in California for certain. You see it in many areas where, you know, you've got this concentration of wealth and then more and more on the, on the lower economic scale. And it's, it's very sad because what has made America so stable and so great for so long is, is this large middle class.

That's true.

Yeah.

Let me suggest something here. Let me quickly get into the problem with inflation and then move into the hyperinflation.

Would love to talk about that. Absolutely. Yes.

There's some key points in the inflation that help with the other. So getting back to starting again, a big, big factor that the average guy has to look at here in terms of what's being reported by the government. And where most people recognize that there's a problem is reporting of inflation. The Consumer Price Index is the most popularly followed series. It's a big measure of consumer inflation, consumer goods and services. When it was, I mean, it has a long history, but when it was first used as a cost of living indicator with the auto union contracts, that was really its first very large usage. The concept simply was that the CPI was a measure of cost of living, of maintaining a constant standard of living. That makes some sense. If you're going to use this as a way to adjust your wages or your salary, you'd at least want to stay ahead of inflation or at least keep up with inflation. So if you had a measure that would reflect your standard of living, this would give you the inflation that you needed in order to maintain your standard of living, the quality of your standard of living. And very simply, the way it was done, they had a fixed basket of goods. Simplistically, they'd measure, let's say, the cost of a pound of beef, a gallon of gas, a loaf of bread, and then they'd measure that same basket of goods the next year. And however much the basket of goods had changed, that's what your salary had to have changed by in order to have been able to continue to buy the way you had the year before. Went along that way for decades into the early 90s. And at that time, Alan Greenspan started making noises along with some others about how the CPI was overstating inflation.

Overstating, that's amazing.

Overstate, right? So I said, what do you mean? Well, steak gets too expensive, people will buy more hamburger, vegetables buy more hamburger. The cost of living is actually reduced substitution. That's reflected in the cpi. Well, of course that's not the concept of the level of inflation that you need to cover in order to maintain a constant standard of living. They did away with the concept of maintaining a constant standard of living. They made efforts, very significant efforts and changes to the CPI series to make it a substitution based series as opposed to a fixed basket of goods. They didn't go all the way with it. They did the best they could within the existing system to change the cpi. They have a new CPI that's been being touted as the one thing that will be used to help slash the budget deficit. It reduces inflation. Lower order, artificially reduces the reported inflation even more. The whole concept here, the reason for pushing this was to find a way of reducing the cost of living adjustments for Social Security recipients. And the effect was that if these changes had not been made, Social Security checks would be effectively double what they are today. And the numbers that are put out are well shy of reality. And I view that as criminal. For from a number of angles. Number one, I mean, beyond what's being done to the Social Security recipient, a lot of people in the private sector rely on these numbers. If you're receiving money that's being based on cpi, if you're the guy receiving the payment you're being underpaid. And if the guy's making the payment, you're getting away with an awful lot. If you're an investor and you're looking to find a rate of return that's going to keep you ahead of inflation, you use a cpi, you're not going to say even with inflation, you're going to fall short. Not only have they changed the lading, they've also changed actually reporting the full out of pocket expense of goods. What they call hedonic adjustments, where they make quality adjustments that you can't measure in a normal sense. The nebulous factors that they come up with. Very fancy statistical calculations, but nothing that the average guy recognizes.

Right, right. Well, you know what? Hedonics, the interesting thing about hedonics, John, is that it has sort of, I can see some rationale to it, but what it basically says is that if you're going to make hedonic adjustments to the consumer price index, it says to us that we are not entitled to the benefits of progress, the indexes rather than us. So hopefully as things progress and society becomes more advanced and technology becomes more advanced, we benefit from the power of a processor increasing and things becoming better and less expensive at the same time and smaller and more portable and having more features. But the hedonics index would say we're not entitled to that progress. We don't get that.

Your point is well taken. I haven't heard it expressed that way before, but that is, that's a very valid, very valid point. And the average guy doesn't understand this is happening to him. Very simplistic example, extreme example, and one that they actually reversed, which means they recognized they didn't reverse it, they stopped it. But it gives you the intent because it continues in many other areas. Some years back, the government mandated a particular gas gasoline formula that would improve air quality. It added 10 cents per gallon to the cost of gasoline.

Yeah. That's why California is so much more expensive. Yeah.

But it was not added into the CPI because it was deemed a quality adjustment. And the average guy filling his tank of gas isn't standing around thinking, oh my goodness, I'm spending 10 cents per gallon here to get better quality airs and that. Wonderful. He's moaning and groaning that he's out of pocket an extra 10 cents per gallon of gas. But he doesn't see it reflected in the inflation numbers or his paycheck. And it's because of things such as that that the CPI has moved far away from common experience. If you look at all the changes that the Bureau of Labor Statistics has made since 1980, and they estimate the effect it has on the reported annual consumer price index differential. And there's another couple of percent that they haven't published estimates on. It's about 7 percentage points. So that where you're seeing inflation of around 3%. Now take it up to about 10% if you were getting full reporting of your out of pocket expenses and something that was reflective of maintaining a constant standard of living.

Okay, so say that again. I just want to make sure that's not lost in any complexity. What do you think we should add to the government reported, quote unquote, official statistics of the CPI to get a more accurate picture of inflation?

I had 7 percentage points, but some you can, depending upon where you want to look at it. Since 1990, the change is a little over 3%. To be safe, I'd put in seven, but you know, there are people, you look at lower amounts somewhere in the 3 to 7% range, maybe 5%.

Okay, so then that means the real rate of inflation now is what I'm.

Figuring it at about 10%.

Okay, about 10%. And I couldn't agree with you more. Let me take a brief pause. We'll be back in just a minute.

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Now, what's interesting is you did a report on hyperinflation, John. Tell us about that. Because that's the prediction for the future. And I just don't see how. I mean, there are very few of them out there, but there are a few deflationists out there, and I just don't get their argument. They say crazy things like this deleveraging issue is so big and so massive that the government can't print enough money to cause inflation. And I'm thinking like, what are you talking about? The government can print as much money as they want, you know, and they don't even have to print it anymore. It's electronic. They just click a mouse and. And money is put into the system. It's crazy. The amount of money being created right now.

They can create anything they want, and indeed they have. And the thing is that when people talk deflation, you have to to make sure that you're talking the right or the same terms. When I talk inflation and deflation, I'm talking about price changes for consumers in terms of consumer goods and services. I'm not looking at asset prices. A lot of people look at the stock market and say, oh, stock market's going to crash. That's deflationary. Most certainly it's deflationary in terms of stock prices, but it doesn't necessarily mean that consumer prices are going to go. So it's other. The credit collapse by itself does not collapse money supply. If the bank lends money, that will tend to create money supply. If it bank lends a million dollars to a company the way the system used to work, and we're not seeing much bank lending, but that would get repeated and you'd end up with about 10 as the funds were deposited with other banks, you'd end up with about $10 million from the million dollars as it was originally lent. But then the company goes under, can't pay its loan, the bank can't pull that $10 million that's been created in the money supply out of the money supply. It doesn't happen. So having a debt collapse does not contract the money supply. What it does do is that it impairs the balance sheets of the banks and then they can't lend money the way they used to. And if they don't lend money the way they used to, you see slowing of bank lending that can slow money growth. And that's what happened. It actually turned negative for a while. It's now going up again. And I still track the government's M3 measure, which is the broadest one. But there's more than just the level of the money supply. It's a matter of how willing people are to hold it. And if people don't want to hold it, which is where you get into the an issue called velocity, how quickly the money turns over, that can be as devastating as the actual printing of the money.

And the velocity has slowed pretty dramatically, hasn't it?

Well, yes and no. I'll contend it's actually rising now. It's in a circumstance when the average person cannot get a safe return on his money that is better than the government. Government's official rate of inflation. That's the current circumstance does better going out, buying goods and services that are inflating, you go out and buy canned goods. It's a better investment now than a T bill.

Well, that's a good point. In that sense, yes. I couldn't agree with you more. It's causing the current economic situation is causing inappropriate behavior that's not necessarily prudent behavior. So, yes, you have people stocking up on stuff because they know their money is going to be worth less in the future. And so that's exactly what they did in Weimar and so forth. They couldn't wait to spend. Not necessarily.

That actually reflects some turnover, an increasing turnover of the currency. The big problem here right now is the US Dollar. When the Fed's put out enough money that if it ever got into the money supply in a normal manner, the banks are not lending. Let me back off. Let me get back to square one. You go back to 2004, the government's overhaul of Medicare. They put prescription plan in place at that point in time. They added about $8 trillion in unfunded liabilities to the government's balance sheet. That's net present value. In other words, how much money do you need in place today to cover that? What they knew they were doing at the time was bankrupting the country. That simple. $8 trillion in perspective at the time was the total level of gross federal debt. I talked with people in the Bush administration at the time, say, hey, look, you're dooming the system to hyperinflation here. And this is not just Bush administration. This is something that's been building up over time over a number of administrations. But this is when I started taking this system to task. And response I got was, oh, it's too far into the future to worry about. Back in the 70s, the Big Ten accounting firms got together with Congress and look, guys, we're running the largest business on the face of the planet. You really should have modern accounting do the same type of accounting that a large corporation does, and it took them 30 years. But earlier this decade, the treasury started publishing financial statements on the federal government based on generally accepted accounting principles. Doesn't get much publicity, but it is published each year. And if you include the year to year change in the net present value of the unfunded liabilities, you'll find that we're running deficits year after year of about $5 trillion with total debts and obligations right now of about $80 trillion. Again, that includes the unfunded liabilities for Medicare, Social Security and such. $5 trillion is beyond containment. It's beyond sustainability. Put into perspective, you wanted to bring that into balance in a year, for a year. You couldn't do it. At least you couldn't do it by raising taxes. You can't raise taxes enough to cover that shortfall. You could take 100% of everyone's wages and salaries and you'd still be in deficit.

And raising taxes, of course, we all know suppresses economic activity anyway, so it's a terrible idea.

If you cut every penny of government spending except for Social Security and Medicare, you'd still be in deficit. The system's bankrupt. There's no way this can be sustained and left its own devices. By the end of this decade, we would have been at a point where the only way the government could fund its obligations would be by printing it. Printing the money, which will give you hyperinflation, right?

Right. So what are your predictions for hyperinflation?

Well, it's. Originally I was looking at that time frame as the financial crisis broke, he saw a circumstance where the system was on the brink of collapse. They weren't kidding back in September of 2008 when they said, look, we don't get our funding in place here, we're going to see the system collapse. The banking system collapsed. Have a run on the banks. They were having a run on the banks. It was globally. Money was being taken out of the US they had to stabilize the system or the system would collapse. Systemic failure is not an acceptable option to the Fed or to the federal government. The Fed's primary function is to keep the Banking system solid. So they spent, guaranteed, loaned and printed, made whatever they had to do, they created whatever money they had to create in order to keep the system from failure. The best they did was they stabilized it a little bit. They did nothing to significantly resolve the solvency crisis in the banking system. They did nothing to significantly correct the economy. Economy continues to be, I'll say bottom boundaries. After a collapse, it's beginning to trend even lower. Big problem there is that all the happy forecasts on the deficits going forward, the treasury funding going forward, they're all based on positive economic growth. That's not going to happen. Much worse deficits than expected, much worse treasury fundings. The Fed has gone so far as to last year with its quantitative easing to effectively monetize the bulk of new debt issuance by the U.S. treasury. That in turn gave a first real serious blow to the dollar. By early 2011, you were the dollar had lost its safe haven status. You saw the upheaval in North Africa, Mideast and such. Dollars of global currencies were flowing into the Swiss franc gold, not the US Dollar. Then you had all the, all the problems in Washington over the debt ceiling and a very clear expression of lack of any political will whatsoever to address the long term solvency issues of the US Government, which unfortunately requires restructuring the social programs. And it's just not going to happen. But when that blew apart, they destroyed the global confidence in the dollar. The dollar started to see a drop. Panic against Swiss franc, against gold. Then the euro crisis popped up again and the euro acted effectively as a foil to try and distract the world from the dollar. And I think that was delivered. But the euro situation will get resolved and what lies ahead here, the fundamentals just could not be worse. You're going to have heavy dumping of the dollar at some point and as that happens, that in turn will become very inflationary. As the little bit of easing that we got by the Fed, you saw the dollar sell off there, that spiked oil prices, spiked gasoline prices. You can have inflation with a weak economy. That's what we've been having. We're seeing higher inflation now than we have had since after the crisis broke. And that's not because of a strong economy. It's because of monetary distortions that have spiked commodity prices that are affecting us in the United States. Has nothing to do with economic demand here.

Yeah, yeah, well, the government and central banks distort the heck out of everything for sure. So John, you're predicting hyperinflation by 2018?

No, I've moved my forecast into an outside timing of 2014.

2014.

The contention is that we may be on. We may, we've crossed through the various prerequisites to it. We're at a point where the dollar has lost its safe haven status. It's lost the confidence of the rest of the world. The next blow may be the fatal one. It may be the one that pushes us out of reserve currency state. It may be the one that results in oil being priced in something other than US dollars. And as that happens, the inflation will just pick up very rapidly.

So there's no academic definition of hyperinflation, but you're saying 2014, that's only two years away. What type of inflation rate are you talking about when you say hyperinflation? Is that 25% annually? Is it 100% annually? Is it 1000%? I mean you look at historically hyperinflation around the world and it's just Hungary, Zimbabwe, Argentina. Those numbers are insane.

I'm talking Weimar Republic type where the definition I use, and again as you pointed out, there's no formal definition. That is when the largest denomination currency before the inflation, in this case a hundred dollar bill becomes worth more as toilet paper or wallpaper, you have a hyperinflation. That's the type of thing I'm looking for. And it's a type of circumstance where number one, I don't see any way of avoiding it. I wish there were. I mean I'd be. It would take a big political shift in our government. If the government could move rapidly to restore the long term solvency of itself and put in discipline that the rest of the world could buy, they might be able to save the situation. But it doesn't help them too much because they need to bail out the banks, they need to boost the economy. They're really in a no win circumstance with very, very few options. And the options that they have are not politically feasible. So that the end result of this is that you've got to look at it from a personal standpoint. How do you protect yourself? And there are several things. One, in terms of your wealth and assets, it's a time to batten down the hatches. Look to preserve wealth, buying hedging it with things such as physical gold. Personally I prefer sovereign coins, gold, silver, but precious metals or basic hedges. Getting some dollars outside the US dollar, Australian dollar, Canadian dollar, Swiss, Franco like, despite the intervention there at the moment with the tied to the euro, that's not going to last. And once you've been Able to hedge your. At least your core assets. Any other money you want to play around with in the gambling casino of the stock market, that's all fine and dandy, but you want to get your.

I love how they call the stock market a gambling casino. It is. You couldn't be more accurate on that one.

Well, I'm looking at survival here. And so you need, you need to preserve the purchasing power of your assets. If you can ride through the storm and maintain the liquidity and the purchasing power of your assets, you'll have some of the most extraordinary investment opportunities anyone will have ever seen on the other side. And at least you'll be in a better position to survive. But survive involves more than just the finances. And the United States is the. It's the most powerful country on earth. It's got the world's largest economy and it has no backup system like Zimbabwe did. Zimbabwe had the worst hyperinflation anyone's ever seen. Stretched over a period of time. The economy continued to function, people continued to work. The reason they did was that they had a backup system of a black market and US Dollars. We don't have a backup system here. If a hyperinflation hits the United States, it'll be extraordinarily disruptive to our economy or way of life. And I would urge anyone to basically look at preparing a store of goods as you would for a natural disaster. I'm sitting on the Hayward Fold out here in California and people out here, they'll have a store of food and water and baby diapers, whatever they need to get through at least a couple of weeks. Here you need something maybe you'll carry through a couple of months. You get things that you can rotate so it really doesn't cost you anything. And you might look at goods that would be usable in a bargaining circumstance. Gold coins, probably a big item to go trade against loaf of bread. I talked with one fellow who'd been through hyperinflation. He said he found the perfect small change was an airline sized bottle of a high quality scotch.

Yeah, yeah, vodka. Vodka and cigarettes probably wouldn't be bad either.

The key thing is to use common sense.

Right? Right. You know what I say overall, John, and just let me run this investment strategy by you. Denominate your assets in things, in commodities that are useful to people, whether they be hedging with physical metals or owning construction materials or food products or food resources. And then denominate your liabilities in depreciating ever more debased fiat currencies like the Dollar debt will just be wiped out when we have this inflation. But it's got to be long term fixed rate debt attached to things of real use that you control.

So I mean what you're saying is fine in theory. Where I would raise cautions is that this is something that will be extraordinarily disruptive. I'm not advocating people take on debt, for example, to take advantage of this. I can't tell you exactly how it's going to break or what the political circumstance is going to be. I mean, you need to be able to take on the debt. You need to be able to cover the debt that even if you're suffering a period of unemployment and perhaps before the full hyperinflation kicks in, you don't know what the government's going to do here. I mean, look at how they've been playing with mortgages. Maybe they'll step in to save the banks and say, oh, we're going to redenominate your loans. We're in some kind of a quasi new dollar. Who knows? The way I'm looking at it, I'm just ultra conservative here primarily looking to hedge the basics and what you say is right in principle and is well worth looking at and thinking through in terms of your own circumstance. But again, it's the type of thing that requires good financial advice and common sense.

Absolutely. Well, good points. Well, John, your website is shadowstats.com anything in particular you want people to see on the website? You've just got a wealth of data there and I just love it. I constantly refer to it as a resource to find out the reality behind the statistics and you've done some great work there and we all appreciate that. Anything in particular you'd like people to look at? Maybe the Hyperinflation 2012 report.

Well, the Hyperinflation 2012 report is for our subscribers. We will make that available to the public in the not too distant future. The prior Hyperinflation report for 2011 is available now on the website. It gives you a lot of the basics as is the background information on the different government series. Anyone interested in subscribing? Of course we put out an electronic newsletter that is at least weekly in frequency, depends on when government statistics are released and we update the hyperinflation outlook and other things that are happening there on a regular basis.

Fantastic. Well, shadowstats.com everybody go check it out. And John Williams, thanks for joining us.

Today again Jason, thank you for having me.

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