 This is Mises Weekends with your host Jeff Deist. Ladies and gentlemen, thanks for joining us once again on Mises Weekends. I'm very pleased to have as our guest today, John Williams, who is the proprietor and founder of a very important and a great website called ShadowStats.com. It's a site that I've been familiar with since a long time ago back in my days working for Ron Paul. We used to use John's information and data in some of Dr. Paul's speeches and statements. John holds a couple of degrees from Dartmouth College and he worked for many years in the private sector for Fortune 500 companies as a consultant and economist for them. But as I mentioned, he now runs ShadowStats.com and if you're not reading it and you're not familiar with him, I think you would do yourself a great favor by reading the site and becoming familiar with him. So with that, John, thanks so much for joining us today. Jeff, thank you so much for having me. Well, let me ask you kind of a tongue-in-cheek question before we get into the meat of things. We've been hearing a lot lately about fake news. That seems to be the story of the day and it struck me when I was looking at your site earlier today. Should we be thinking of government-issued statistics like CPI and GDP as fake, at least in a certain sense of the word? Absolutely. What you'll see here is that the problems are, in most instances, definitional. Definitional where the methodologies have been changed over the years, but the methodologies that have been changed have generally been counterintuitive to what most people expect in the numbers. So that you end up with the headline economic details overstating economic growth and understating inflation, and that is deliberate, and I really find that criminal. Well, deliberate in the sense that the government always wants to look good, it always wants to paint a rosier scenario than reality might posit? Well, not just that. If you go back to the 1990s, now in Greenspan was one who led the charge here, the move was made to restate inflation for purposes of cutting the federal budget deficit. Alan Greenspan's position was simply the CPI, the headline number that still is published today on inflation, overstated inflation, and that if only we had a more accurate number, a number lower in inflation, that that would reduce government spending in terms of cost of living adjustments to people on social security. It would also increase tax revenues by boosting taxpayers into higher income tax brackets than they were. So he proposed, along with the Boskin Commission, set up a number of changes to the CPI inflation aimed at reducing CPI. But if you asked him what's wrong with the CPI, how is it overstated? His response would be, well, suppose the state gets very expensive and people buy more hamburger. If they buy more hamburger, their cost of living isn't as great, but that's not reflected in the CPI. So the CPI overstates inflation. What you have to consider here and what you have to understand is the way most people view the cost of living measure and the way or the various inflation measures have been viewed over time. And I'm talking here centuries. I mean, you have price indices that go back literally centuries. The idea has always been to measure inflation from the standpoint of maintaining a constant standard of living. Prices are rising. What kind of an adjustment do I need to make to my income or to my investment strategy so that I can at least live as well as I did last year? But the changes that were made here where they introduced substitution effects or tried to at least and tried to mimic that in the headline CPI, the effects there were to give you something that was not measuring a constant standard of living. It's effectively measuring a declining standard of living. I mean, if you can go from steak to hamburger, you can go from hamburger to dog food, which unfortunately has happened to some people. I know that just can't live on the adjustments that they've gotten on there, for example, social security. And that was done deliberately to reduce the cost of living adjustments. And that I can't buy. I mean, there have to be better ways to balance the budget than idle people. It's absolutely criminal. I think you're correct. But again, when I worked for Dr. Paul, we used to talk about the Fed tax and Dr. Paul defined that loosely as, let's say, the difference between the real rate of inflation, not CPI, but what we might call the real rate of inflation and the interest rate one could get on a reasonable non-esoteric certificate of deposit or simple savings account. And the difference between those two is the Fed tax. If you accept that definition, it seems to me maybe you have a different view that the Fed tax is about as high or higher than it's ever been. In other words, the delta between interest rates one can easily earn and what you're really losing in inflation. Yeah, that's a fair, it's got to be at a record. It gets worse each year because the changes that have been made here are cumulative. And they were not just changes that were made with Greenspan in the 1990s. They started back in the 1980s changing the way CPI was calculated and estimated. And the changes there over time have had an aggregate impact of about five percentage points that they publish and admit to as changes in methodology. And there's another couple of percentage points on there for changing elements such as going from mom and pop shops downtown to malls out in the highway where people tend to buy cheaper products. And that's, well, you say, well, that's what I do. Again, this has not been handled in a way that handles things consistently in terms of measuring what would be maintaining a constant standard of living. Now, what they did here, they recognize that there's a problem. You have the government's tip instruments, the treasuries that are adjusted for inflation. And I believe you'll find somewhere in the background of those documents that if they change the methodology, they have to adjust the pre-existing tip instruments. Well, they've been very careful not to have any so-called methodological changes since it would affect that, but a real simple thing. And this was just to give you an idea. And it was more a matter of rounding than anything else. But if you look at the cost of living adjustment that came out of the CPI this last year for adjusting social security payments, I believe it was three-tenths of a percent, they made a correction to one of their adjusted numbers. And it was just a real small one. You wouldn't see it in most of the aggregate numbers, but the way it worked out, the effect was it knocked the headline adjustment to three-tenths of a percent from what would have been four-tenths of a percent. Many people rely on the government's numbers. It's not just government elements, but people out in the private sector. Landlords often will have their rental fees escalated by the CPI. They're not getting an even bet. And if you're basing your investment return on trying to beat the government's CPI measure, you're doing yourself a disservice there because you're not keeping up with inflation. I think that would pretty much confirm what you're saying about that Fed DAX actually expanding. It continues through year after year. Well, let's talk a little bit about inflation as it relates to the monetary base and then the broader money supply, one measure of which M3 is no longer compiled by the Fed, but it's compiled by you. Talk to people just generally about the monetary base has expanded more than four times since the crash of 0809. And a lot of Fed apologists will say, well, gee whiz, that's not the money supply. And as long as that money is sitting there parked more or less as bank reserves and it's not sloshing around in the general economy, it saved the banks. It provided them solvency or liquidity. And why should we care if the monetary base is quadrupled? I say we should care, but I'd like to hear what you say. Well, let me put it this way. The U.S. government has a tremendous solvency problem long-term unfunded liabilities, net present value, but with existing liabilities such as the federal debt in excess of 100 trillion can never be covered as things exist. The Fed's quantitative easing, what they did here was not at all as represented. You go back to 2008, you had the collapsing banking system. The Fed, the Treasury got together, there's a general agreement, absolute agreement. We will not let the system collapse. Now the Fed, yes, the Fed says it has a mandate to keep the economy growing, to contain inflation. Their primary function is to keep the banking system afloat. They had failed. The banking system was collapsing and it shouldn't have been in that position, but it's a, I mean you have to think real hard as to what you want to do, you let the system go or not. They decided to save the system at all costs. And what they did was there's all sorts of stopgap measures guaranteed, whatever had to be guaranteed. They bought companies, they funded companies like AIG, they did whatever they had to to keep the banking system afloat. The quantitative easing, initially you think my goodness, the monetary base was a tool usually used to control the, to either upper, lower the growth rate of the money supply. But that involved the, in the monetary base, generally going into the flow of commerce with banks lending. Now had the banks been allowed to lend some of this money, that might have helped the economy some. It would have gone into lending. It would have kept commerce going a little better than it did. The problem was the banking system was collapsing. And the Fed, not that they could do much to stimulate the economy, but they didn't even think of it. They were looking at saving the banks. The problem was the public was getting a little uncomfortable with bailing out the banking system. So that whenever the Fed upped its quantitative easing, it was doing so in response to negative economic news or doing this to save the economy. That was their political coverage. It had nothing to save the economy. It did help to provide some liquidity to the banking system. But guess what? All these treasuries that they were buying, also were effectively monetizing the federal debt in the period of time that they were actively buying the treasuries. They effectively monetized 75% of the new debt issuance, the public debt issuance of the Federal Reserve. Now, that should have been very inflationary. And it will be because we're coming back to that. We're not finished with salvaging the banking system here. But when they ceased the quantitative easing, so to speak, they did not liquidate their treasury holdings. They're still holding $2.5 trillion there in treasuries. The Treasury pays them interest, but the Fed pays the interest back to the Treasury. That's fully monetized. They might as well just write it off. And that's where you get into big trouble down the road with inflation, and it works. I'll tell you how we get there very soon. But the issue there is that if you don't have the ability to pay what you owe, which is the US government does not, you either have to borrow it or you have to print the money. The Treasury has been borrowing. Actually, we're having some funding problems. They got downgraded by S&P back in 2011. He started to see some rapid flight from the dollar and all sorts of interventions. What happened there, though, with the Fed's intervention, effectively saved the Treasury as well as the banks because the Fed, again, was monetizing that debt. Now, if you look at the circumstance today, the rest of the world is pretty much dumping treasuries. They're not buying them. China, Japan, South Korea, former big buyers of treasuries, they're not buying. The Federal Reserve's still out there with 2.5 trillion and they have a banking system that still is not solving and hasn't worked globally. We're at a point where there's a talk you're going to have an imminent rate increase. It may happen, maybe not, but following that, that does not preclude further quantitative easing. You have an economy that is never fully recovered from the crash into 2009. It's turning down again. That puts more stress on the banking system. The banking system is still not solvent or fully solvent. They've got all sorts of problems there and they're not lending normally. The Fed's going to have to go back in and increase quantitative easing again, buying up the treasuries. I would expect them to do the same thing they did before effectively monetizing the debt. This is something you'd expect when the US couldn't pay off its bills and just put in money and put you into hyperinflation. The monetization there does have a very big inflationary effect and should lead to very bad inflation down the road. Among other things, right now, what's helped contain the circumstances has been all sorts of trouble. Yes, we're going to raise interest rates, which helps to prop the dollar. As long as they can prop the dollar and try and bring in some money from abroad, that's one thing. If you do the quantitative easing, which I think you'll see early in 2017, the dollar will be dumped and you'll see a tremendous amount of dollars being put back into the system. The Fed's got to absorb. There's going to be quantitative easing. They're going to be buying treasuries and that will affect the money supply and that will spike the money supply and it will give us a tremendous inflation problem. In terms of M3, why they stopped doing it, I don't think it was for the reasons, why they stopped covering it, but do not believe it was for the reasons they expressed. They said, oh, it's too expensive to track and report and it didn't give them any new information. So the reporting M1 and M2, M1 is just basically cash or near cash, like checking accounts. M2 includes savings accounts, small time deposits, and three takes you into large time deposits, CDs, institutional money funds, your dollar accounts. If you follow the small time deposits and money funds, why wouldn't you follow the bigger ones? M2 is something like 60% of M3 and what we've been seeing recently is that you've had very, we've seen a big pickup in M2 and M1 growth, but it hasn't been happening in M3. What's been happening with them is that you've seen some liquidation in those larger accounts that I still follow. The Fed still has those numbers. It's not that they don't have the numbers, they could put it together if they wanted to, but this growth that you're seeing, which some people consider to be healthy, others say it's a worry about inflation, actually is not inflationary as it looks because it reflects these funds that are generally being liquidated out of M3 into the, let's say, the M2 accounts so that where the numbers weren't in M2 before, now they are and it makes M2 look larger. That's all smoke and mirrors. We're not yet at the brink of a real serious inflation with those money supply numbers, but watch this next round of quantitative easing because as soon as that kicks in, all the other factors that will, the negatives from the standpoint of an expanded money supply will be in place. The inflationary pressures will start to mount. The dollar selling will intensify. I look for the dollar as we know it to become effectively worthless. And in the process, if you're an individual, what you need to look at is preserving your wealth and assets. If you live in a dollar denominated world, gold is the primary hedge there, silver is as well, physical gold, physical silver that will preserve the purchasing power of your current assets going forward. And you have a circumstance like that and all of a sudden you start to see rapid inflation. Gold right now has been hit very heavily and a lot of that's deliberate intervention by the central banks, selling by the central banks trying to discourage ownership of it. But when the inflation begins to surface when the renewed selling of the dollar picks up, you're going to see the inflation fears rising along with that gold prices. But if gold gets up to 10,000 or when it gets to 10,000 or when it gets to 100,000, you don't want to just run and take your profits. Because when you get to that point, what that's telling is you're in the middle of a major inflation problem, one that is going to, as I see it end up in the complete, in the devaluation of the dollar, and the dollar become worthless. So that you, where you buy the gold, the concept there is it's a hedge. This is not, I mean, the people have loved to do day-to-day trading it, that's fine. That's not what I'm talking about. I'm talking about having this as a store of wealth, something to protect you against the inflation ahead. You have to hold it through the crisis. If you hold it through the crisis, you will have kept intact and liquid the purchasing power that you had in your assets before the crisis. So it's interesting, you talk about what the Fed's doing and more QE possibly in 2017. Has it ever amazed you how they're able to change their tune? It wasn't that long ago, 2011, 2012, where the St. Louis Fed chair, Bullard, was talking about how they were going to unwind all this 2.5 trillion of Treasury debt that they bought. And just a couple months ago, Ben Bernanke at their conference at Jackson Hole in Wyoming said, well, we might have to rethink that and even consider expanding the Fed's balance sheet a little bit. I mean, it's almost like the financial press has amnesia and still imagines that there's a plan of some sort. Well, the press plays along with us. I mean, the financial press is largely controlled by Wall Street and the interests there are the same as the feds. They just want to keep the system as liquid as possible and make as much money off it as possible. But the problem is that it's not good for the average guy and it sure is not good for the system over the long haul. The system's effectively been bankrupt. We have a new administration coming in and there's talk of fiscal stimulus. Fiscal stimulus should generate some economic activity. The problem is there's a lead time there nine months to a year before we start seeing it hit the economy. Of course, there's impact on the deficit depending upon how that's worked and where there's hope that, you know, an expanding economy in the future will generate revenues to bring down the deficit or control the deficit. The problem is the long-term solvency issues of the sovereign solvency issues of the United States. That has to be addressed in the context of whatever stimulus is put in place here. If that, the long-term solvency issues can be handled but into some kind of a credible form of control then they've got a clear shot for whatever they want to do. But if they don't, you have a circumstance where as the stimulus packages are put in place, I'd be very surprised that there's not some increasingly short-term in the federal deficit. The process there will focus the global markets again on the long-term dollar and solvency. I mean, there's no question unless the circumstance is brought under control for the United States at some point in time, the dollar becomes worthless which is no way that we can cover the obligations. That circumstance has to be controlled. That's what brought the system near the brink again in 2011. We were at the brink in 2008 but again, everything they did there was stopgap. And very little, if anything, was done to address the underlying issues that brought us in. Nothing was done to turn the economy around. The solvency issues were not addressed and they did some stuff to address the banking system but again, the banking system at this point still is not normal. It's not right. Not lending as it should be. That's all part of the question. So technically, the system collapsed in 2008 and the Fed just hasn't figured out how to get around that. They keep promising, raising rate and they've been doing that for the last year since they hiked rates in December of 2015 and now when people look at the virtual certainty, they'll do it again in 2016. I know this is a day or two before that is being recorded but whether or not they do that that does not preclude what's going to happen in the next couple of months into 2007 as the economy continues to sink. Seeing that in a lot of good leading indicators of economic activity. Industrial production down year to year for now for five quarters you've never seen two consecutive quarters. We now have five consecutive quarters. Never seen two consecutive quarters of annual decline in industrial production that's been outside of a formal recession and that goes back to the founding of the index in the post world war one at the same time and a little bit after the founding of the Fed. You look at health wanted advertising. You don't have the newspaper index the way you used to but you do have an online advertising index that's surveyed by the conference board and the newspaper index used to be the best leading indicator around. That one in the year to year decline in particular if you're down 10-15% you always had a recession. Again that goes back to post world war one. We're seeing patterns now in the online index. It's a relatively new index but it predicted and tracked very closely the economic collapse that began in 2006-2007 into 2009 and it's been showing a new one in place now the near future you're going to see a lot more in the way of the downturn and the headline data and that again pushes the Fed back into the quantitative region and they just don't have a way to handle it. It's not a happy circumstance and if you don't think they're going to work things out good place to be is to buy a little bit of insurance such as with coal. Well it's not a happy circumstance as you say. It's smoke and mirrors I'm afraid and we're out of time but let me just wrap up by saying I wouldn't want to be Janet Yellen right now and I wouldn't want to be Donald Trump either. Our guest is John Williams. Again his website is shadowstats.com all one word shadow stats.com do yourself a favor check it out it's an absolutely fascinating site it has quite a bit of information in front of the paywall that may well entice you to become a paid subscriber. John I want to thank you for your time and ladies and gentlemen you have a great weekend.