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 wrote:

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 hold?

John Williams: 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.

TER: The downgrade was an indicator of the loss of confidence, though—not the cause.

JW: 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.

TER: What happens to oil prices in hyperinflation?

JW: 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.

TER: 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?

JW: 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.

TER: September gross domestic product (GDP) 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?

JW: 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.

TER: Is that the case with oil price estimates?

JW: 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 economic activity.

TER: That’s for prices of oil. What about volume? In September, oil volume was down according to government statistics.

JW: 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.

TER: 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?

JW: 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.

TER: So if we’re looking at hyperinflation sooner rather than later—which would affect oil prices very directly—how can individual investors protect themselves?

JW: 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.

TER: Any other energy-related issues that our readers should be aware of to prepare for hyperinflation?

JW: 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.

TER: Is there any way to create store-of-wealth value in agriculture?

JW: 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 possible.

TER: Could drilling for natural gas in the U.S. really have an impact on the import/export statistics going forward?

JW: 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.

TER: 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?

JW: 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.

TER: 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 international media.

The Gold Report: When we talked in May, you predicted that hyperinflation could be a reality as soon as 2014, something you addressed at length in your Hyperinflation Special Report. Have six months of euro debt crises, Middle East revolts and U.S. Treasuries’ downgrading altered your outlook?

John Williams: Not a bit. We still seem to be moving down that road to a relatively near-term break toward hyperinflation. The most important thing that’s happened since we last talked was the global response to the U.S. legislators’ negotiations over the debt-limit ceiling and the deficit reduction problems at that time. Clearly, no one controlling the White House or Congress was serious about addressing the nation’s long-term solvency issues. That sparked a panic selloff on the dollar against currencies such as the Swiss franc, and of course gold, which made the gold price rally sharply.

TGR: Did the politicos learn anything from those “negotiations,” as you just described them?

JW: Not at all. In fact, I’ll contend that everything that’s happened since then has been just a playing out of what resulted in a complete collapse in global confidence in the dollar. The ensuing rapid shift of market focus to crises in the euro area was really more of a foil to distract the global markets from the dollar. Following that horrendous performance by Congress and the White House, the global markets indicated a major loss of confidence in the dollar that had been coming. I think that’s now established and in place. The dollar is doomed to lose its reserve status eventually, and any day now, we may see things heat up again over the deficit negotiations.

TGR: What steps would we see on the way to the dollar losing its reserve status?

JW: Probably the biggest thing would be heavy selling pressure against the U.S. dollar, along with a spike in the stronger currencies such as the Swiss franc. The more the pressure builds for selling of the dollar, the more expensive and disruptive it will be for the Swiss National Bank to keep supporting the euro so I don’t think that intervention will last long.

As heavy selling of the dollar develops against the Swiss franc, the Canadian dollar and the Australian dollar, and the gold price rallies, we’ll see a very strong effort by those who are dependent on the dollar—such as the Organization of the Petroleum Exporting Countries (OPEC)—to have the dollar removed from the pricing of oil. Along with that will come a movement to change the dollar’s reserve status.

TGR: If other countries start demanding payment in alternative currencies, how can investors protect themselves against a shift from the dollar standard?

JW: I’m not a day-to-day timer in this. My outlook has been consistent that we’re heading into U.S. dollar hyperinflation, and the effective purchasing power of the currency as we know it will disappear. If you’re living in a U.S. dollar-denominated world, you don’t want to be in dollars—you want to move to protect the purchasing power of your assets, your wealth.

To do that, I look very specifically at physical gold, preferably gold coins and silver, and assets outside the U.S. dollar. The currencies I like the best are the Swiss franc, the Australian dollar and the Canadian dollar. This is something you do for survival over the long haul because you’re likely to see all sorts of volatility in the short term.

But once you ride through the storm, if you’ve been able to preserve your wealth and assets in terms of their purchasing power and to maintain liquidity—which the physical gold and the currencies will give you—you’ll be in a position to take care of yourself and take advantage of some extraordinary investment opportunities that likely would flow out of the turmoil ahead.

In the interim, I wouldn’t start betting that next week we’re going to see the dollar do this or that. This is a long-term hedge strategy, an insurance policy against the hyperinflation that I view as inevitable due to the long-range insolvency of the U.S.

TGR: Is that long-range insolvency also inevitable?

JW: Severely slashing social programs such as Social Security and Medicare would be the only way it could be avoided. I don’t have any problem per se with Social Security or Medicare, but you can’t bring things into balance without addressing them. If you look at the U.S. annual deficit on a GAAP basis—generally accepted accounting principles—with accounting for the year-to-year change and the net present value of unfunded liabilities in Social Security, Medicare and such, you’re seeing a federal deficit in excess of $5 trillion per year.

Putting that in perspective, if you wanted to raise taxes, you could take 100% of people’s salaries and the government would still be in deficit. You could cut every penny of government spending, except for Social Security and Medicare, and you’d still be in deficit.

You can’t escape the eventual hyperinflation if those programs are not addressed. Originally, I was looking for hyperinflation by the end of this decade. I’ve advanced it to 2014, and it may well come before that. I think we’re already in the early stages of going through what has to happen for this to break.

TGR: But would politicians touch those entitlement programs in an election year?

JW: No one wants this, but the federal government and the Federal Reserve have backed us into a corner and there’s no other way of escaping. There’s no political will to address the long-range insolvency, so they kick the proverbial can down the road. They did that in 2008. They did everything they could to prevent a systemic collapse by creating, spending and guaranteeing whatever money they had to.

We’re coming to another point where we face risk of systemic collapse, and we’re likely going to see another round of quantitative easing (QE) as a result. That also could pull the trigger for massive dollar selling, moving us into much higher inflation. That will start the final process.

TGR: One of your recent newsletters showed that annual core inflation had risen for 12 straight months, ever since QE2. What would QE3 do to some of the indicators you watch—gold, silver, commodities?

JW: Gold tends to anticipate the inflation problems. All sorts of factors hitting gold create tremendous volatility, but generally it will continue to move higher as the broad crisis deepens. Then as we get into the high inflation, it will start soaring. People have to keep in mind that they’re preserving the purchasing power of the dollars that they put into gold. If gold gets up to $100,000/ounce (oz) as you start breaking into the hyperinflation, and they bought gold at $2,000/oz, it isn’t that they made $98,000 per ounce. Instead, they’ve maintained the purchasing power of the dollars they put into gold.

They’ve also lost the purchasing power of the dollars that they didn’t put into gold or some other hard asset. That’s a different view than most people look at with investments, but this is not a normal investment environment. Again, this is one where you batten down the hatches and look to preserve wealth and assets, as opposed to trying to make money day to day in the markets. Once you have your basics covered, then you take gambling money and go play Wall Street’s casino.

As to core inflation, the Fed likes to ignore energy and food prices, using the rationale that those prices are too volatile and don’t hold over time. Yet, oil is probably the most important single commodity in terms of domestic inflation. Not only does it hit basic energy costs, but it also affects the cost of transportation of all goods. Beyond what is defined as basic energy costs, oil is also the basic raw material for many products, ranging from chemicals to fertilizers to pharmaceuticals and plastics.

As oil prices rise, the Fed just takes out the energy component in so-called core inflation. But the inflation still spreads to the broader economy. When they started to jawbone on QE2 in October of 2010, year-to-year inflation on a core basis was at 0.6%. In the consumer price index reporting of October 2011, despite a drop in the gasoline prices, core inflation was at 2.1%. In response to QE2, gold rose against the dollar and the dollar weakened against other currencies. The weaker dollar, in turn, spiked oil prices. The higher oil prices spiked gasoline prices and broader inflation, which still is boosting consumer inflation in the U.S.

With the next round of Fed easing, the dollar problems will intensify again. That will put new upside pressure on oil and gasoline prices, further intensifying the spreading broad inflation pressures in consumer goods and services.

The Fed’s mandate from the government is to try and sustain reasonable economic growth and contain inflation. From the Fed’s standpoint, however, those are secondary to maintaining the solvency of the banking system. Nothing in the outlook for the system has changed meaningfully since the crisis in September 2008. The banking system still is in a solvency crisis, the economy continues to worsen and we’ve had no real recovery. The stopgap measures to prevent collapse of the system did nothing but kick the crisis a little further into the future, and now, we’re coming to peak period of crisis again.

TGR: You’ve repeatedly said that the global economic crisis is not Europe’s fault but part of a pending systemic collapse that started with the manipulation of the U.S. financial markets—the moves you’ve been talking about. What countries or sectors will suffer the most if the crisis continues?

JW: The more closely they’re tied to the dollar, the greater the inflation impact will be in other areas, but the runaway inflation I’m talking about will be largely in the U.S. and for people living in a U.S. dollar-denominated world.

That’s from an inflation standpoint. Yet, it also will have an extremely negative impact on the U.S. economy, and problems in the U.S. economy indeed will have a global impact. The U.S. economy is still the largest in the world, and you can’t push it deeper into a depression without having negative economic consequences outside the U.S.

But while the global economic problems will worsen, systems can ride out bad economies. We can’t ride out a hyperinflation because the currency becomes worthless. That’s an ultimate crisis that forces a resetting of the system.

TGR: Can Europe or China do anything to counteract what’s going on in the U.S.?

JW: Dump the dollar. China needs to delink from the dollar, and it will be forced to do so. It’s importing inflation. If China doesn’t want that inflation problem, all it has to do is cut its link with the dollar, and oil suddenly becomes a lot cheaper.

TGR: But how practical would it be for China to sell off all the U.S. dollars and U.S. Treasuries it holds?

JW: In terms of insulating itself against U.S. inflation, all China has to do is delink its currency from the U.S. dollar. That’s true of other currencies as well. The Swiss franc is artificially linked to the euro now, but because of the general weakness in the dollar, it’s ironically also intervening to support the dollar against the euro.

Whenever major holders of dollar-denominated assets decide to sell those assets, that will determine how large a loss they will take on the U.S. currency.

TGR: Will the euro survive?

JW: I wouldn’t bet on a long-term survival of the euro, but I think it will survive the current crisis as long as its survival is needed to prevent a systemic collapse in the U.S. The Fed will do whatever it has to do to keep Europe’s problems from imploding the U.S. banking system. It can create whatever money it wants to do that.

Long term, I would not look at the euro as surviving in its current form. The loss of the dollar eventually will force a reexamination of the global currency structure. That might be a time when other currency disorders get resolved and we may see the euro break up. It was never practical to think that all the countries within the euro would be able to align their economic and fiscal policies in a way that would enable them to operate together. The euro was doomed from the beginning.

TGR: Let’s go back to gold. According to your research, the September 2011 high of $1,895/oz gold was below the historic high of $850/oz in 1980, if the 1980 figure was adjusted for inflation. The $850/oz in 1980 would have equaled $2,479/oz in Consumer Price Index–all Urban consumers (CPIU)-adjusted dollars, or $8,677/oz Shadow Government Statistics (SGS)-alternate-CPI-adjusted gold prices in 2011. Is gold underpriced if you put it into that context?

JW: On that basis, yes, it is. It also depends on when you measure it. My hyperinflation report looks at what has happened to the dollar over a longer period. Since President Roosevelt took the U.S. off the gold standard domestically in 1933, the dollar has lost 98–99% of its purchasing power. People tend to forget that. But if you look at the gold price movement since 1933, it actually has moved a little more than the government-reported pace of inflation. My estimate of what inflation should be if we had consistent CPI reporting shows that the loss of the dollar’s purchasing power against gold is the same as it is measured by the CPI.

So over time—and this is true over millennia—gold tends to maintain purchasing power, which means it holds its value net of inflation. Not that you’d break a piece of gold down to a small enough unit to buy a loaf of bread, but if you did, it also would have bought a loaf of bread in ancient Rome.

TGR: For the same amount of gold.

JW: Same amount of gold. Gold has a long tradition as store of wealth. That’s why—globally—gold generally has been viewed as such. It only got bad press in the U.S. because private ownership of gold was outlawed after Roosevelt’s action. It became legal for Americans to own gold again after Nixon abandoned the international gold standard. Yet, even today, some on Wall Street discourage investment in physical gold, largely because they cannot make a commission on it, as they do with stocks and bonds.

Given the gold ownership limitations after 1933, those in the U.S. who wanted to buy gold turned to buying gold stocks. But because of what happened in the 1930s—that’s now two generations or so ago—gold as an investment and as a hedge to protect wealth lost some of what had been its commonly recognized value in the U.S. Outside the U.S., almost everyone views gold as a traditional hedge.

TGR: That’s physical gold. What about exchange-traded funds and gold equities in the juniors? Will those investments also preserve wealth?

JW: I wouldn’t count on the financial system working as it should. I look at physical gold, preferably sovereign coins, not only as a store of wealth, but also for purposes of liquidity.

Gold stocks also should preserve wealth over time, but I would look at them as longer-term holdings. There could be periods of systemic failure with resulting interim liquidity issues.

TGR: You talked about hyperinflation coming as early as 2014, or even before that. But 2012 is just weeks away. What can people expect next year in terms of the data you watch and maintain versus some of the government-issued statistics?

JW: I can tell you that the economy is weaker and will remain weaker than the government reports. We don’t have an economic recovery in place. We’ll tend to see higher inflation.

TGR: Something to watch out for. Thank you, John.

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 bachelor’s in economics, cum laude, from Dartmouth College in 1971 and earned his masters in business administration 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 international media.

Economists are anticipating that the federal budget deficit will be in the trillions of dollars this year. There are estimates that, with all federal efforts combined, the bailout and stimulus packages will be upwards of $7 trillion. I wonder if politicians who are so cavalier about using taxpayer money actually know how much a trillion dollars really is.

According to the Bureau of Engraving, a dollar bill is .0043 inches thick. That means that a stack of 100 new dollar bills would be .43 inches tall. A thousand is 4.3 inches. A million is a thousand thousands, so a million dollars is 4,300 inches. Converted to feet, that is about 358 feet high. A trillion is a million millions, so a trillion dollars would be a stack of money 358 million feet tall. If you convert that to miles, the dollar stack would stand 67,866 MILES high! It would wrap around the equator more than two times.

For another perspective, I saw an ad in the paper just this morning, offering bread for $1.99 per loaf. A loaf is 4 inches tall, so one dollar will buy a 2 inch tall loaf of bread. If, instead of using .0043 inches, the thickness of a dollar bill, we substitute 2 inches, the thickness of a loaf of bread that 1 dollar will buy, we get a much more dramatic view. A stack of bread that $1 trillion can buy would reach up more than 31 million miles. Given the price of $2 per loaf, that would be 500 billion loaves of bread.

Considering that there are roughly 300 million people in the United States, that is enough bread to give about1600 loaves to every man, woman and child in America. It is enough to give each of the 6.5 billion people in the world 77 loaves apiece. Our politicians certainly don’t buy loaves of bread with the money. So where does it go? Where does it come from?

The answer to the second question is that it comes from out of thin air. Modern money is the creation of the monetary authorities, in the case of America, the Federal Reserve and fractional reserve inflationary credit. Money is only as valuable as the goods it can be used to buy. Wealth and prosperity only come from production and never, under any circumstances, from money created by a central bank. When more money is made from nothing, with no increase in production, the primary effect is to increase prices. More dollars in the system changes the ratio of dollars to goods, and prices have to rise.

Prices should be decreasing significantly at this point in the downturn, lowering the cost of living for everyone, making everything easier to buy. They are, however, being propped up by your government. They are also establishing the next big wave of the cycle, and the choice in the near future will be runaway inflation or excruciatingly high interest rates.

Not too many years ago, the outrage was over politicians’ callousness when dealing in terms of billions. Billions lead to trillions, which lead to tens of trillions, then hundreds of trillions. Zimbabwe has put it in high gear with an inflation rate of over 1 million percent per year. Their government destroyed their monetary system and economy by making lots of money out of thin air.

We may never get to the point where we have a million percent inflation rate, but if we don’t start holding our elected officials accountable, they will destroy our economy, even more so than they have so far. From the ridiculous and irresponsible things that they keep doing, that destruction actually seems to be their goal.

The first question above, where does all the money go, is a very good one. It’s all a deep, dark secret. In spite of the rhetoric about transparency, you won’t really see where most of it goes. I’m sure that bailout millionaires will be grateful for your contribution to their investment fund.

A trillion dollars is an incredible sum of money. Incredible sums invite incredible abuse. Maybe something good will come of this whole mess. Just maybe, the people of this country will finally see through the scam that both Republicans and Democrats in congress have been perpetrating for decades. Maybe we will start to see some real change in the next few years when hundreds of crooked Washington politicians are kicked out.

Hey, anything’s possible when people use their heads, isn’t it?

However, not even good intentions can have a positive impact on what is basically bad economic policy, where the laws of supply and demand are ignored. Price ceilings often lead to shortages while price floors often lead to unnecessary surpluses (Gwartney et. al. 86).

Throughout history, many in positions of power have used price controls to influence economic activity and the results have often been disastrous. As mentioned previously, Diocletian’s own attempts to curb the rampant inflation which was devastating Rome at the time of his reign during the third century A.D., only hastened the economic deterioration of an already declining empire (Watkins). In the aftermath of the French Revolution, the government led by Robespierre instituted price controls (“Law of the Maximum”) on a variety of items (especially on food), which not surprisingly, led to widespread shortages and starvation (DiLorenzo).

Unfortunately, the United States has not been immune to the allure of price controls despite their dismal historical record. In a book review written by author Thomas J. DiLorenzo and published on the Ludwig Von Mises Institute website, he noted that at one point during the American Revolution, General George Washington’s army was in danger of starvation thanks to price controls instituted by “friendly” colonies such as Pennsylvania. These had the effect of causing severe shortages which were only alleviated after the Continental Congress recommended the repeal of these controls in June 1778 (DiLorenzo).

One could only hope that our dear legislators of today would take the time to thoroughly study the historical evidence before enacting policies that will hurt instead of help the economy. One suggestion would be to examine the impact of wage and price controls during the 1970s.

Professor William R. Park (University of North Carolina, Chapel Hill) recalled how it seemed like a good idea back in 1971, especially since it was popular with the general public and with a number of economists. President Nixon hoped to stem rising inflation (four percent in 1971) so on August 15th, he implemented temporary wage and price controls. Initially, this policy seemed to work as inflation took a dip in 1972 (helping Nixon win a major reelection landslide) and was still below four percent before Nixon’s second inauguration. Later in 1973, inflation went up again, and reached double-digits by the time wage and price controls were largely repealed, in April 1974. Nixon’s inflation-fighting strategy was deemed a “monumental failure” (Park).

Others have pointed out that the 1973 Oil Embargo and the sudden jump in gas prices helped fuel inflation and the recession that hit the United States, during that period. However, a 2003 article by Peter Van Doren and Jerry Taylor, which was published in the Cato Institute (Cato.org), blamed a significant, but not-so-obvious culprit: Nixon’s price controls. Back in 1971, oil companies responded by cutting back on imports (a price ceiling prevented them from passing on the higher cost of foreign oil) especially for use in gasoline products. As a result, the amount of gasoline in the U.S. market sharply declined leading to a significant reduction in the number of independent filling stations since the oil companies obviously gave preference to their own affiliates. Shortages then became a reality in parts of the country during the summer of 1973. The government responded by enacting the Emergency Petroleum Allocation Act in September, but this measure did absolutely nothing to increase the amount of available oil.

The short-lived “oil embargo” actually had minimal effect except to make an existing problem even more apparent. OPEC announced a five percent reduction in exports to the United States which was meaningless because supplies could have easily been replaced by non-OPEC oil. However, this inability to pass on higher prices to consumers and concerns over scarcity insured that much oil would be kept off the U.S. domestic market and the long lines at the gas pump continued until price controls on foreign oil were lifted (Van Doren, Peter and Jerry Taylor).

Unfortunately, these lessons seem to have been lost on some of the current generation of lawmakers. One recent example in the text (Microeconomics: Private and Public Choice) referred to the crisis that occurred after Hurricane Hugo struck South Carolina in 1989. The city of Charleston enacted a law against “price gouging” which insured that shortages would occur within the city area since prices could not be raised to meet actual demand. This also resulted in a misallocation of products as artificially low prices and scarcity combined to limit the availability of essential goods to those who were most productive and willing to pay higher prices, such as businesses (Gwartney et. al. 87).

Bad government policy is like that old Yoga Berra quote: ”It’s déjà vu all over again.” Nowadays, with skyrocketing fuel costs and food prices affecting the United States and other countries, some government officials are again taking a hard look at price controls as a possible panacea for staving off inflation and ignoring once again, what philosopher George Santayana referred to as the “mistakes of the past.” In recent years, countries such as Zimbabwe and Venezuela have instituted price controls only to experience the same disastrous consequences as others before them.

Why do people stubbornly cling to such a failed policy?  Author Laurence M. Vance links it to the often misunderstood concept of the “just price,” which he claims is the source of a “great deal of erroneous thought.” Vance cites the lack of biblical teaching regarding this principle, but instead sees the idea taking shape in ancient Babylonian laws and in the teachings of Greek philosophers such as Aristotle and Plato, who both took a dim view of merchants and commerce, in general. This may have formed the basis for the similar attitudes and views expressed by some prominent medieval thinkers-especially Thomas Aquinas (Vance). Unfortunately, these ideas would go on to influence many throughout the centuries and continue to this day.

It would take many years for us to finally reach Adam Smith, David Ricardo, Ludwig Von Mises, and a host of others, who together would clear up a lot of the confusion and misunderstanding that have muddled economic thinking since the early days of civilization. Ultimately, any worthy discussion of price controls has to be linked to an examination of this concept of a “just price” and who decides what that is. I hope policymakers would reflect on the following quotation,”If there is such a thing as a just price, then the extent to which it influences one’s pricing decisions should be a function of religion, ethics, and morality — not a function of law” (Vance).