Editor's note: Also check out John Williams' recent appearance on the Financial Sense Newshour with The Bigger Picture update.
“If you look at the government’s latest statistics - the poverty survey of 2009, which is the most recent release, with average and median household income adjusted for inflation (and they use a really gimmick low inflation rate with that one) - it shows that not only has household income been falling the last year or two, but it’s below its near-term peak before the 2001 recession. Household income has not recovered above that, and if you use the CPI-U (the usual inflation rate to deflate that by instead of the gimmick one) it shows that household income today is below where it was in 1973. Again, the average household has not been able to keep up here. If income growth is not keeping ahead of inflation, very simply you can’t have consumption growing faster than inflation on a sustainable basis.”
Government statistics guru and believes the most important economic indicators used by our political leaders in their decison-making - the Consumer Price Index, the unemployment rate, the Gross Domestic Product - are deeply flawed in how they're calculated. Whether these flaws result from letting theory trump reality or by machinating politicians, the result is the same: we are fooling ourselves at our peril. We have been understating the risks we face - which is why we are working harder for less today than the previous generation, and why our economy is not only not in "recovery" - but on the precipice of crisis.
Click here to listen to Chris' interview with John Williams (runtime 37m:40s)
Read the Transcript of the Podcast
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In this podcast, John and Chris outline how:
- John came to understand how changes in the way the key economic indicators are calculated has resulted in an outcome in which they no longer reflect reality. No one believes, values or knows how to accurately apply them anymore.
- There is rampant precedent for political manipulation of how these indicators are calculated. Past administrations forced changes in the forumlae for many reasons - a common one being optics.
- Using erroneous indicators is dangerous - not just for the governement, but for everyone. When inflation is running higher than most expect (as it is today), investors are cheated out their returns, wage earners wonder why their paychecks buy less goods, and fixed income earners suffer greatly. Unfortunately, there are myraid incentives for politicians and corporations to embrace artificially-low calculations - as they justify reducing obligations owed.
- The key approaches to calcualting inflation are especially convoluted, especially the practice of applying hedonics. If we instead calculate inflation according the formula used in 1980, we would see a number closer to 8%+ vs today's 1.5% rate.
- Similarly with unemployment, John calcualtes the true rate in the country today is 22% (vs the reported 9%).
- In sum, he sees the US suffering from structural issues that are extremely hard to address - but impossible if we continue to let fantasy data be our guide. Our circumstances are not sustainable and, in his eyes, have us on an inexorable path to higher inflation - and likely hyperinflation.
Part 2 of this interview is available to enrolled users and focuses on the main drivers behind John's inflationary predictions, how he sees events unfolding & on what timeline, and what individuals can do today to protect themselves from such an outcome. If you are not an enrolled member, enroll today to access Part 2.
Walter J. "John" Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.
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