Rosy GDP numbers may have cheered the masses, but John Williams of ShadowStats.com says we're a long way from prosperity. In this interview with The Gold Report, Williams debunks the myth of economic recovery and warns that we still have serious debts to settle. That is why he is recommending caution in 2015 to preserve purchasing power and maintain your standard of living.
The Gold Report: Your hyperinflation report predicted 2014 would be dominated by economic distress, financial crisis and panics. Were you surprised by the performance of the economy this year?
John Williams: No, at least not in terms of the actual performance. We're getting some fantasy numbers, which I'll be glad to address. The economic distress continued. If we look at the consumer conditions, generally median household income has continued to be stagnant at a low level of activity, below where it was in 1967 as adjusted by the Consumer Price Index (CPI). Even though the gross domestic product (GDP) supposedly rebounded in mid-2009—it's 7% above where it was before the recession started in 2007—there's very little that confirms that.
If the individual consumer is not out there buying, we don't have good activity in the bulk of the u.s. economy. Over 70% of the GDP is tied to personal consumption expenditures, and another couple of percent on top of that is tied to residential investment. If we don't have positive inflation-adjusted growth in income—I'm talking actual household income—we can't possibly have an economy that will grow faster than income growth, other than for a temporary boost from credit expansion, and that is not happening.
Credit growth is very limited for the consumer. If we look at consumer credit outstanding, although those numbers have gained since the panic of 2008, all the growth there has been in federally owned student loans, not in the type of consumer loans that would usually go into buying washers and dryers and such. Basically, the consumer's liquidity has been constrained. We are also seeing consumer confidence and sentiment numbers that are typical of a recession, not an economic boom. We have a lack of income growth, a lack of adequate credit availability and, generally, a low level of confidence.
Consider that GDP growth in Q3/14 adjusted for inflation was an annualized 3.9%, and 4.6% in Q2/14. That's two back-to-back quarters of roughly four percentage points. This is the strongest economy in over a decade if you believe the government's statistics, yet I'll challenge you to find someone who thinks that this is that good of an economy. It's just not there. There may be pockets of strength in Silicon Valley or such, but the average homeowner and the average consumer are not seeing it.
TGR: If there are all of these negative signs going on, why are the GDP numbers so high?
JW: When Lyndon Johnson was president, he would get to review the GDP numbers every quarter. If he didn't like them, he'd send them back to the Commerce Department and keep sending them back until the Commerce Department gave him what he wanted. We don't have anything quite that overt happening now, but the government understates inflation. The problem is if you use too low a rate of inflation when adjusting economic numbers for inflation, that tends to overstate economic growth. When there is a roughly 2% annual understatement of GDP inflation, it means that GDP is basically overstated by two percentage points. When we look at the current number, 4% annualized GDP growth, we're seeing year-to-year growth of 2.4%. So if we take 2% out of that, you're seeing 0.4% growth. That's negligible.
As far as what happened in 2014, the economic data do not surprise me that much, because there are always problems with how it is reported. The ongoing problems with the economy continued. We did see a couple of flutters in the stock market. What did surprise me was the strength of the dollar. That's where the risks run for the immediate future, particularly into 2015.
The dollar is unusually strong, the strongest it's been in some time. If we look at the factors that drive it, the dollar is very vulnerable. Right now, our economy purportedly is booming, and the rest of the world is in recession. So that, on the surface, would tend to result in a strong dollar. I'll contend, though, that our economic growth is not real. The numbers will weaken. Retail sales and industrial production actually have much higher credibility than the GDP in that we'll see indications there of renewed recession. We've already seen a sharp slowing so far in the data for Q4/14.
TGR: How, in your view, did quantitative easing (QE) and tapering impact the dollar?
JW: QE was a fraud in how it was put forth. The idea here is that the federal reserve was doing this to help the economy. But even as he was expanding QE, Fed Chairman Ben Bernanke explicitly expressed that there is very little the Fed can do to stimulate the economy at this point. The systemic financial panic of 2008 brought the financial system, particularly the banking system, to the brink of collapse. That's where it was headed. The Fed and the Treasury did whatever they had to do to prevent total collapse. They created whatever money they had to create. They lent whatever money they had to; they spent it; they bailed out whatever firms they had to; they guaranteed all deposits.
