John
Williams: A Hyper-Inflationary Great Depression Is Coming By The Gold Report
| April 30, 2010 4:53 PM EDT
John Williams: A Hyper-Inflationary
Great Depression Is Coming
Source: Tim McLaughlin and Karen Roche of The Gold
Report 4/30/10
ShadowStats' 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 Report:
John, last December you stated, "The U.S. economic
and systemic crisis of the past 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.
TGR: How will the
United States' decreased economic power impact global
economies? Will the rest of the world survive?
JW: 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 now.
TGR: After a period
of recession, isn't inflation considered a good sign?
JW: 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 recession.
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 governme