John Williams: Can Domestic Natural Gas Cut the Deficit?
Source: JT Long of
The prospect of significant U.S. natural gas production may
not be powerful enough to overcome the hot air coming from
government quarters, but
Editor John Williams identifies it as one bright spot in his
otherwise dark outlook for the U.S. economy. As Williams tells
The Energy Report
in this exclusive interview, increased domestic shale production
may not save the U.S. dollar from extinction but it just might
have a major positive impact on the GDP, the trade deficit and
The Energy Report:
You've been tracking macroeconomic trends and their impact on
energy commodities for decades and since 2004 through your
Shadow Government Statistics
newsletter. In a Nov. 10 piece on the trade deficit, you
Massive fundamental dollar dumping and dumping of
dollar-denominated assets may start at any time with little or
no further warning. With the U.S. government unwilling to
balance or even address its uncontainable fiscal condition and
with the Federal Reserve standing ready to prevent a systemic
collapse so long as it is possible to print, spend, loan or
guarantee whatever money is needed, it puts the U.S. dollar at
increasing risk of losing its global reserve currency status.
Much higher inflation lies ahead in a circumstance that rapidly
could evolve into hyperinflation.
What would be the first sign that hyperinflation is taking
I'd look at the dollar. You'll see massive selling of the U.S.
dollar and dumping of U.S. dollar-denominated assets as an early
indication. That will be very inflationary, and an indication of
global loss of confidence in the U.S. currency. We've already
crossed that bridge.
Based on generally accepted accounting principles, the annual
U.S. budget deficit is running in excess of $5 trillion. Such a
deficit is beyond control and containment and dooms the U.S.
government to ultimate insolvency and a likely hyperinflation.
Money is printed to meet obligations; the government cannot cover
its debt otherwise. The efforts by the Fed and federal government
to contain the current systemic solvency crisis have moved the
onset of a hyperinflation from the end of this decade to the
relatively near term.
If you look at the debt-ceiling negotiations and the
deficit-reduction deals that were in progress back in early
August, it became clear to the rest of the world that the people
running the U.S. government had absolutely no political will to
address its long-term insolvency. You saw a very heavy selling of
the U.S. dollar right after that. This was even before the
Standard & Poor's downgrade.
The downgrade was an indicator of the loss of confidence,
though-not the cause.
The downgrade only exacerbated the problem. Once it was clear
that there was no political will to address the fiscal issues,
dollar selling became intense. Official actions followed that
provided temporary support for the U.S. currency. You saw the
Swiss franc soar relative to the dollar. The Swiss then
intervened, with a quasi-tying of the franc to the euro, which
effectively also meant intervention to support the dollar. Gold
prices soared, and gold future margins were narrowed.
The lack of global confidence in the dollar underpins the
extremely volatile markets since that time. We've seen all sorts
of interventions and all sorts of rumors floated, but I believe
the fundamental global confidence in the dollar has been mortally
shaken. As you see mounting selling pressure on the dollar,
you'll generally see spikes in commodities that are denominated
in U.S. dollars, particularly oil. That's very important to the
U.S. in terms of inflation. That's where heavy dollar selling
will be seen as a trigger for rising consumer prices and as an
early trigger for hyperinflation to move into full speed.
What happens to oil prices in hyperinflation?
It depends on how they're denominated. I suspect if the dollar
becomes weaker, we'll see a very rapid and strong movement to
base oil pricing in something other than U.S dollars. The value
of the OPEC (Organization of the Petroleum Exporting Countries)
members' income will drop very quickly as the dollar value drops
in terms of international exchange. If oil were denominated in
Swiss francs, you might not see too much of a spike, but looking
from the perspective of someone living in a U.S.
dollar-denominated world, the pace of increase in oil prices will
be directly and proportionately tied to the weakness in the
dollar against whatever the valuation base is for oil.
The Department of Energy (DOE) reported that gas prices declined
0.8% in September. Are you seeing that gas prices are declining
or increasing according to your statistics?
I think the DOE aggregate prices are reasonably accurate on
gasoline. You're going to have ups and downs in the market with
very volatile oil prices, as we've seen over the past couple of
years. Various factors will affect it. For instance, a crisis in
the Middle East can spike oil prices very rapidly. But as the
dollar comes under massive selling pressure, oil prices will
spike, and a rapid decline in the U.S. dollar will result in a
very rapid rise in oil prices in dollar-denominated terms.
September gross domestic product (
) numbers showed a slightly narrower trade deficit compared to
August, partly due to declining oil prices and import volume.
Your newsletter suggests possible inaccuracies in federal data.
Can these numbers be trusted?
I pay no attention to GDP as an indicator of what's happening in
the broad economy. There's a major problem with the way the
government adjusts its data for inflation. The way it comes up
with the headline number, growth is deflated by its estimate of
inflation. To the extent that the inflation is understated, you
end up with overstated GDP growth. Perhaps not too surprisingly,
government-reported inflation is understated, which causes
significant overstatement of official economic growth. That's one
reason the GDP is out of whack.
The GDP inflation estimate includes what the government calls
hedonic adjustments, where nebulous quality adjustments are
factored in and subtracted from inflation. I estimate this takes
about two percentage points off the annual inflation number. If
you deflate the GDP corrected for that, you'll see that we never
recovered from this recession.
Is that the case with oil price estimates?
Oil price impact on the GDP is not obvious to the casual
observer. If oil prices rise, that usually means a higher
inflation number and, therefore, it could be expected to weaken
the inflation-adjusted economic numbers. So in terms of domestic
oil production reflected in the GDP, in nominal terms-before
inflation adjustment-part of the production number increases
because oil prices are higher, but that gets reduced out when
inflation it is factored in. That's what most people think of as
the inflation effect. But remember, we import more oil than we
export, and the imports are subtracted from the GDP. So high oil
inflation, which would traditionally lower the rate of growth,
actually increases the pace of total GDP growth because the
negative effect actually is subtracted out as part of the
aggregate negative net exports.
In other words, higher oil prices actually spike GDP reporting
because of the way the net exports are handled. That's the nature
of the GDP. Again, I put no value in the GDP as an indicator of
That's for prices of oil. What about volume? In September, oil
volume was down according to government statistics.
I believe the government has fairly good measures of the physical
flow of oil. The reporting of the flows, though, does not always
hit when it should. The paperwork flow on imports is better than
it is on exports. Duties are sometimes assessed on the imports so
they keep much better track of that than they do for goods where
they don't collect money.
So if oil imports were down from September to October, is it
simply because, as you said, we never came out of the recession?
Or does it mean we're going into a double-dip recession?
I wouldn't read much into that because you can argue it either
way. You can make all sorts of stories from it, and the people
who hype the GDP numbers for the market are pretty good at
spinning their yarns.
So if we're looking at hyperinflation sooner rather than
later-which would affect oil prices very directly-how can
individual investors protect themselves?
They need to preserve their wealth, assets and purchasing power
by getting into hard assets. If you look at oil as a hard asset,
it will tend to preserve purchasing power, but it's a consumable
and not easily portable. You can't stick it in your briefcase and
carry it with you if you move from one place to another. It's
difficult to spend physically. So in terms of hedging, I would
look primarily at the precious metals and getting assets outside
the U.S. dollar into the stronger currencies, particularly the
Australian dollar, the Canadian dollar or Swiss franc-despite the
Swiss interventions. I'm looking long term. We can expect a lot
of volatility short term, but when massive movement against the
U.S. dollar begins, those areas will do very well.
Any other energy-related issues that our readers should be aware
of to prepare for hyperinflation?
I'm looking at the hyperinflation primarily in the U.S. dollar,
not in other currencies, so it's largely a dollar problem, and
the basic protection for those living in a dollar-denominated
world is to be out of the U.S. dollar. If you live in a world
denominated in Swiss francs or one of the other stronger
currencies, you need to think seriously about where you have your
dollar investments. That's the basic consideration from the
standpoint of hyperinflation, whether you're in the energy
industry or you're a farmer or Wall Street trader.
Is there any way to create store-of-wealth value in
Farm land is a good hedge, but there's a difference between
holding hard assets with short-term liquidity, such as physical
gold, to get through the tough times until after things
stabilize, versus assets that may have short-term liquidity
issues. Real estate may present liquidity problems at various
times, although long term, it's a fine hedge in terms of
maintaining purchasing power. Up front, though, your core assets
hedging a hyperinflation have to have enough liquidity so that
you can respond to circumstances as they evolve.
In this environment, those invested in the energy sector also
have to realize that demand for energy goods will tend to be
lower than it might be otherwise, because the U.S. economy will
continue to be weak, and not much is being done to fundamentally
address that. On the other hand, if domestic oil production could
replace foreign production, you could still have a positive
domestic demand environment. I'd push for that as much as
Could drilling for natural gas in the U.S. really have an impact
on the import/export statistics going forward?
If we can increase exports, that would be a plus. To the extent
we produce it domestically and import less as a result, that also
would be good for the economy. To the extent anything is produced
domestically, that's a big plus for the economy.
Can we pump and use enough natural gas domestically from the
shales to actually make a difference or are we talking too small
of a number compared to the amount of oil we import?
I am not an expert on natural gas production. Of course volume is
an important factor, and a major increased production would have
a significant, positive impact on the GDP. Anything that
increases U.S. production and reduces the trade deficit is a
plus. Usually increasing domestic production would have the
effect of decreasing the deficit. The deficit is a negative for
the economy and for jobs. So anything that reduces the trade
deficit will be a positive factor for U.S. employment.
That makes sense and is very helpful. Thank you for taking the
time to talk with us.
Walter J. "John" Williams has been a private consulting
economist and a specialist in government economic reporting for
30 years, working with individuals and Fortune 500 companies
alike. He received his AB in economics, cum laude, from
Dartmouth College in 1971 and earned his MBA from Dartmouth's
Amos Tuck School of Business Administration in 1972, where he
was named an Edward Tuck Scholar. Williams, whose early work
prompted him to study economic reporting and interview key
government officials involved in the process, also surveyed
business economists for their thinking about the quality of
government statistics. What he learned led to front-page
stories in the New York Times and Investor's Business Daily,
considerable coverage in the broadcast media and a joint
meeting with representatives of all of the government's
statistical agencies. Despite a number of changes to the system
since those days, Williams says that government reporting has
deteriorated sharply in the last decade or so. His analyses and
commentaries, which are available on his ShadowStats.com
website have been featured widely in the popular domestic and
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