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Monday, May 3, 2010

John Williams of ShadowStats.com: A Hyper-Inflationary Great Depression Is Coming

From AUReport:

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...

Read the rest.

Don't believe the puffery that "recovery is here".


Anonymous Anonymous said...

Well, I've been reading these posts for almost a year, including the very realistic "The Day The Dollar Died". But, nothing yet. And, that's the problem. Yes, it's coming say the experts, but no one can tell you when. The feds plunge protection team will keep the market inflated to give the illusion of recovery. The feds are also just continuing the massive unemployment benefits to keep the millions in the tent cities that exist in various locations througout the USA from rioting.
If it looks like Barry and his boys and girls start to really lose control, they'll stage a false flag to suspend the constitution and/or start a war. My money is not on a big collapse, but rather a slowly deflating balloon which can be managed and spun by Barry's media whores.

May 3, 2010 at 5:23 PM  
Anonymous Rollory said...

Williams and Denninger cannot both be right.

Denninger predicts deflation because: 1) "the money supply is cash plus credit", 2) credit (in the form of housing loans) has been evaporating at terrific rates, 3) there is no mechanism for a wage-price spiral - there is nothing linking wages to prices or to inflation. So if they print, it just means everybody's savings disappear overnight, and a week later everybody is rioting.

Williams doesn't address this. Until he does, there's little point in listening to someone who can ignore such fundamental facts.

May 3, 2010 at 6:28 PM  
Anonymous Anonymous said...

Back when Clinton was POTUS, both he and the Republican-controlled Congress discarded American sovereignty in the form of kissing manufacturing goodbye ! NAFTA, GATT and Most Favored Nation status for the Commie Chinese have given us the financial debacle we're in today. NOTHING....absolutely NOTHING of manufacturing value is produced in the U.S. today. Our youth are boneheads from government schools. And few if any of today's youth has a work ethic.

Where are the family sustaining jobs ? They're in Red China ! Thank you Bill and Newt !


May 4, 2010 at 1:38 AM  
Blogger Concerned American said...

Rollory: Your point is almost worth a subscription to Williams just to ask that point. Thanks for thinking....

May 4, 2010 at 1:45 AM  
Anonymous Anonymous said...

Inflation/deflation is not either/or. We could have deflation as the pyramiding of fractional reserve loan-making collapses, at the same time we have inflation from printing dollars to cover the deficit. These two tends could appear to cancel for a time, although they really don't because the net effect is still a huge distortion of the economic environment as experienced by the honest business. Ultimately, however, hyperinflation will outstrip deflation. All the historical empire collapses have been in hyperinflation, not deflation. Why should this one be different?

May 4, 2010 at 5:13 PM  
Anonymous Anonymous said...

Williams and Denninger cannot both be right.--Rollory

Williams predicts an inflationary recession. M3 has turned negative. This will cause an intensified downturn. Aggregate wages will fall because employment will decline. This is the implication of "negative economic growth".

This will impact tax receipts, which will push distresses states such as California into default on its credit obligations (e.g., bonds and pensions).

It will also push under-capitalized banks over the brink as more unemployment translates into additional foreclosures.

The financial support needed for bankrupt state treasuries and failed banks will come through addition injections of cash and credit--what Denninger identifies as the "money supply".

There is no contradiction. The coming deflationary collapse will trigger massive intervention and credit expansion, which in turn will inflate commodity prices.


"Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It's happened four times before now, in modern reporting. You saw it in the terrible downturn of '73 to '75, the early '80s and again in the early '90s. In December of 2009, annual growth in real M3 turned negative. It's now at a record low in terms of decline, down more than 6% year over year. What that suggests is that in the immediate future you're going to see renewed downturn in economic activity.

"In all the prior instances that I mentioned, this event led recessions, except for '73 to '75. That's when you had the oil spike and a recession that came from that. When the money supply turned down in that recession, the economy accelerated in its decline. We're going to see something along those lines, now, with about a six-month lead time. You're going to have negative economic growth this year. The implications for that are extraordinary, because the projections on the federal budget deficit, a number of the state deficits, and the solvency and stress tests for the banking system all were structured assuming positive economic growth in the 2% to 3% range for 2010. Instead it's going to be negative. Many states are going to be in greater difficulty than they thought. Most likely, you're going to have federal bailouts there. The banks are going to have more troubles. All this means more government support, more government spending, greater deficits and greater funding needs for the U.S. Treasury."

May 4, 2010 at 10:34 PM  

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