U.S. Economic Weakness (Uncut) 02-25-2025

John Williams: U.S. Economic Weakness – How Markets Might Derail Trump’s Early Efforts

Welcome to Palisades Gold Radio. I’m your host, Tom Bodrovix. Joining me today is John Williams, founder of ShadowStats.com. John, thanks for joining me today.

And Tom, thank you so much for having me. Always a pleasure. And I thought that this would be a good time to chat with you.

You know, there’s been a lot of noise, a lot of momentum, a lot of things happening in the first month here of the Trump administration. You and I were speaking on the 20th of February. And what I wanted to do was get, let’s say, a more accurate picture of where the economy is, where job numbers are, you know, where things actually stand in reality versus if we only looked at the markets and what the momentum and prices are doing in the general equities, that tells us seemingly a very different story.

Is that correct? Well, I’m looking at, quite frankly, a very weak economy and a circumstance that promises much higher inflation down the road. We’re through the political hype of the election, which has its distortions both ways. But I’m not seeing anything fundamentally that suggests that it’s different than what I was looking at last time we talked.

We have a circumstance where the drivers of inflation generally are high. The money supply, which is under the Fed’s control, still is at something like a 53, excuse me, there’s a 57-year high level of liquidity, which is what’s triggering the inflation. The liquidity that I look at in the money supply very simply is it’s a currency and the time deposits, the liquid areas, your checking account, cash you have in hand.

That’s what people go out and use to buy things unless they’re buying on a credit card. But then they pay their credit cards off again, you know, checking account, whatever. And those areas are, again, multi-decade highs, they’re inflationary.

In terms of the economic activity, despite some of the happy news that you’ve seen with the GDP recently, it’s very weak in the better quality reporting areas. For example, if you look at the gross domestic product, you’ll see year-over-year growth that is now adjusted for inflation. And it’s up 1.5% year-over-year, plus or minus.

Yet if you look at the underlying economic components, such as retail sales, and that’s adjusted for the headline CBI inflation, forget my inflation numbers, which would tend to be higher unless give you a lower real retail sales. Just taking the headline real retail sales. If you look at industrial production, if you look at the housing numbers, if you look at the cash freight index, they’re all negative, flat to negative year-over-year on a quarterly basis where the GDP is just booming along.

There’s no basis for the GDP to be booming. I think what we’re seeing is a residual from the pre-election gimmicking that we saw with the last administration on those GDP numbers. I think you’re going to see that slowed down rather quickly.

The money supply, again, is supporting the inflation. The Trump administration’s in a position where they’re going to want to spend more money to stimulate the economy, but it’s going to mean bigger deficits and greater inflation. So you combine that with the underlying softness in the economy, which is, at the moment, you don’t see, per se, in the GDP, although the GDP is beginning to slow, it will catch up with the underlying better quality numbers that you see in the monthly data.

It’s a difficult circumstance for the new administration. It was a difficult circumstance for the last administration, and it’s one reason that you saw a change in power. Usually, the economy’s heading down, inflation’s getting higher.

That’s not good for an incumbent party. People tend to vote their pocketbooks, but the new administration, there’s a lot going on. We’ll see what happens, but I’m not seeing any fundamental shifts here that suggest that there’s all of a sudden going to be a big surge in economic activity or containment of the inflation problem.

So, John, could we compare, let’s say, GDP, the way it’s measured by the Fed and the way that you measure it? Well, the GDP, the Fed has its own economic measures. The GDP comes out of the Bureau of Economic Analysis, and it’s a very heavily politicized number. It’s a broad survey of national economic activity, but usually, you would expect to see that underlying economic series that make up the economy would tend to confirm what you’re seeing in the gross domestic product.

But again, you look at the retail sales, which is a big component. That’s your consumer. The consumer is the biggest element in the picture here.

Adjusted for headline inflation, this is reported on a monthly basis, it’s negative year over year. At least it has been for the last couple of quarters. Industrial production, which is the output of all manufacturing mining facilities, also is negative year over year.

And the housing numbers are also down. When you get down to the monthly level, there’s nothing there that’s giving you a solid year over year growth. The employment numbers are very heavily gimmicked at the moment.

You just had payroll revisions, which showed the payrolls generally were weaker than had been reported. That’s a common effect. The many years ago, I’m talking back in the 70s, when you could go in and sit down with a guy who puts the payroll numbers together at his desk in Washington, DC, instead of some place out in Maryland.

They get their benchmark revision, and benchmark revision was always to the downside. And I asked him, well, why is it always to the downside? And he said, well, it worked to the upside. It would have lost my job, because it meant I was undercounting the jobs.

The pattern still continues. So you have to take a lot of those numbers with a grain of salt. The consumer sentiment numbers is a good indicator.

Industrial production is generally reasonably good. But even there, you have some funny things that happen with the Fed reporting. But of the monthly numbers, that’s probably the most reliable.

It used to be the GDP measure. Before they came up with the GDP, the Federal Reserve published the industrial production. That was viewed as a pretty good indicator of economic activity.

But we’re just not seeing the strong year-to-year growth that would support what’s being reported by the gross domestic product. So what I expect you’re going to see happen here is that as we get into the Trump administration, and we start getting reporting from the Trump administration, you’re going to see some downside revision to the Biden administration numbers. And that’ll help a little bit with the Trump administration numbers.

Right, for that year-over-year comparison. Yeah. Well, John, I always find it’s interesting to think about these revisions.

We get these CPI numbers. And when it’s reported, all of a sudden, the market reacts one way or another. Or, for example, jobs numbers, the same kind of idea.

And then once they actually get a revision, the market doesn’t seem to go back, doesn’t look back and say, oh, that was actually not even close to what we should have been reacting to. Yeah. Well, you probably know the markets better than I do.

They respond to the new news. And once that’s in there, normally when you get a downside revision, you’re also getting some new information. And the new information, if it’s at all positive, the markets will try to give a positive spin to.

It’s going to be very difficult in the near term here because all we’re seeing still with the money supply is extraordinary, which you have to consider. And this is a problem that the Fed has with inflation and a problem that we have generally with inflation. Now, when the pandemic hit, the Fed pumped the equivalent of something like 30 years of stimulus into a month to try and keep things from collapsing.

They’ve taken some of that out. But you’re still right now, if you look at the money supply components, it’s still roughly 120 percent above where it was before going into the pandemic. So that even though the year over year change in the money supply now is below 10 percent, it’s still very bloated from the pre-pandemic era.

And that’s a factor behind the inflation risk. The Fed doesn’t have good control in the system. They can’t seem to bring the money supply down at the moment.

The economy is weak enough to justify their cutting interest rates again. So we’ll see what happens there. But the Fed’s primary function in life is to keep the banking system afloat.

They’re owned by the banks. So they’ve got to make sure there’s adequate liquidity in the banking system and the banking system’s not about to fail or any of the major banks, any kind of a crisis there. So the banking system there takes a little bit of precedence over the domestic economy and inflation to the extent there’s any conflict of interest.

Well, that seems to serve, you know, one of their aims, which is to protect economic stability, right? And yes, I mean, that’s the banking system falls apart. You’ve got a real bad problem there from the standpoint of economic stability. You can have that otherwise.

But again, the Fed, it has to keep the banking system afloat. So, John, as we think about what this expansion to the money supply caused, you know, leaving out exactly how it works and everything like that, the inflation that we’ve experienced from 2020 to 2025, like this year, from the last five years, what are those cumulative numbers like for this last five years as measured by CPI versus the way that you measure it? My measure of consumer price is based on the way it was measured back in 1980, which is the way it had been measured for decades before. What changed in 1980 was that you had a bad inflation number.

Actually, it’s 1980, 1981, 1982, where inflation came in higher than expected. It meant that there’d be a cost of living adjustment to Social Security recipients, which was going to cut into the budget for the next year that actually increased the deficit spending limit, what the government, what the Congress could spend. And what that triggered was Newt Gingrich.

And, oh, the lady who used to head the Bureau of Labor Statistics, your name will come to me momentarily. But she and her memoirs reflected how Gingrich had pulled her aside and said, hey, look, if you can find a way to bring down the headline CPI here, we might be able to find more funding for the Bureau of Labor Statistics. And that’s what they did.

They started rigging the system more to suppress the CPI. And as a result, you saw changes made to the components. And they were redefined.

For example, they changed dates and methods in calculating the housing inflation. And as they shifted this around, they had the effect as they redefined the weightings and such. Of shifting away from the headline, the CPI, the stronger numbers.

The first change they made, I don’t think that got a big play at the time, was with the housing cost. And they changed it to the measure of homeowners equivalent rent. It used to be that the housing cost was based on the actual cost of housing.

The homeowner’s equivalent rent was reflected what the average homeowner would pay himself to rent his own house, and then how much he’d increase the rent on himself for the next year. And when that was changed in the CPI, and again, this was the first big change in the early 80s, the effect that had in the redefinition was that it knocked one and a half percentage point off the annual inflation at that time. And the changes that they’ve made ever since, and this went on up until before the pandemic, there’s an aggregate masking of roughly eight percentage points of the CPI over the years, where those elements of the CPI were sort of moved off the books and redefined away.

And if the CPI were reported the same way it was back in, say, 80, 81, the headline CPI would be up around 8% higher. We’re getting up around 10 percentage points in today’s headline numbers instead of the 2% to 3% range. That was the design of the redefinition.

And again, the reason for the redefinition was that whatever the change was that affected the cost of living adjustments on Social Security, and that cut into the deficit spending that the Congress was looking to use. And that’s where Mr. Gingrich clamped down on Bureau of Labor Statistics, and we’ve been living with that ever since. So that if you look at the headline CPI, I look at it and what the headline numbers show, I’m looking at a year-over-year inflation that’s up in the 10% range instead of the 3% range.

And the funny thing is that if you plot my estimates as to where the CPI would be had not made all these changes, plot that over time, just the level, and the headline CPI, the level of the headline CPI there, and you look at the price of gold and plot that out, and you set everything there equal to, say, 1980 equals 100, what you’ll find is that the price of gold is indeed soaring. The old line CPI, the way it was and would have been today had the net intervened, is soaring right along with the gold. The gold and the old CPI are moving in a coincident manner.

The one that’s not moving is a gimmick CPI, which has tended to flatten out with the redefinitions over time. My contention is that the real CPI is indeed still moving with gold, or gold is still moving with the real CPI. The average guy feels it, and it’s very dangerous to the system.

You’re going to see a monetary crisis ahead that will be exacerbated by this circumstance. John, I wanted to ask you, though, what are those numbers? Let’s say the inflation over the last five years, let’s say from February 2020 to February 2025, what is that number that we’ve experienced? What is the devaluation in the currency that we’ve actually seen? I do have the CPI numbers in front of me. Tell you what, let’s just go to the annual number.

We’ve got January now, which is 3% year-over-year with the CPI, and my number year-over-year for January is 10.8%. If you look at the annual number, the year of 2024, the annual CPI was 5.90%. Now, my number was 10.8. If you go back five years to 2019, you were at 1.8. The headline, mine was 8.9. The inflation peak was an annual basis in 2022, and the headline was 8.0, and you got up to 16.2 of the shadow stats. So, okay. Okay, look at the five years through the end of 2024.

The headline CPI was up by 21.9%. The alternate, my alternate was up by 64.6%. Now, that was an unusual period of time with the pandemic and such, but that sounds about right. Yeah, that’s quite a difference. It is quite a difference, and I’ll tell you that if you plot it out and you look at the price of gold, you’ll find that the price of gold is running very close to my number as opposed to the headline CPIU number, which it left far behind back in 2004.

And I think gold is a fair surrogate for what’s happening to actual inflation. So, John, what is your inflationary outlook going forward? You know, is this something that is re-accelerating again? And how long, if you have any idea, do you think that this is going to continue for? Well, right now, the economy does appear to be slowing. And you’ve got factors tied to the international scene that can still keep the inflation pressures high.

The money supply growth is basically still there. It’s accelerating. We’re still 128% above where you’d normally be in terms of the level of money supply.

That’s going to keep the upside pressure on the inflation. It’s difficult to pull it out because that money supply also helps the economic growth, which is faltering. So where do you think this type of inflation leads to? Well, there’s a chance that it can go hyper, in which case you end up with effectively a valueless currency, but in this case, the dollar.

I would look at the price of gold as to how the better money is viewing this. And with the price of gold soaring to new highs right now, it’s at levels that are consistent with what would be the higher inflationary, the hyperinflationary unfolding. And I think there’s a chance that’s going to continue to unfold because it’s going to be very difficult for the economy still to regain its normal level.

We’ve got factors still beyond the pandemic and disruptions to the government’s operations. If I were to look down the road here to the year from now, I would look for inflation to be higher than it is today and that the economy would still be flat to minus if not in a deepening recession. And in that type of circumstance, you’re going to get more stimulus pumped into the system.

The Fed’s going to do everything it can to keep the banks afloat. It talks about containing the money supply, but it still needs to keep liquidity into the system. I would look for, I think we’re going to have some kind of a very disruptive move in the next year or so in terms of the economy and the inflation, where you may have a bad market crash, big surge in inflation, or a big drop in economic activity or some combination of the three.

Don, why measure CPI against the price of gold? What does that tell us? Well, gold has traditionally been viewed as a hedge against inflation. Over time, that has worked very well. I can point to a graph which you can add here if you’d like.

It shows the plot of gold over time against the headline CPI and the alternative CPI as it’s been unfolding. What it shows is that the broader inflation measure tends to move with the price of gold or the price of gold with the broader inflation measure. And right now, the broader inflation measure is reflecting all the games that are being played at surging.

And I would expect you’ll see the price of gold keeping up with that. Does that basically give us the inflation adjusted price of gold? Yes, it does. Either way that you look at it, and in fact, this chart that shows you the price of gold, it’ll show you the money supply and the different inflation measures.

And what you’ll see is that the inflation measures and the price of gold, let me start for sure, just looking at the money supply and the price of gold, take inflation out of it for a moment. I’ll send you the graph of this. If you look at the price of gold over time against headline inflation, if you set the price of gold, the CPI, both in its headlined form and its adjusted form, which takes all the revisions out of it and just reports it the way it used to be, and set them equal to 100 as your starting point, you go back sometime before 1980, and then take them forward, what you’ll find is that the CPI that was and is net of the CPI revisions in the 1980s, same way the CPI was calculated beforehand before they defined away a lot of the CPI, using the 100 base on both that CPI and gold, they overlap ahead in time up to today.

It’s a very sharp rise. And if you take the headline CPI that’s been adjusted over time, you’ll find that that falls short so that when you have both the CPI and the price of gold rising exponentially, effectively on top of each other on a relative, same relative change basis, the traditional CPI starts to rise for a while, but then it effectively flattens off after the early 80s when they redefined it to bring down the headline inflation. So that my point there is that if you look at the inflation before and after its redefinition, and you plot it on a consistent scale with gold, and just arbitrarily use 100 as a starting point for all of them, the headline inflation and the headline inflation, the old inflation, and gold will tend to overlap.

They’ll move together. And the new CPI will follow as long as it was on the old course, but then when it was redefined, it starts slowing down and levels off while the old headline CPI and the gold continue to surge. I guess what I’m getting at here is I would contend that the relationship between gold and the CPI still exists.

The only thing that’s changed is the definition of the CPI. And if you left the CPI definition alone, you’d still have that historical relationship between the gold and the CPI. Well, the reason I wanted to ask that is because I want to know if we see gold at all-time highs.

We made another all-time high either yesterday or this morning. But if we inflation adjust that, are we even close to an all-time high? Well, if you use the numbers I’m talking about, it’s effectively flat. But what that’s telling you is that the gold is, despite whatever supply and demand issues have been in play, over time, gold is your inflation hedge.

The inflation is going out of control on the old basis, and the surge that you’re seeing in gold is directly parallel to it. I mean, I can work out the numbers so that you see the gold price versus the inflation in some kind of standard measure. And there’s some variation over time, of course.

But what we’re seeing now is showing effectively that the surge in gold is reflecting the surge in inflation that would have taken place had it not been redefined. John, I really appreciate you running us through this stuff. You know, I think a lot of people feel the, let’s say, the true inflation or closer to your definition, or let’s say the old definition or old measure of inflation, CPI, price rise, far more.

And I think that speaks volumes to, let’s say, where the economy is right now and what this last five years has really done to the average consumer. So I really appreciate you walking us through that. Is there anything that you’d like to leave our listeners with to think about maybe before we wrap up? Well, I think your summary there is good.

I think that’s an accurate picture. And again, I will forward to you the graph of the headline gold prices. And you’ll see that the money supply is running great with the gold.

That money supply runs with the real inflation and that the gold is doing the same. The reason you’re seeing the gold and the inflation there is the same reason that you’re seeing the gold and the inflation with the old money supply. Perfect.

Well, John, I want to thank you very much for your time today. And I really appreciate you walking us through these issues. You’re most welcome.

And best wishes to you for a happy new year. And thanks again for having me on your show. Always a pleasure, John.

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