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The Goverment and Credit

Posted On: 2006-10-11
Length: 45:00

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This is Johannes Ernharth here, and welcome to tonight's edition of Vigilant Investor, live talkcast radio. Glad you all could make it, if you are listening to the live streamcast today. Let's get on to today's subject matter. Tonight we're actually expecting a call in from John Williams of shadowstats.com. John Williams is an economist who has been doing a lot of econometrics work over the years and he has a way to help get more accurate value out of the standard things we're typically looking at, GDP, CPI and so forth. We're expecting him in a few minutes to call on in. If you are interested in calling in on that we have a dial in number, which is (724) 444-7444, that's (724) 444-7444, talkcast id. 982 and the pin number that you want to use, we have two of them for anybody who has not been a registered user of Talk Shoe, and the pin numbers are 222-333-4444, that's one of the numbers and the other is 333-444-5555. We're keeping them as simple as we can and the phone number you want to call is (724) 444-7444. [music]

The bigger news outside of the stock markets is that the bond markets are beginning to adjust a little bit from their dip down we had with the bond markets earlier in the spring. The bond markets had indicated that the bond market was expecting things to be a little bit more difficult where they were continuing to raise up rate wise. And yields were not as good as people had liked them to be if you were a bondholder you were losing a little value. Today, you're looking at the 30 years yielded 490 and that is up from last week, which was about 471, and last month, pretty much even, which was about 493. So, we've bottomed out it would appear, if we're going by the 30 year. The yield curve is still at this point, inverted, meaning shorter-term rates, 6 month, your 2 years are still higher relative to your 5-year and your 10-year. And ordinarily that's going to be a recessionary indicator. The bond markets like to discount the possibility of recession. And when they begin saying, "hey, we're going to pay you a higher rate today than we are for a 5 year, it's telling you that something's a much there. And that's lasted a lot longer than the last time it inverted earlier in the winter, late, early 2006. But, the bottom line is, it will be interesting to see what happens with rates, and the reason why rates are important is that so much of what we talk about all the time on Vigilant Investor is the credit bubble and a lot of the credit bubble is mortgage influenced housing bubble and the [...] that these ultra low interest rates, we're talking 50 year low interest rates in the mortgage markets have basically enabled people to go out there and bid the prices of homes up to astronomical levels. Especially in certain regions where the high demand being the coasts, San Francisco, L.A. San Diego, you get down into Miami you go to Boston, New York, all the big cities that everybody wants to go to, with the biggest populations have just seen prices going through the roof. And if we wind back as to how that was possible it basically was driven by interest rates going down, and mortgage rates enabled people through a lower monthly payment. To get a larger home or to buy into a larger home that they might not have been able to previously afford. And the issue that we have today, 3 and a half, 4, 5 years down that path is that a lot of people are now marginal home owners if you will, relative to their mortgage, one payment away from default, or that kind of thing or if they were to lose their job, they would lose their home pretty quickly. That kind of set is feeling a lot of the pain. And just to give you an example of some of the things that have been going on, in some areas the average person cannot afford the average home price. At least they wouldn't be able to afford it through a typical 30-year mortgage. And in order to fit into the home in that region, the family has got to have a home, they would have to get into an adjustable rate mortgage, which an adjustable rate mortgage of course is going to have a lower teaser rate for anywhere from a year to 3 maybe even 5 years depending on how the product was structured. But, generally the 3-year is a very popular format and after 3 years the rate resets to the current market environment. And generally it's pegged to an index and then it's that index plus a couple of points. And, what's happening and we're in the midst of right now is a lot of those 3 year old mortgages going through a reset. And I was reading a figure just a couple of days ago where we were looking at about 2.5 trillion in 2006 and 2007 coming due in adjustable rate mortgage resets. Now, we're very fortunate that we've had this dip down where mortgage rates and you know, you were reading the news the past couple of weeks, mortgage applications were hitting highs again over the past few weeks as mortgage rates were hitting lows again from where they had been in the spring. And, people were getting kind of panicky in the spring because the average mortgage rate was starting, like the 30-year for example was starting to bust over 7 percent. And, when that was happening you had people coming out of a 3 and a half percent or 4 percent adjustable rate mortgage interest rate, and watching their interest rate go up by that high a degree, if they were even going to re-fi, and if they weren't going to re-fi, they were going to stick with their ARM or their adjustable rate mortgage, it would even have been higher, peoples payments were doubling. And if you're talking about people who couldn't afford the initial monthly payment to begin with, you're talking serious problems. Now, separate from that, we're also talking about the speculative side of the market. And if you checked out the Vigilant Investor, I think it was on Friday we posted up a story about a blog that was out there, there's a 24 year old who literally went out, and I've got to read this to you, he says about me, and this is on his blog at iamfacingforeclosure.com, basically he says, "about me, I am a 24 year old aspiring real estate investor from Sacramento, California, and after going to a few seminars, I bought eight houses in eight months across 4 states with no money down. I fixed and sold two and ran out of cash and now I'm facing foreclosure on 6, (and he had six crossed out) 5 houses and I'm learning my lessons, finding solutions and blogging about it, comments appreciated." Now, that's directly from iamfacingforeclosure.com, you can click through that, we have links to that at Vigilant Investor we posted last Friday, which was the 7th I believe of October. One of his posts says, " yes, I lied on my loans, I overstated my income, misrepresented my owner occupied status, and the concealed the cash back at close from the bank, I knew it all along, nobody made me do it, it was my fault, I take full responsibility." If this 24 year old is able to get away with that and we know for a fact that that mortgage market has had some of the most lenient lending conditions over the last 5 years, if ever existed in history, I mean obviously how difficult could it have been for this 24 year old to pull this off? And people say, "yeah, this is an anomaly." But no, the bankers, mortgage lenders seem ready to just throw money at the situation and when you have that kind of money flowing around for a 24 year old to do this, house prices clearly are out of whack from reality, and the real problem is going to be on the backside of this. [music] John are you there with us?

John: yes I am.

Okay, excellent. Well, welcome to the show...

John: Oh, thank you Johannes.

Glad you could make it on tonight, and certainly do thank you for joining us. John, maybe you can tell the listeners a little bit about how you got to where you are today as someone who we've come to rely on to give us a better view of where CPI, GDP, unemployment, all these figures that we get, you know, week to week, month to month coming out of the government, and opinions on that coming out of Wall Street.

John: Sure. I've been a consulting economist for 25 years or so, and when I first started, one of my first big accounts was a commercial airplane company. They had a model, a model revenue passenger miles, which is their primary marketing number, they used it for forecasting airplane sales. And, I had a pretty good model that well all of the sudden wasn't working. One of the factors that drove it what was then called the Gross National Product. And, we looked at the numbers pretty carefully and found that indeed that there were problems with what was being reported with the GNP, there were some terrible distortions in the trade data, we corrected the numbers for the client, their model worked, a year or two later the numbers were actually revised as we had indicated by the government. Unfortunately that series has now gone far astray from what is usable in most economic forecasting. But as a result of that I realized early on that I had to get into the background, the nature of economic reporting, how the numbers were put together, where the weaknesses were in the system. I knew a number of people who were clients and I met a number of people over time who had been involved and government numbers going back to the 1920's and even before that. An old friend by the name of Al Shindlinger had been a consultant to Herbert Hoover before the Great Depression. He had a, he did some consumer polling for Paramount Pictures at the time, that's how they determine how their certain pictures were received, what people were looking for. And, the problem that Hoover had was that he really had no idea how bad the economy was. Back before WWII, the economic statistics that you had were very limited. You had a crude industrial production number that was put out by the Federal Reserve, there was a nation CPI number, but beyond that, very little. And what people tended to rely on was the stock market. The stock market was strong, people presumed the economy was strong, and if it was weak, it was weak. After the war, the system of reporting that we have today was pretty much put into place. Hoover knew that the system would quickly be politicized and he set up Shindlinger in businesses an alternate to measuring the government statistics as the government did through direct surveying of consumer conditions. And, Shindlinger did that for a number of years, he died maybe five years back. And his numbers tended to coincide with mine and outlook tended to coincide with mine. I was coming at it from a different standpoint working with my own versions of the government statistics. We got together and compared notes and I think got a fair sense of where economic reality was. What happened after the war, what was it, it took about 10 years before the numbers started getting fooled around with. During the Kennedy administration, the unemployment rate was redefined, so that if someone was unemployed and they wanted to work, but they couldn't find a job in their area and they'd given up looking, they were classified as a discouraged worker and taken out of the unemployment count. And that significantly reduced the unemployment rate. During the Johnson administration, Johnson was noted for reviewing the GNP statistics before they were released, and if you didn't like them, he'd send them back to the commerce department, and he'd keep sending them back until he got them right. During the Nixon administration he got into terrible political fights with the bureau of labor statistics, he wanted to do some things to the labor numbers from a political standpoint that even the bureau of labor statistics would not do then but it did start doing under the current Bush administration. Jimmy Carter was caught fudging the inflation numbers. During the Reagan administration, a lot of changes were made to inflation reporting, employment reporting, GDP reporting; we had a very severe double dip recession in the early 1980's and one thing that you don't want to have happen if you're a statistical agency of the government reporting any economic activity is to underestimate economic growth or overestimate inflation. That's political suicide, and that was actually happening. So what happened, what started happening then to a certain extent it happened before was that methodologies were changed and altered and biases were built into the series that tended to put an upside bias into economic growth as you saw it in the GNP and the GDP and the changes were made that tended to reduce the [...]that reached its zenith under the Clinton administration, although it started in the first Bush administration. If we look at the CPI in particular. When the CPI was came into popular use was after its inclusion in some auto contracts after the war, that's the cost of living adjustment. The concept was fairly simple. You look at a fixed basket of goods, you look at a steak, a gallon of milk a loaf of bread, here's what it cost this year, here's what that cost the next year, the difference between the two is the increase in the cost of living. It's a constant standard of living. And that's the way the CPI was reported in terms of its rating up into the 1990's. Are you there?

Yes, I am.

Okay, sounded like we were going blank there a minute. Then the, in the late 80's, Michael Boskin who was the head of the council of economic advisors and Alan Greenspan, then the Fed Chairman watched a coordinated effort to change the way the CPI was reported. They argued that the CPI, and you'll still hear this today from Mr. Bernanke, that the CPI overstates inflation. The rationale is as follows: that if the price of steak goes up, people will tend to buy hamburger and if they buy hamburger instead of steak then really their cost of living goes down instead of going up. But that violates the whole principle and the whole concept of the fixed basket of goods, and having a cost of living that's based on a constant standard of living instead of a declining standard of living or what I'll call a cost of survival as opposed to a cost of living. The reason they were pursuing this was that if they could reduce the rate of inflation in the CPI that, that would lower the annual increases to Social Security, the cost of living adjustments. That in turn would help bring down the budget deficit, no one in Congress would have to vote against Social Security, which is political suicide. So it solved all sorts of issues for them. When you talk about Social Security, estimating where Social Security would be payment wise if they hadn't made these adjustments what kind of cut did [...] actually get from that?

John: Well, I've recalculated the numbers, going back over time because there was a change, although it didn't take place this time with Boskin, when Clinton came in they put in what they call geometric waiting that was supposed to mimic the substitution based CPI, that's what they have in effect now. And, the effect of that is about 3 percent per year, and its effect is cumulative, but if you go back over time there are other changes that were made as far back as 1980 where they switched the way housing was included in inflation. And that effect is if you take out the changes, and the Bureau of Labor Statistics does publish an estimate of what the different changes have added to or subtracted from inflation. And then, bring it back forward and keep in mind this is cumulative year after year after year if we were using the CPI today the same way it was calculated back in 1980, Social Security checks would be double what they are today. That's how big a difference it makes.

You hear numbers like that and the immediate reaction, when we try to explain this sort of thing to people out there is that, is this is really going on why aren't people really up in arms? Why is Wall Street not saying for example, we can't trust real CPI?

John: Well, keep in mind that this is something that has changed slowly over time and incrementally over time. The changes have been public. The government is very honest about the changes as they are made, you can make academic arguments for why you'd want to do this, and indeed you have someone like Mr. Greenspan saying yes, the CPI indeed overstates inflation because it doesn't have a substitution effect in it. That's nonsense if you're looking at a constant cost of living. I mean a constant standard of living, cost of living. But Wall Street needs this type of data. You mentioned how you were getting mixed signals out of Wall Street, I'm not a Wall Street economist, it's an option I had many years back and I decided that I was not going to join the whore house if you'll pardon the language. I know a number of Wall Street economists and there are a couple of guys in there that are really good. But most of them are employed by people whose livelihoods are dependent on selling stocks and bonds. I'll give you a very specific example of something that shows how the views get pushed around here a little bit. Keep in mind that the primary sources for information and the financial media are Wall Street economists. Wall Street makes them readily available, Wall Street does a lot of advertising in the major financial media. I was on CNBC back before the recession of 1990, or as the recession of 1990 was breaking in 198, arguing whether or not there was going to be a recession and I was on with a prominent bank economist, that bank has since been merged a couple of times, but the economist is still around, well recognized guy. And we were sitting before the show talking about what was happening, he asked me what I thought was ahead and I told him we were looking at a very severe recession, it's going to be a protracted one, and he looked at me and said, "yes, I think that's the consensus." Now, that to me was a shock, because I wasn't hearing anyone else talk about it. We went on the air, I gave my view and then, I think it was Neil Cavuto turned to the other guy and he said, "what are you looking at?" And he said, "oh, we've got a booming economy ahead." And, it wasn't that the man was a bad economist or that he was stupid, he knew exactly what was happening, but he had to sell his story.

I was watching Bush earlier on TV today, the president talking about how the budget deficit has dropped to 250 billion and how far ahead of schedule they are. What are you seeing with those kinds of numbers coming out of the Federal Government relative to [...] deficits and you know, the whole U.S. budget and whether it's balanced or not.

John: The budget's probably the worst of the numbers in terms of the accuracy of the popular reporting, and there's a reason for that - goes back to the 1960's with our old friend Lyndon Johnson who made sure that GNP numbers came out right. Very astute politician, he wanted to spend money on the war in Vietnam, he knew that people didn't like deficit spending and budget deficits so they introduced accounting on our national fiscal condition which ended up excluding Social Security at least in terms of the ongoing liabilities that we were accruing. But they did count the cash that was paid into social security taxes as part of the regular cash flow. And that had the effect of reducing the actual deficit as, the reported deficit against what was actually happening. By the time you got to the 70's, what was [...] the 10 big accounting firms decided to address the issue in a different manner and they said, "look, Federal Government's biggest operation in the world should have a bookkeeping system that's similar to a major U.S. corporation, they should be able to track their books and their income and liabilities in such a same way that corporations do, and they asserted then to set up a bookkeeping system that would use generally accepted accounting principles, the same way a corporation does. And as of 2000, although they've had prototype statements since the late 70's. 2000, 2001 they started actually publishing financial statements on the federal government the same way a corporation does. And, what you'll see happen is if you account for the liabilities that are being accrued on Social Security and Medicare that are not funded. What they do is they estimate what's unfunded, they make it a, they adjust it for the value of money and bring it into present dollars, they reflect that on the statements as a liability, they've reflected and as assets they take the weapons we buy, they put them into inventory and expense them, it's just accounted for like a business. The problem is, when you look at it on a gap basis, instead of seeing a deficit that's running from 250 to 400 billion a year, you're seeing something that's close to 4 trillion a year, ten times that magnitude. And to put that into perspective, you say 4 trillion, people look you and say you're nuts. You go to our site, you'll find links to the treasury statement and you can see it for yourself. But to put a 4 trillion-dollar a year deficit into perspective and one year it was recently was up to 11 trillion. That's when they improved the Medicare system. They put that in place, they just didn't fund it. So in one year they added 8 trillion dollars to the net obligations of the government, you have people there that, you know, think they can spend any money that they can think about without having to worry to pay for it. But if you look at the 4 trillion a year, if you just decided to now want to balance the budget, if you were to do it from a standpoint of raising taxes, if you took 100 percent of everyone's wages and salaries, just made taxes 100 percent, seized all income, you'd still have a deficit. That's how bad it is. And it's beyond control. I mean if you can't contain it, if you can't cover it with taking all the cash that's been generated in income, there's no hope of containing it from that standpoint. The other end, is to cut off Social Security and Medicare which politically is impossible, so that has very dire implications for what lies ahead.

Stephan: John, what do you think is the inevitable result?

John: Inevitable result is going to be a hyper inflationary depression. You effectively have a national bankruptcy, only the government's not going to go bankrupt, they're not going to say, "well, we're not going to pay the debts that we owe." I mean that's an option they have, but from a practical standpoint, I've never seen a major government do that. But the solution is a simple one, you rub up the printing presses on the money to pay off everything with very cheap dollars and you end up with a very high rate of inflation, you get your money back but it's not worth anything. And the problem is we're dealing with the world's reserve currency here. It's out of control, most people know this in Washington, most central bankers know it, you don't want to be holding dollars when the dollar goes, becomes worthless, you want to be in something like gold to preserve your purchasing power because at some point, speculating here where this will go but, I think this is a fairly likely scenario, we're going to have to reconstitute an international currency system, because without the dollar, you do have to look at reorganizing things. My betting is they'll have some kind of [...] new system for gold, the reason for that being that they're going to have to regain public confidence.

The Federal Reserve just had an article written by Laurence Kotlikoff -

John: Yeah, I think it was the St. Louis [...]

Yeah, they literally posed the question, is the U.S. going bankrupt? And his solution was an immediate two-third cut of all benefits, of all promises or an immediate doubling of taxation, was his solution, just because of the liabilities out there -

John: Right, well the taxation end of it won't work, and politically there's no way out of it. There's no political solution within our current system.

Absolutely, the voter will definitely want to have their cake and eat it too. Reminds me of the quote from H.L Mankin, "the system of democracy is the theory deserve to get what they want and good and hard."

John: We are seeing something like that work it's way through the extreme.

The Federal Reserve itself is almost pre-inoculating itself against what's coming down the pike when it is functionally the enabler of a lot of this through the money supply system.

John: Well, it's to a large extent responsible for this as are both major political parties. And the thing is they have no way out, so what they're trying to do now is just to buy time and hope that the bomb goes off on the next guy's watch and they're just trying to keep the system afloat day to day, hope that there's no financial panic. But if I could just quickly turn back to the statistics a second?


John: Because there's, there is something here that you'll find, I mean in terms of, some of the things you were getting at early on. If you know your own business, your own conditions, and you rely on your own intellect and instincts, you're generally going to do a lot better than what the stuff you get out of the federal government. I did a survey of business economists, some years back on a regular basis, and asked them about the quality of government statistics, and you get the economists for a major retail company and he'd say" well the retail sales report is terrible, but I think the money supply is real good". Then you've got a major bank economist and this literally happened, the guy said, "oh I think the retail sales are the best number around but, money supply numbers, you know, they're worthless." People know the numbers, they're not very good. Few people understand how bad the numbers are. It's a typical think to put these statistics together, but with the biases that have been built into the system over time, just as a rough rule of thumb, going up and down the major list, the GDP is overstated by about 3 percent, inflation is understated by about 7 percent, if you go back to the 1980's where you've calculating it, unemployment running around 12 percent; now those numbers may sound crazy in terms of out there in the popular press, but you go back a couple of years, the Kaiser Foundation along with The Washington Post conducted a survey of the public. And asked the public, you know, what's the rate of inflation, what's the rate of unemployment and so on? And believe it or not, their numbers came in very much in line with what I say is reality. The Kaiser Foundation took the public apart and said, "see how ignorant the public is. The public doesn't know that this is what the numbers are and economists know what these numbers are."

Stephan: John, the other thing I [...had this conversation] recently and also with clients of ours, am I correct in stating that M3 over the last 3 years, did that increase to [...] around 20 percent?

John: Well it's increased roughly 9 percent in the last year alone so that's about right.

Stephan: Yeah, and you know, as someone that walks into a grocery store or picks up a salad for take out or what have you, you start to notice that that is your true rate of inflation, what costs 7 bucks does cost 10. The first time I can remember going shopping, I do a double take on a package of coffee, when normally you didn't really pay attention to it. [...] It is a direct correlation.

I think what's missed by a lot of people is that there's the impression when you look at a number like CPI and you're conditioned over your lifetime to read inflation as a CPI figure, you're under the impression that inflation hits everything equally across the board and it's does not do that, and you see a couple of variables that inflation has been largely venting through our credit system over the last 10 years and you look at, you know where have we seen some of the biggest price increases in some areas, of course the housing bubble is a byproduct of that, but you also look at...You know and I've sat down with people who have told me point blank they will leverage themselves to the hilt in order to put their kids through college. And then, you people are scratching your heads wondering why college prices are going up 14 percent a year. So it doesn't necessarily hit everything evenly at all times, it tends to flush around pretty quickly. It dumbfounds me when I see this, but even the temporary beneficiaries of the trade deficit [...] absent the ability to offload a lot of that money supply through the global system and through global trade. We would have seen prices go up dramatically over the last 10 years and instead it came back to us in the form of very cheap, hi-tech goods, you know cheap TV sets and so forth, that now we're starting to see, you know greater competition for hard assets and commodities and so forth on a global scale. And you know, I look at the real tipping point is going to be once the foreigners get tired of holding so many dollar denominated assets and they're already beginning to taper off a [..little bit] but once that you know, that button gets pushed where, even a slow cut back on the pace of their willingness to accept U.S. Treasuries or something like that, or you know the whole petro-dollar concept shifting a little bit. And you can see everything unwinding in unprecedented unknown ways.

John: Yeah, you're right on the mark, that's the trigger for what will be the greatest financial disaster ever seen, is when the foreign investors start dumping the dollar. There's no way the central banks are going to start step in [...] to protect it again. Central banks are big holders of the dollar and you know everyone says, "oh my goodness, these guys are going to hang on to the dollar because it's in their best interest to do so," and that may be true to a certain extent, but they also know that their dollars are going to become worthless and you don't want to be the last guy out of the burning theatre which is what we have here.

When people hear this kind of talk, a lot of times they get very suspicious, they think it just can't be. You know, why would more people not be onto this, it seems so obvious. And one of the key points I found that people, their jobs just drop. Maybe you can explain, most people have never heard of the discouraged worker concept relative to how it's calculated in unemployment. You were saying earlier that we were probably running closer to 12 percent if we were to gage unemployment by how we [...] in the depression it was 25 percent using the same standards we did then, someone who was able bodied could work but wasn't able to find a job, or wasn't trying to find a job. One way or the other, that was 25 percent [...]

John: So based on if you were using the standards of unemployment from the great depression, you'd be looking at something like 12 percent, we're talking common sense here. And let me just argue for a second that if a government statistic does not have any relationship to the real world as the general public sees it, if it doesn't affect the common experience, it really has no value outside the academic community. And the academic community God bless them, wonderful people there, but often far removed from reality. The unemployment, and this will give you some sense as to how this has been played with over time, one time I think they had 9 or maybe even 12 levels of unemployment that they reported. Right now they report 6 levels of unemployment. The popularly followed series that you hear every month is level 3, it's called U3, which is [...] around 4.6 percent at the moment. The broadest measure they publish a the moment is U6, which is up around 8 percent, that's more of a seasonal distortion at the moment than anything else. But the discouraged worker concept very simply was, to be counted in the unemployment survey now a lot of people thing this is based on the filing of unemployment claims, that's not true. What they do is they go out and they survey 60,000 households every month and they interview someone in the household and find out if someone is actively in the workforce and to be in the workforce you either have to be unemployed, or employed. To be unemployed, you have to be without work, wanting to work, able to work and to be actively seeking work. The discouraged worker is defined as one that met all those qualifications except that they've given up actively seeking work because there were no jobs to be had in the geographic area in which they were living. This is when you had major plants close and such. During the Clinton administration, they decided to redefine the discouraged worker so that if a discouraged worker had been discouraged for more than a year, the worker was no longer accounted for as a discouraged worker, he just disappeared from the numbers. And that reduced the number of discouraged workers, of course it was you know 4 and a half, to 5 million people, down to about 4 to 5 hundred thousand. So, if you add that back in, those discouraged workers that have been defined a way that takes you from your current highest level of unemployment to about 12 percent. That's where I came up with that number.

It was reported I think earlier in the week or late last week 4.6 percent is the jobless rate...

John: Yeah

So that puts it in perspective of just how ridiculous it is. And when you cut to the details of what actually has gone on there is just so brazen that it defies I think common sense. You know you tell people that this is going on and they say, "no, that can't be!"

John: It is common sense, you ask the average guy...let me tell you a quick story. You look at the way consumer confidence is measured, popular measures basically ask individuals to, you know, how's the economy going to be 6 months from now? Any better or worse? They're asking people to be economists. And in doing so, since the average person isn't an economist they'll tend to rely on what they heard in the financial media as to what's happening. So, the consumer confidence more than anything else in terms of the economy tends to follow what's being reported in the press. And there's a professor out at the University of Michigan who has shown that with his own measure of negatives or positives reporting on the economy in the press. It does predict consumer confidence. My old friend Schindlinger who did something similar, in fact he designed the conference boards survey, what he did with his survey was, he'd survey the individuals and instead of asking them what was, you know the economy was going to be stronger in 6 months, he'd say well, where do you work, do you think there are going to be more people working 6 months from now? Do you think your own personal income is going to be up or down six months from now? Put it at a personal level. And if you look at it at a personal level and aggregate it, you get a much better picture of what's happening? And I'll contend that if you talk with the average person today, you're going to find that most people are finding it's a tough economy, that inflation is bad, business is not as good as it used to be, it's been softening in the last year if it's not actually down, and that's the reality. If you go with the anecdotal evidence, you'll generally do better than what you're going to do with the popularly followed government statistics in terms of being right about the economy and inflation.

We see when I think it was a week and a half ago or so, Wal Mart revised down it's earnings estimate by a half percent, just think was right after the 30th, two days later, they knocked it down some, and it tells you, when the largest retailer is having issues there relative to what it is expecting to come through the door, I think you're seeing a little bit, and when you have inflation moving along, people who are dealing with the money and the first users of it tend to do a lot better than people on the bottom end of the scales. So, you always see the recession, that's inflation induced, affecting the lower wage earners, the people on the margins much sooner. And last week we were told that retail sales were up a little bit from other retailers. But, you hear a lot of stories about the fancier stores doing just fine and being full, but a lot of the other stores finding that the consumer's getting tighter.

John: Well there's another thing going on right now too that you have to be wary of, and that's only true for the next month or so and it's a happy coincidence for the administration, with a current need of happy numbers before the election. A year ago, you had Hurricane Katrina devastating the gulf coast, and if you look at what happened then, retails sales dropped sharply. You could argue that it actually gave you a negative economy for a month or two. So the numbers that you're looking at now, you mentioned the retail store sales, year over year those are going to look a lot better because there you're looking at more normal activity against what was a depressed period last year. And you're going to see, and that also affects the seasonal factors that they put into these things. So, you're going to see some stronger economic numbers for the month of September, you're also going to see a sharp drop in inflation on a year over year basis. The CPI jumped I think it was 1.2 percent last September because of what was happening but well again that's going to be on a comparative year over year basis. But the, those numbers are going to reverse after the election, and you're going to see higher inflation again and weaker economic activity.

There's so much tied to the expansion of credit over the past few years too, that it just seems as, you know, common sense wise that it's inevitable that you have to have a slow down. I just don't see where the next huge round of liquidity to get the consumer out there purchasing, and you know still, last week you could flip on your MSNBCs and so forth, everybody's talking about the resilient consumer. And, you know, I tune into Kramer every now and then to hear what that guy has got to say and he's talking about how the Fleckenstein's of the world are all wrong and they keep giving the obituary for the American consumer. But common sense tells you when you know, two years in a row you have a 650 billion dollar contribution from home equity withdrawal to the U.S. economy, you have to scratch your head and just ask you know even if that gets half of what it was the prior year and you just can't have home equity with especially, you know, clearly now the housing bubble even the Fed has acknowledged is you know reversed. And you know, when you have that happening, you just can't have that ATM card, which is really what the houses have become there for a while serving to aid the economy, to aid the consumer. And I think just to keep on presuming that everything is just fine and that you're not going to have an adjustment is just insane. It just doesn't add up. Well, John I'll tell you what, we've gone a little bit over our ordinary time, but great conversation, I certainly have enjoyed speaking with you on this, and we'd love to have you on again if you can -

John: Oh, that would be my pleasure, I thank you for having me tonight.

Maybe you can tell the listeners a little bit about Shadow Stats, what they can find there -

John: Sure, I have a web site called shadowstats.com. I have a number of publicly available articles that describe the background and history of the more widely followed government statistics and detail on the actual federal deficit as the treasury does report it, these statements come from the treasury, I'm not making them up. We also now publish estimates of alternate CPI, ongoing measures of M3, and alternate GDP measure, and we do sell a newsletter if anyone's interested in subscribing, we certainly welcome subscribers and we do have a number of the older newsletters available in the archives for people to read at their leisure. And if anyone wants to leave a question, I'll do my best to get back to them, the web address is shadowstats.com. And, again I thank you for having me on your show.

Well, thank you too John and we'll be in touch with you, you take care. And, look forward to speaking soon.

John: Likewise, take care

There are definitely some pundits out there that are worth following and what we try to do is help you find them, but when they're saying something that's of importance, but there's a lot more to this whole stats side of things, there's a lot more to the money supply side of things. And one of the things, the topics that I would love to get into going forward is the whole premise of the modern view of inflation, and you know, hey the official stats are underestimating or underreporting what's really going on, which I'll tell you what if you're planning your retirement on the 3 and a half CPI and in reality inflation is 9 percent, holy moly you better be rethinking your whole real verses nominal return discussion. I mean that's just, you could be totally upside down and find yourself you know, opening the cat food cans if you're not careful. But, more importantly, people need to understand what inflation does to an economy. Inflation is simply the printing of money and we're not creating anything, it's not backed by anything, it's not as if someone went out there and baked a bunch of loaves of bread or built a factory or saved something, they're just printing money, they're throwing it out there and that money all the sudden has achieved purchasing power, but it's at the expense of everybody else. Stephan do you have anything else to add to this before we wrap up tonight?

Stephan: Yeah, and I think you're right on and I think the figures are there but the thing that you and I always chat about, it's people have to want to, it's the truth, these truths are not easy to swallow, but they are concrete facts and I think one of the biggest phenomenon out there related to this is that [...] the industry definitely, the investment industry definitely doesn't want [...] these facts, it wants the party to go on. And sad to say, so do a lot of investors. And, so do a lot of people out there.

Yeah, it's a lot more comfortable to be with the herd and to not have to worry about this kind of stuff. And, you know it's complacency, but it's also hopeful thinking and so forth. And, we'll be having Doug Wakefield on again fairly soon and Doug is great. Doug of Best Minds Incorporated. Doug does a lot of good research and a lot of commentary on the human Psyche through this phenomenon where people just get so comfortable with the way things are that they begin to suspend reality. And I always sum it up as a little bit of a gamblers dilemma where the gambler at the Vegas table keeps winning, suddenly his reality gets suspended and you just kind of think that's a whole new set of rules in the odds of change, it's very corrupting to common sense. And, humans are fallible that way and it's happened time and time again. And you know we had the, you know people say, "ah that kind of stuff can't happen," but you know heck, we had the Great Depression and nobody saw that coming, or a few people saw that coming but, forget some did. You had the fiascoes that happened in the 70's and people saw that coming and were planning around it, maybe they couldn't tell you exactly when the whole kit and caboodle was going to hit the fan, but it was definitely lurking there. But we've gone well over time here, Stephan, so I'm going to thank everybody who is listening and thank everybody who has downloaded the Podcast. All said and done, this is Johannes Ernharth with the Vigilant Investor, we're on every Wednesday night 9PM. And, in the coming weeks we will be having additional guests, I mentioned already Doug Wakefield, well have G. Edward Griffin, author of The Creature From Jekyll Island which is a great expose on, not just the Federal Reserve and how it came to be in the United States, but also central banking as a whole, the IMF and a whole bunch of other things going on out there. And we'll be having Robert Bloom who knows a good deal about Austrian economics. Just be touching on a lot of different things including this inflation thing again, and talking about how that's destructive for the economy. But, again, this is Johannes Ernharth, thank you for tuning in and make sure you let your friends know about vigilantinvestor.com and the Vigilant Investor live show Podcast available on iTunes.

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