Economist: ‘Debt-fueled growth is not healthy, not sustainable’

By From page A1 | February 25, 2013

This is part two of a two-part article featuring an interview of consulting economist John Williams who believes that many of the statistics issued by the government misrepresent the true state of the economy. Part one ran in the Feb. 22 issue. 

John Williams, a San Francisco based economic consultant, said the unemployment numbers put out by the government aren’t the only statistics that are misleading. He says the (CPI) consumer price index, federal deficit and GDP (gross domestic product) are also inaccurate with the result that many Americans remain in the dark about the true state of the economy.

Defining inflation away

Williams claims the CPI is much higher than is being reported and that’s because in the last 30 years, they have changed how it’s calculated.

He says the government used to calculate inflation by pricing a basket of standard items needed to maintain a person’s standard of living. So included in the basket would be such things as a piece of beef, gallon of milk, or other goods and they would track how prices changed from year to year.

But in the 90s they began changing how the CPI was calculated because they believed the old way overstated the amount of inflation. Instead they developed a substitution based index instead of a fixed rate. So if people could substitute ground beef for steak, or low-grade gasoline for premium, no price inflation was registered for those items.

Williams said the motivation for doing so was to bring down the budget deficit by reducing cost of living adjustments for such things as social security. He said no one in Congress wanted to have to vote against social security, so by changing the way inflation was calculated, they could limit social security and other cost of living increases without actually having to vote against them.

Williams said currently official government figures put inflation at 1.7 percent. However, when he reverses the changes the government has made to the calculations, he gets an inflation rate of 9.4 percent using the way they used to calculate it prior to 1980s. If he calculates inflation the way they did in the early 1990s, he gets five percent.

He believes that today’s actual inflation, using the old way of measuring it, is actually somewhere between five and eight percent.

GDP and the American middle class

The U.S. Department of Commerce has issued numbers saying that GDP increased 2.2 percent in 2012 (from the 2011 annual level to the 2012 annual level).

However, Williams says his numbers show the economy stagnating. The biggest reason being because consumer spending accounts for 70 percent of GDP and people don’t have any extra money to spend.

“The average person’s salary is not keeping up with inflation. They aren’t spending and that’s why there’s no growth in the economy,” he said. “More than two-thirds of the economy is impaired and the economy is getting worse. There’s no consumer buying or growth in consumer credit with the exception of student loans. Retail sales are only slightly above zero and may actually be lower once inflation is factored in.”

He said the average worker is so financially strapped because of the extraordinary poor trade policies in this country that have killed domestic production.

“Trade policies have not been free and have encouraged a flight of jobs to offshore competition,” he noted. “The result has been lower-income jobs and structural unemployment. We need to overhaul the trade system and build things in the United States again. We have a big trade deficit running at close to a trillion dollars a year. We have transferred U.S. wealth abroad. It’s a way of redistributing of U.S. wealth to the rest of the world and we’re suffering as a result of it.”

Williams noted that the U.S. had a trade surplus before passage of NAFTA (the North American Free Trade Agreement) which was initiated by George H.W. Bush and finalized under Bill Clinton.

He used to own several companies that made products but was priced out of the market due to liability insurance. Then the Chinese began going around the country buying up labor intensive equipment because they have lots of labor. “Machine tool operations were part of what they bought,” Williams said.

One result of which was when a gun on the USS Iowa blew up, there wasn’t anyone in the U.S. with the machine tools to replace it. They were all shipped off to China. “You can’t live on a service economy,” he said. “Production creates wealth and that’s what we’re lacking here. Trade patterns have cost us a lot of wealth and been redistributed to trading partners who have surpluses while we have deficits.­”

The economist said the illusion of prosperity we had prior to 2008 was because Federal Reserve Chairman Alan Greenspan pushed people to take on more debt by using their homes as piggy banks. As a result, the bulk of economic growth that people saw prior to the panic of 2008 was driven by debt expansion, not income growth. “Debt-fueled growth is not healthy, not sustainable,” he said, saying that the next big credit bubble is student loans.

“The economy never recovered,” said Williams. “The GDP number is nonsense. It’s a statistical illusion by using too low an inflation number.”

Federal budget deficit

The Federal budget deficit is also incorrect, said Williams. Last October, the Treasury Department announced that the Fiscal Year 2012 deficit would be about $1.1 trillion, or 7 percent of GDP. However Williams says the actual federal budget deficit was $6.6 trillion using generally accepted accounting principles. He said that number includes a shortfall of $1.3 trillion in revenue plus an additional $5.3 trillion shortfall in the “year-to-year increase in unfunded liabilities in social programs such as Medicare and Social Security.”

That’s not sustainable,” he said. “We’re bankrupt and raising taxes has only made the problem worse.”

Williams said the deficit means long-term insolvency for the United States.

“That’s what is killing the global markets and promises to be very dangerous in the months ahead in terms of how the world will be treating the dollar,” Williams said.

“Our total obligations in terms of debt and net unfunded liabilities are about $85 trillion and it’s getting worse. If you wanted to balance the deficit, you couldn’t without an extraordinary overhaul of the system. If you took 100 percent of everyone’s income, you’d still be in deficit. We can’t raise taxes enough to cover the shortfall. On the spending side, you could cut every penny of government spending, except for social programs, and still be in deficit. You could cut every bit of defense spending, Homeland Security, etc. and you still couldn’t bring things into balance unless social programs were brought into balance because they aren’t solvent. They are insolvent. Politicians need to do something, but they probably don’t have the will to do so.”

Williams said the Federal government and California have worked out different tax scenarios on the maximum amount of taxes they can take out of system without causing a downturn in the economy. “If you kill the economy enough, it will reduce tax revenues. We’re at that turning point at the national level and California has done it as well.”

Williams said one reason the Federal Reserve is monetizing U.S. debt is because of the insolvency issue. “The Federal Reserve is the lender of last resort,” he said. “But as the Fed monetizes the debt, it means opening up the printing press. As you do that, you trigger inflation and eventually hyperinflation. There is no way to contain it other than through extreme action, but there is no political will to do that.”

Hyperinflation ahead?

Williams maintains that based on his analysis, the economy is actually contracting. “Until the income issues are addressed, we can’t have sustainable economic growth,” he said.

“The economy and banking system are still in trouble, the budget deficit is beginning to explode out of control, and we will have a serious inflation problem down the road. The Federal debt will be $18 trillion by the end of the year.

“In the past, Social Security actually contributed a cash surplus to the system. That surplus counted as spending cash for government. But the deficits have been offset by using social security.”

Williams advises that big cuts are needed to the military and social programs. He said doing so would further slowdown the economy, but stabilizing the system would allow the country to move forward.

However, Williams does not expect cuts. Instead he predicts we go into hyperinflation by end of 2014, by which time the dollar will be effectively dead.

Contact Dawn Hodson at 530-344-5071 or [email protected] Follow @DHodsonMtDemo on Twitter.

Dawn Hodson

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