John Williams: A Hyper-Inflationary Great Depression Is Coming

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John Williams has done his math and believes his numbers tell the
truth. He explains why the U.S. is in a depression and why a "Hyper-Inflationary
Great Depression" is now unavoidable. John also shares why
he selects gold as a metal for asset conversion in this exclusive
interview with The Gold Report.

The Gold
: John, last December you stated, "The U.S. economic
and systemic crisis of the past two years are just precursors to
a great collapse," or what you call a "hyper-inflationary
great depression." Is this prediction unique to the U.S., or
do you feel that other economies face the same fate?

John Williams:
The hyper-inflationary portion largely will be unique to the U.S.
If the U.S. falls into a great depression, there’s no way the rest
of the world cannot have some negative economic impact.

How will the United States’ decreased economic power impact global
economies? Will the rest of the world survive?

People will find to their happy surprise that they’ll be able to
survive. Most businesses are pretty creative. The thing is, the
U.S. economic activity accounts for roughly half that of the globe.
There’s no way that the U.S. economy can turn down severely without
there being an equivalent, at least a parallel downturn outside
the U.S. with its major trading partners.

When I talk
about a great depression in the United States, it is coincident
with a hyper-inflation. We’re already in the deepest and longest
economic contraction seen since the Great Depression. If you look
at the timing as set by the National Bureau of Economic Research,
which is the arbiter of U.S. recessions, as to whether or not we
have one, they’ve refused to call an end to this one, so far. But
assuming you called an end to it back in the middle of 2009, it
would still be the longest recession seen since the first down-leg
of the Great Depression.

In terms of
depth, year-to-year decline in the gross domestic product, or GDP,
as reported in the third quarter of 2009, was the steepest annual
decline ever reported in that series, which goes back to the late
’40s on a quarterly basis. Other than for the shutdown of war production
at the end of World War II, which usually is not counted as a normal
business cycle, the full annual decline in 2009 GDP was the deepest
since the Great Depression. There’s strong evidence that we’re going
to see an intensified downturn ahead, but it won’t become a great
depression until a hyper-inflation kicks in. That is because hyper-inflation
will be very disruptive to the normal flow of commerce and will
take you to really low levels of activity that we haven’t seen probably
in the history of the Republic.

Let me define
what I mean by depression and great depression, because there’s
no formal definition out there that matches the common expectation.
Before World War II, economic downturns commonly were referred to
as depressions. If you drew a graph of the level of activity in
a depression over time, it would show a dip in the economy, and
you’d go down and then up. The down part was referred to as recession
and the up part as recovery. The Great Depression was one that was
so severe that in the post-World War II era, those looking at economic
cycles tried to come up with a euphemism for "depression."
They didn’t want to create the image of or remind people of the
1930s. Basically, they called economic downturns recessions, and
most people think of a depression now as a severe recession.

I’ve talked
with people in the Bureau of Economic Analysis and the National
Bureau of Economic Research in terms of developing a formal depression
definition. The traditional definition of recession – that
of two consecutive quarters of inflation-adjusted contraction in
GDP – still is a solid one, despite recent refinements. Although
there’s no official consensus on this, generally, a depression would
be considered a recession where peak-to-trough contraction in the
economy was more than 10%; a great depression would be a recession
where the peak-to-trough contraction was more than 25%.

We’re borderline
depression in terms of where we’re going to be here before I think
the hyper-inflation kicks in. You’ve certainly seen depression-like
numbers in things such as retail sales, industrial production and
new orders for durable goods, where you’re down more than 10% from
peak-to-trough. In terms of housing, you’re down more than 75%,
and that certainly would be in the great depression category. With
hyper-inflation, you have disruption to the normal flow of commerce
and that will slow things down very remarkably from where we are

After a period of recession, isn’t inflation considered a good sign?

There are a couple of things that drive inflation. The one that
you’re describing is the relatively happy event where strong economic
demand is exceeding production, and that’s pushing prices higher,
as well as interest rates. That’s a relatively healthy circumstance.
You can also have inflation, which is driven by factors other than
strong economic activity. That’s what we’ve been seeing in the last
couple of years. It’s been largely dominated by swings in oil prices.
That hasn’t been due really to oil demand, as much as it has been
due to the value of the U.S. dollar. Oil is denominated in U.S.
dollars. Big swings in the U.S. dollar get reflected in oil pricing.
If the dollar weakens, oil rises. That’s what you saw if you go
back to the 1973–1975 recession, for example. That was an inflationary

Indeed, the
counterpart to what you were suggesting earlier about the strong
demand and higher inflation is that usually in a recession you see
low inflation. The ’73 to ’75 experience, however, was an inflationary
recession because of the problem with oil prices. That’s what we
were seeing early in this cycle, where a weakening dollar rallied
oil prices, and then the dollar reversed sharply and oil prices
collapsed. We have passed through a brief period of shallow year-to-year
deflation in the consumer price index, but, as oil prices bottomed
out and headed higher since the end of 2009, we’re now seeing higher
inflation, again.

I’m looking
at hyper-inflation, which is a rather drastic forecast. This has
been in place as an ultimate fate for the system for a number of
years. Back in the ’70s, the then Big 10 accounting firms got together
and approached the government and said, "Hey guys, you know
you need to keep your books the way a big corporation does. You’re
the largest financial operator on earth." The government then,
as well as today, operates on a cash basis with no accrual accounting
and such. Yet, over a period of 30 years, the accountants and government
put together generally accepted accounting principles, or GAAP,
accounting for the federal government and introduced formal financial
statements on that basis in 2002, which supplement the annual cash-based

If you look
at those GAAP-based statements and include in the deficit the year-to-year
change in the net present value of the unfunded liabilities for
Social Security and Medicare, what you’ll find is that the annual
operating shortfall is running between $4 and $5 trillion; not $500
billion as we saw before the crisis or the $1.4 trillion that they
announced for fiscal 2009. Now to put that into perspective, if
the government wanted to balance its deficit on a GAAP basis for
a year, and it seized all personal income and corporate profits,
taxing everything 100%, it would still be in deficit. It can’t raise
taxes enough to contain this. On the other side, if it cut all government
spending except for Social Security and Medicare, it still would
be in deficit. With no political will to contain the spending, eventually
the government meets its obligations by revving up the currency
printing press.

With all this new paper money coming into the system, wouldn’t we
see a bigger bubble than we’ve ever seen prior to a hyper-inflationary
great depression?

No, in fact, it’s a very unusual circumstance that we have now.
Put yourself in Mr. Bernanke’s situation – he had to prevent
a collapse of the banking system. He was afraid of a severe deflation
as was seen in the Great Depression, when a lot of banks went out
of business. The depositors lost funds and the money supply just
collapsed. He wanted to prevent a collapse of the money supply and
keep the depository institutions afloat. Generally, that has happened.
The FDIC expanded its coverage and everything that had to be done
to keep the system from imploding was done. The effects eventually
will be inflationary.

the rest of the article

8, 2010

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