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ShadowStats Editor
John Williams advises legislators to stop fooling around with the country's
credit rating. Regardless of the deal reached, he predicts that the Treasury
and Fed will continue to print money to meet obligations and add liquidity to
the economy. In this exclusive interview with The Gold Report, he
explains how that will have the effect of pushing the price of gold and other
commodities even higher.
The Gold Report: Unless Congress approves and
President Obama signs an increase in the $14.29 trillion debt ceiling, the
U.S. Treasury is set to begin defaulting on payments starting August 2. That
threat launched months of competing big deals to cut spending and/or raise
taxes. To add to the pressure, in mid-July the credit rating agencies Moody's
and Standard & Poor's threatened to downgrade the U.S. credit rating from
its historic AAA status if the debt limit isn't raised in time to avoid
defaulting on interest and bond payments. That could raise interest rates for
the government and trickle down to consumer mortgage loan and credit card
payments. John, what kind of deal would be good enough to satisfy bond rating
agencies and avoid a double-dip recession?
John Williams: First of all, the chances are nil that the government
actually will default. There is some talk that if the debt ceiling were not
raised by the August 2 deadline, the government could avoid default for a
while by playing games with its payments—pay interest and debt first
instead of paying other obligations. That could trigger a rating downgrade,
if one had not occurred otherwise. Also, I don't think global investors would
view non-payment of general obligations as a plus and could engage in dumping
the dollar. I think Congress will agree, however, to something by the
deadline. I have no expectation, though, that the deal will be of any
substance; nothing that has been proposed would improve U.S. fiscal
conditions meaningfully.
A country's credit rating is a measure of the risk of debt default. The U.S.
dollar, as the world's reserve currency, is considered the benchmark
instrument for an AAA rating. That generally is considered the riskless
category. It would be very unusual for rating agencies to downgrade a
benchmark. Yet the credit rating agencies now are seeing risk of a U.S.
default and are talking a possible downgrade of U.S. Treasuries. A downgrade
would have about as much negative impact as an actual default. You don't want
to see a downgrade. You don't want to see a default. Those actions would have
all sorts of implications, very negative implications for the financial
markets, particularly for the U.S. dollar. You would see heavy U.S. dollar
selling and dumping of U.S. dollar-denominated assets such as Treasury bonds.
You would see a spike in dollar-denominated commodity prices such as oil.
Gold prices would rally sharply, as would silver, as traditional hedges
against inflation.
TGR: Is printing more money really what the government is going to do
to pay its debt?
JW: That is what countries that spend beyond their means usually do if
they can't raise adequate tax revenues. I can tell you that the current
government cannot raise enough taxes to bring the actual deficit under
control. It could tax 100% of income, take 100% of income and corporate
profits, and it would still be in deficit. In terms of generally-accepted
accounting principles (GAAP) that include annual increases in the unfunded
liabilities on a net present value basis, the U.S. is long-term bankrupt. A
true balanced budget approach would require excessive overhaul—I'm
talking massive cuts in the social programs because cutting every penny of
government spending except for Social Security and Medicare would still leave
the country in deficit. We are spending well beyond the bounds of reason in a
number of areas. The country just does not have the ability to pay for all
the services it provides.
TGR: In a July 14 commentary, you said that, "In the event of an
actual default or downgrade, the United States position as the elephant in
the bathtub of sovereign risk likely would cause the dollar to plummet
against all major currencies irrespective of any ongoing concerns related to
Euro-area debt." What would this mean for the U.S. dollar and the price
of gold going forward?
JW: Already stocks are down because the markets are frustrated with
the lack of a deal. The U.S. is such a large player in the world markets that
if the dollar is downgraded, the impact will be felt globally. The dollar
should sink against most major currencies, including the euro, and gold
prices would experience a big bump up. It should be very positive for gold
long term. It doesn't mean that Central Banks aren't going to intervene and
that the Treasury or IMF are not going to try to
keep gold prices down. But, over the long haul, you'll see much higher gold
prices.
TGR: What would default or downgrading mean for the dollar?
JW: If the U.S. defaults or gets downgraded, that likely will end the
U.S. dollar as the global reserve currency. That's not a viable option for
the United States. People involved with getting the country to that point
should be removed from office. If you are the most financially powerful
country on earth, you don't fool around with your creditworthiness.
TGR: So, if the dollar isn't the benchmark, would it be the euro?
Would it be the yen? Would it go back to a gold standard? What would happen?
JW: It would probably revert to some kind of a basket of currencies,
probably including gold. The dollar would tend to suffer against the new
benchmark and gold would tend to increase relative to the dollar in such a
circumstance. But I can't tell you exactly what would happen.
TGR: The new European Union plan for reducing the debt burden for
Greece, Ireland and Portugal offers longer-term and low-interest loans and
allows some bonds to go into temporary default. Does that set a precedent?
Will it contain Europe's debt crisis?
JW: The euro never should have been put in place. Anyone who ever
thought that the Germans and the Italians could coordinate fiscal policy
didn't know the Germans and the Italians very well. The euro would have been
disbanded or at least realigned by now if we weren't in the middle of a
systemic solvency crisis. The European Union will do anything to keep Greece
afloat, as long as it is viewed as a threat to systemic solvency. Once the
system stabilizes, I'd expect to see a breakup of the euro.
TGR: In our conversation with you last January,
you talked about the difference between the true deficit and the cash-based
deficit published by the government. What is the true deficit and what can be
done to deal with that?
JW: The GAAP-based deficit is running around $5 trillion a year right
now. That includes the numbers popularly looked at in the press and the
year-to-year change in the unfunded liabilities for Social Security and
Medicare adjusted for the present value of money.
To bring the true deficit into balance, there is nothing that can be done
short of slashing Social Security and Medicare programs, and I see that as a
political impossibility. Again, I mention the entitlement programs here,
because you could eliminate every penny of government spending except for
Social Security and Medicare, and the government still would be in deficit.
TGR: One of the other things that we've discussed with you before is
quantitative easing (QE). Federal Reserve Board Chairman Ben Bernanke said
there will be no more quantitative easing. In your July 8 commentary, you
said the Fed will likely find the markets and banking system pressuring it
into some form of QE3. What form might that take? And, how might that impact
the dollar and precious metals?
JW: Well, Mr. Bernanke hemmed and hawed about the status of QE3 at his
Congressional testimony earlier this month. The economy is weak enough; he
will use that as an excuse. I can't tell you exactly what the Fed is going to
do. I imagine it will go back to buying Treasuries, once the debt ceiling is
raised. That will cause weakness in the dollar and strength in gold.
Generally, anything the Fed does to debase the dollar, which it continues to
do on an ongoing and very deliberate basis, means higher gold.
TGR: So, what is your prediction for the final solution?
JW: In terms of the debt ceiling, the solution is going to be to
continue raising the debt ceiling. Either that or eliminate the debt ceiling.
I don’t know what can be done politically on either side there. But,
the government is committed to certain obligations. It doesn't make sense
that it wouldn't follow through and borrow the funds to pay what it has
already committed to spend. As to bringing the U.S. fiscal circumstance under
control at present, there simply is no political will by the president or by
the aggregate sitting Congress to do so.
TGR: Isn't it strange that instead of having this debate when they
were voting about the budget and whether to spend the money, they are talking
about it when it is time to pay the bill for the spending decisions already
approved?
JW: No, we're just dealing with a group of individuals in Washington
who are politicians first, second and last. Most of them have very little
real interest in the nation's fiscal condition. They are looking at getting
reelected and serving their special interests wherever they can. That has
been evident to anyone who has watched the system in recent decades. There
are some new, good people in Congress, but not enough to change things, yet.
As Congress stands right now, there is no chance whatsoever of putting the
U.S. fiscal house in order.
TGR: You look at a lot of numbers. We have really only talked about
the debt limit. Anything else that you would like to leave us with that could
impact the price of gold?
JW: Well, I think you have covered them. You are going to see ongoing
weakness in the economy. The government is going to respond with more stimulus before the 2012 election, despite the so-called
efforts at reducing the deficit. The Fed is going to ease liquidity more. All
those actions to address the economic problems will tend to be inflationary,
and that is generally positive for gold.
TGR: Thank you John.
Walter J.
"John" Williams was born in
1949. He received an AB in economics, cum laude, from Dartmouth College in
1971, and was awarded a MBA from Dartmouth's Amos Tuck School of Business
Administration in 1972, where he was named an Edward Tuck Scholar. During his
career as a consulting economist, John has worked with individuals as well as
Fortune 500 companies. For 30 years he has been a private consulting
economist and a specialist in government economic reporting. His analysis and
commentary have been featured widely in the popular media both in the U.S.
and globally. Mr. Williams provides insight and analysis on his website, www.shadowstats.com.
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