Jason Hartman introduces today’s Creating Wealth Show with a look at why there is no ‘short-cut’ into income property investment and explains how what you learn along the journey can be even more valuable in the long-term. He also uses personal experience to discuss just how certain companies have managed to beat inflation.
His guest for today is the co-founder of Reaganomics, Paul Craig Roberts. Together, they discuss some of the international threats that could face America, thanks to the recent actions from Washington. Specifically, they deal with issues of demography, currency and military developments in Russia and China and consider the potential impact of each of these on the United States.
Key Takeaways
01.30 – Jason Hartman gives some background to today’s guest, Paul Craig Roberts.
04.09 – As a worldwide population, we face so many issues – can we ever surpass all of them?
10.34 – You can’t expect to find an ‘easy way’ into real estate investing. It’s tough but the journey AND the result combined is worth it.
24.55 – Jason Hartman introduces his guest for today.
26.22 – The ruble should be strong in comparison to the dollar, and yet the ruble is risking collapse.
30.16 – The reserve currency status no longer seems as stable when we look at potential drops in use of the dollar.
37.31 – Paul Craig Roberts describes the US’s current position with regards to Russia and China.
47.30 – We’ve got a whole generation of people who now can’t afford to live on their own terms.
50.23 – The discussion moves to inflation and how it could transform the US economy.
59.30 – With so many problems, is there a solution?
1.04.12 – For more information, head to www.PaulCraigRoberts.org
Tweetables
Famous last words of investors and economists: This time it’s different. (It’s never different!)
China and Russia have the power to destroy the Western world in a matter of minutes.
We’re in a situation where all of the economic vulnerabilities are in the United States.
Transcript
Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com
Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing. Fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years, and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it, and now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman:
Welcome to the Creating Wealth Show, this is your host, Jason Hartman and we are at episode number 468. I can hardly believe it myself – by the same token, I can’t wait ’til I get to say we’re at episode 1217! We’ll keep going and keep this content coming; we’ve got a lot of great shows coming up too. Today is going to be no exception. Even though it’s on the pessimistic side – well, you know, yeah, I think that’s fair to say. You be the judge! Maybe realistic? I don’t know, I don’t even think that.
It’s Paul Craig Roberts. Now, you probably know who that is; very well-known man, nationally syndicated columnist, Assistant Secretary of Treasury in the Reagan Administration and is widely thought of as the co-founder (this is probably the biggest thing) of Reaganomics. So, I think Reaganomics works, I think it makes sense, I think the opposite is socialism, and you could say that trickle-down economics was a bad deal for some – that’s also debatable. I think overall, the Reagan Presidency was pretty awesome. There were a few major glaring mistakes, one being the war on drugs. That was a disaster of epic proportions, but that’s sort of another topic.
But yeah, Reaganomics. I remember I got to meet Arthur Laffer of the Laffer curve, and I still want to get him on the Show for you. I got to meet him several years ago – it’s pretty amazing, really, what they did. Clinton obscured them a bit, but Clinton had some really lucky forces occur during his Presidency, most notably the Internet, which just changed everything and increased the velocity of money and increased resources in commerce. That, by the way, is why I am overall – as much as the Government is trying to mess things up – so incredibly optimistic about the future.
I just finished the audiobook of, well, it’s not even an audiobook, it’s a Nightingale program, and it’s Peter Diamandis’s Get Abundance. Now, as you know, his first book with Stephen Kotler, who we had on the Show, was entitled Abundance: The Future is Better Than You Think, and it was fantastic. This Get Abundance program was sort of a casual talk about some of those topics, and then his new book coming out is called Bold. I’ve pre-ordered that one already; it’s not out yet but it should be phenomenal.
I know that maybe throughout history people have viewed things as ‘Oh, so and so/thing coming will save us’, and maybe it’s an excuse not to be responsible or careful or cautious about the future. The famous last words of every investor and economist is – here they are, are you ready for this, folks?: “This time it’s different”. Those are the famous last words.
You look at the country, right, and you look at the world. There are huge geopolitical problems. Radical Islam. And you look at the debt, you look at the welfare state, the unfunded mandates, the unfunded entitlements, the possible spread of disease, the idea of superbugs where doctors, they say, have been over-prescribing antibiotics and because of this, all these bugs are getting very resistant. That’s a problem.
There are all these problems we face, but we are at a stage – and I’ve really got to tell you, I believe this (of course, I could be wrong, so there’s my disclaimer!) – of exponential technologies. Largely, because of the Internet and because of the communication and the way computing power and intellectual capital can be crowd-sourced. And crowd-funding – I’m not saying you should engage in crowd-funding yourself, necessarily, but certainly if you go and you look at Kickstarter or Indiegogo and some of the investment-oriented crowd-funding websites. A lot of ideas that formerly couldn’t get off the ground, they’re getting wings nowadays. It’s truly an amazing time to be alive in so, so, so many ways.
You balance that with what we talk about with today’s guest, which are the harsh and scary economic realities of the debt bubble, the entitlement bubble, the welfare state, and then the geopolitical things with Russia and so forth. By the way, I’ve got so many fantastic episodes in the can coming up for you, but one of them that I just recorded a couple of days ago was the second time with this guest, and I had them back on the show – that’s Jim Norman, who’s an oil industry expert. He wrote a book called The Oil Card and we had a fantastic interview. It was a really good discussion with him, although I think that he’s way too bearish on things like Houston, because he had a personal experience there in the Eighties that I don’t think is the same dynamic today. That economy was far less diversified than it is now.
But again, speaking of Houston, I did issue a yellow light warning on Houston, and that’s why we’ve stopped recommending it. You know, I’m not selling my property there. I think owning properties there is fine, as long as they’re stabilized. I just wouldn’t want to enter that market now. Some of the non-diversified oil-only type of areas; in those areas, you’d want to be very, very careful. Not the least of which is North Dakota, and I’m very glad that we did not jump into that in the fray when everybody else was, because I think there will be – as the stock market people like to say – a correction. Doesn’t that sound a lot better than a crash or a disaster, or everybody losing their money? A ‘correction’. I love how they sanitize these words. Words are pretty meaningful – it really does change the impact and the meaning when you change the words, so be careful of that and watch for it.
A couple more things before we get to our guest. One is that a listener gave me a challenge, he hit me with a challenge a few weeks ago, and I just didn’t really know how to respond to this. What I did is I stripped the listener’s name off of it and I have a real estate Mastermind groups that I’m in – I pay $15,000 a year, plus travel and event expenses to be in this group, but I’ve got to say, it’s well worth it. I’m in a couple of Mastermind groups and they’re expensive, but in an era of exponential growth opportunities and exponential networking opportunity, Mastermind groups are just well worth it. It depends on the group, obviously, but these two groups in spending, I don’t know, what am I spending on both of these groups? Maybe $50,000 a year, $45,000 a year, something like that I’d say, from being involved in these two Mastermind groups. They’ve been very worth it to me. So what I did was I stripped off the listener’s name and any identifying material, and I posted it in the forms for my real estate Mastermind group.
So here’s what the email said that I got. When I posted this, I said ‘Hey members, I need help responding to this because I don’t exactly know how to respond.’ The listener says:
“Hello Jason, I’m writing you with a challenge. I’ve been an avid listener of your Creating Wealth Show for the past 2 years. I get it. I understand. [But here’s the rub]. I don’t have the down-payments dollars to get started buying properties. The challenge to you is to find a way, through creative financing via private lending etc, to allow me to buy my first rental property and more. I want to, of course, have a solution that follows your 10 Commandments of Successful Investing, and I’m not looking for partners, just to get started. What has inspired me to get off the sidelines and find a solution was listening to two recent podcasts: episode 459 with Fernando and 458 with David Porter. My motivation is my wife and children. I want to have them financially set if anything happens to me. In addition, I’m looking forward to my own freedom day so I can quit my job [and he’s referencing back to Fernando saying he had his ‘financial freedom day’.] In conclusion, it is my hope to be invited, in the future, on your show to tell my success story. I look forward to hearing from you and your ideas. Thank you.”
I, again, stripped off the listener’s name and then I posted this to get some feedback and some ideas. The first person said ‘seller financing’. Well, obviously.
The second person in my Mastermind group who commented said: “Jason, this challenge is BS. Most every one of us started the same way: broke with massive ambitions. Looking for you to find a way is looking for a shortcut. Totally different than ‘I’m looking for a way and would love some advice’. Add to that, ‘I don’t want partners’. My first question would be ‘If you don’t bring the money, knowledge, experience or a massive committed desire, what exactly are you bringing to the deal?’ Trying to skip the process and the journey to get the reward is a proven failing strategy for someone getting started. Maybe your response should include a dose of reality. You can do this, and it’s not going to be easy, but remember: the process of grinding through it, getting knocked down again and again and still getting up and brushing yourself off and finding a way is beyond monetary value.”
Now that one, I have to say, got a lot of likes. Many people in the group put a like on that comment. The same person continued:
“We call it earning the right, and only you can do that for you.” In other words, speaking to the listener.
And then the next person said: “Wow, that’s right on.” I’m editing names out as I read these, okay. And then another person said: “I couldn’t agree more.” So the vibe is that we’ve all got to earn our way. My first two property investments, I didn’t have any money either. I was 20 years old, I was going to college part-time, I was selling real estate part-time. I borrowed the money from my grandmother, basically, to do my first two deals. That’s what you’ve got to do. If it’s a family member or a very good friend, they might just help you out of goodwill, but if it’s a business partner, you’ve got to bring something to the table. This is just me talking here, obviously. You’ve got to bring some experience, some knowledge, some massive committed desire, as the person says, and I would say effort.
For example, are you finding the deals? Are you going to manage the deal? What are you going to contribute? You’ve got to contribute something, right?
Just one more comment here that I got on this post: “Good question, Jason. I would tell him to go back to the drawing board and figure out what does he bring to the table?” Well, that’s what I was just saying, right? “If he does not bring any value, why would anyone want to even partner with him, or lend him the money?”
I guess they’re assuming that this is a him, by the way. Well, yeah, he referenced that in the email. “He seems to have goals that are not smart” – and you know that smart goal acronym: Specific, Measurable, Attainable, Realistic, with Time limits – SMART is a goal format which you can Google.
“Sometimes these people need to look at themselves in the mirror and face reality. You have to know where you come from in order to map out a plan on where you’re going. A seed must first go down into the ground and break that ground before it can grow to be a huge oak tree.”
I think that’s reasonable advice. It’s seller financing, saving money, borrowing money from a friend, relative or a hard money lender (and a hard money lender is probably not a smart one, it’s not going to loan you 100% loan to value, so you’re probably not going to be able to do that); maybe you can assemble the money between a family member or a very good friend that’s willing to do a 100% deal with you if you can convince them the deal’s good enough. That’s how you get your start. That’s how I got my start. Everybody has to start somewhere.
Again, we have some listeners who invest with our company who are very wealthy, and they don’t ask a question like that. And we have some people who are just starting out. The difference is some will do it – they’ll get past that point where they break the dam and they start, and others will be those dreamers. They’ll be those seminar junkies. Maybe nowadays the better word for it is ‘those podcast junkies’. Don’t be the person who’s just sitting on the sidelines and listening to this stuff, don’t be the person who’s going to events and spending a bunch of money on these kinds of things. Be the person who takes action. There is wisdom in action alone, even if it’s not good action. There’s always wisdom in action.
The next thing I want to do, just before we get to our guest, is talk to you for a brief moment about what a weirdo I am. So, I’m driving back from San Diego. I don’t really eat here often at all, but it’s funny, whenever I’m on a road-trip, I do tend to eat at In-N-Out Burger. I used to be a vegetarian for six years (not a very strict one!), but I gave that up because I just didn’t think it was ultimately healthy, and I’m not a huge burger eater by any means, but they’re good. I stopped at In-N-Out Burger and while I was inside, waiting for my number to be called, I noticed on the wall – and those of you back East and in the Mid-West who don’t have In-N-Out Burger (I know, if you like burgers, you’re jealous because it’s very good) – one of their pictures on the wall had the picture of an old In-N-Out Burger, and in front of it, it had a sign, and this goes to what a weirdo I am, right? I have nothing better to do. It had a sign and it showed the menu.
By the way, this rendering wasn’t a picture, it was a painting of a 1948 In-N-Out Burger. It said ‘Burgers, 25 cents. Cheeseburgers, 30 cents. French fries, 15 cents. Cold drinks, 10 cents’. You know who was my first teacher about inflation when I was growing up because I’ve told you this before. It was Wimpy, the character on the cartoon, Popeye. Wimpy is the one who really made me understand, at a very young age, the time value of money. What was Wimpy’s saying? “I’ll gladly pay you Tuesday for a hamburger today.” Wimpy was always mooching off people. I’m, of course, not doing his accent right, but what I did is I just pulled out my iPhone and I did some inflation calculations. See what a weirdo I am? This is why I’m probably single because I’m just a strange person.
I took a picture of this picture, of the 1948 In-N-Out Burger and then I took a picture of the menu today. Today, a hamburger is $2.05. Now, if you look at the stats on the Federal Reserve, which was formed back in 1913, over 100 years ago, the stats will show you that the dollar has lost 96% of its value since the inception of the Federal Reserve. I think Central Banks are a scam, I think we should do away with them, I do not like the idea of Central Banks – or at least not privately-held ones. I think if we’re going to have them, I think they should be run by the Government. Listen, you’re hearing that from someone who doesn’t think the Government should be doing much of anything. Minimalist Government is my favorite kind of Government; you already know this because you listen.
But adjusting for inflation, let’s see what happened here. I think this is pretty telling because I went to a CPI inflation calculator and of course, the CPI is understated blah blah blah, but it probably didn’t really become very understated until the late Seventies and the late era of the Carter administration because that presidency was such a disaster. That’s when they started really manipulating the inflation numbers the most.
A 1948 25 cent hamburger, today, is $2.05. One of the things about In-N-Out Burger is that it’s really inexpensive. It’s a much better deal than going to McDonald’s or Burger King or any of its competitors, and the food quality is far better too, I would submit. So interestingly, In-N-Out has beat inflation from this survey, basically. It is now cheaper to have a burger than the inflation rate, because that burger, according to my calculations, should cost $2.46 today, and it only costs $2.05 today. Now, granted, the other problem is we have this problem of substitution. That’s one of the ways they manipulate the Consumer Price Index, and so substitution in this case wouldn’t apply to whether it’s a beef burger or not, because it’s still beef.
The substitution rule says that if the price of beef goes up, everybody will just switch to chicken. Well maybe they don’t like chicken. I’m not a huge fan of chicken, I think chicken’s a dirty bird. Maybe they don’t want to switch. That’s what they do and how they manipulate the Consumer Price Index. One way is substitution, another way is weighting, and another way is hedonics, and we’ve talked about those before. Here, we don’t know if it’s the same burger, right? Well, obviously, the 1948 burger probably wasn’t pumped full of hormones, the cow wasn’t eating genetically modified food, like it probably is today, and who the heck knows what that’s going to do to us in the future? The cow was probably treated much better, it was probably a free range cow going around grazing on grass in a big farm – now it’s probably very poorly treated. Listen, I’m an animal lover. I really am very much against that kind of thing, but on the same token, I’m not saying that the Government should regulate it. I think the private sector should regulate this type of stuff – another discussion, so I will not go off on one of my usual tangents, I promise!
Is it the same burger? Is it the same size? Does it weigh the same? Is it the same number of ounces? We don’t know that, but assuming it is, and it’s probably not, In-N-Out has actually beat inflation, and that’s probably one of the reasons that the lines are so long there. You walk into any other fast food type restaurant or burger joint and you will get served much faster than you get served at In-N-Out. In-N-Out is almost always crowded, it’s an incredibly successful company. I just wanted to point out the way it seems to have slightly beaten the rate of inflation. This is what I do in my spare time at In-N-Out Burger; I can never stop thinking about inflation rates! Probably one of the reasons I’m single…just a thought.
Anyway, let’s get to our guest, Paul Craig Roberts, but before we do, actually – you know, there’s always one more thing, right? The one more thing is I have – how many of those do I have? I think I’ve got like 26 of them, and then they will be gone forever, of our Best of Meet the Masters physical product. By the way, we shipped a bunch of the Creating Wealth products last week to all of you. Thank you for buying them, that one is completely gone, totally sold out. There were actually two orders we couldn’t fulfil – we are offering those people either the digital product or a refund, or a different product. We totally ran out of those so they’re completely gone, and these will be completely gone too, soon, and that is the Meet the Masters Home Study Course, just to do a total blow-out sale.
If I do end up moving to San Diego, part of the Socialist Republic of California, which I may do as I discussed a few episodes ago (I’ve got this big tax break there that I can’t take unless I re-establish California residency for about a year) – I am not taking these things with me. I am selling them! If you want to buy the very last of these Meet the Masters Home Study Courses, I had Brittney lower the price – they’re now $197.
Mind you, I don’t know how many, but probably over 100 people have purchased the digital product. It’s the same product; this is the physical and it’s actually cheaper than the digital product, and that’s bass ackwards, as they say, right? It never happens that way, it’s just because I do not want to store these. I’m doing a physical product blow-out on our last physical products. They’re only $197 versus the digital product, which will cost you more than double at $497. It’s less than half the price. You get the Atoms (that’s the physical product) for less than half the cost of the Bytes (that’s the digital product). Bytes versus Atoms. Usually the Atoms are much more expensive than Bytes – this is one of those incredibly rare exceptions that the Atoms are actually less expensive than the Bytes.
Go to www.JasonHartman.com and pick up one of the last remaining copies of that and we will ship it out to you. Shipping is actually free – we’ll pick up the shipping within the Continental US and that costs us right there about $20. We are probably making $30 on each of those that you buy. Terrible profit margin! We don’t lose money. It’s like that saying, we almost lose money. By the time you put in time, we lose money on everything we sell, but we make it up on volume, as that funny old saying goes.
Anyway, let’s dive in and get to Paul Craig Roberts. You can go to www.JasonHartman.com, click on the Store and take advantage of that great deal. Here’s Paul Craig Roberts.
It’s my pleasure to welcome Paul Craig Roberts to the Show. He is a nationally syndicated columnist for Creators Syndicate and Former Assistant Secretary of the Treasury in the Reagan Administration. He’s co-Founder of Reaganomics and Former Editor and Columnist for the Wall Street Journal, Businessweek, Scripps Howard News Service and author of How America Was Lost: From 9/11 to The Police/Warfare State and The Tyranny of Good Intentions: How Prosecutors and Law Enforcement are Trampling the Constitution in the Name of Justice. These are all very interesting topics. Paul Craig Roberts, welcome to the show, how are you?
Paul Craig Roberts:
Just fine, thank you.
Jason:
It’s good to have you. Where are you located? Are you in Washington, by chance?
Paul:
Oh no, I left Washington.
Jason:
You’re not in the belly of the beast, anymore?
Paul:
Part of my time is spent on the Gulf of Mexico and part of the year in the Blue Ridge Mountains.
Jason:
Fantastic. Oh, that’s a beautiful area, the Blue Ridge Mountains are gorgeous. Well, good. I don’t know exactly where to start, but I would definitely like to talk about the economy and most notably, maybe, Russia. There’s a lot of talk about the ruble collapsing, how Russians are trying to soak up dollars and run toward the safety of our currency, which is not exactly well managed. Maybe in comparison, it is. I don’t know. What are your thoughts?
Paul:
Well, the ruble is not collapsing, it’s being driven down by the United States as part of an act of war, actually. The ruble is driven down by short-selling, and it’s not clear whether it’s the Fed and the Treasury or whether it’s the big hedge-funds, or all of them. Compared to the dollar, the ruble is in good shape because unlike the United States, which has a massive trade deficit, the Russians have a trade surplus. And unlike the United States, which has a massive public debt of 100% or more of GDP, the Russian public debt is some tiny fraction of GDP, something like 14-20%.
What should be happening is the dollar should be collapsing, but economic forces are not in the picture. It’s not economic forces driving down the ruble, it’s short-selling. It’s either officially done or it’s done with official blessing.
Jason:
The oil prices have just deflated so much, how do those play into it? That’s got to have some real impact on Russia, right?
Paul:
Well, it would have more impact on the United States because the cost of producing for all of Russia is below the cost for the United States. The average cost for Russia is less than here. In fact, the biggest effect of the oil price decline is probably going to be on the fracking industry in the United States. It put them out of business, and since they have so many loans with the banks and there are so many derivatives associated with them, you’re probably going to see another serious financial crisis like the one we had over the fraudulent grade mortgage backed securities. The most likely effect of the oil price decline will be on the United States, and because all the derivatives are related with European banking systems, you may see bank crises throughout the Western world.
I don’t think there’s any specific attention to Russia; I think it’s a problem that will have far more adverse effects on the United States from the fracking industry and all of their debt from instruments and the energies associated with them.
Jason:
Would you agree that your view is somewhat counter-intuitive, or at least counter to popular opinion nowadays? Maybe not counter-intuitive, but..
Paul:
Certainly not counter-intuitive. There is no such thing as popular opinion; you mean propaganda.
Jason:
If you want to call it that, sure.
Paul:
Lies. Lies come out of Washington and the financial press. All they do is lie; they never tell the truth about anything. I don’t say anything against that being so corrupt.
Jason:
I would not disagree with you for a moment there. I would definitely not disagree with you. The BRICS, well, several nations in fact, are trying to trade outside of the dollar, and that reserve currency advantage that America enjoys is a huge advantage because we can wantonly print and do all kinds of things, taking advantage of the system. Do you think that will last or do you think the reserve currency status will go away?
Paul:
I think it’s on the verge of being overturned, mainly for two reasons. One is that quantitative easing created so many new dollars that weren’t matched by the output of goods and services that the value of the dollar is no longer tenable. It’s held up, of course, by the pressure that the United States is able to put on the bank of Japan to print money even quicker than Washington, and on the European Central Bank to print in order to support the sovereign debt so that the European banks don’t go belly up. It’s all the printing of fiat currencies that protects the dollar’s exchange rate because everyone else is printing, even the Swiss.
But of course the Russians are not printing. One reason we’ll lose the reserve currency is that the dollar is being over-supplied and of course, because of dollar-denominated debt. The amazing rapid escalation in US-issued debt will also put this pressure on the dollar.
Now, the second main reason is that the rest of the world has learned that the United States abuses the role of reserve currency and uses it for financial imperialism over others, and the rest of the world is learning from the examples of Iran and Russia that the United States illegally uses the reserve currency status of the dollar to impose sanctions, to threaten people’s exclusion from the SWIFT Clearing System, to interfere with currencies, to interfere with their access to foreign credit. The rest of the world is withdrawing from this system; it’s not just the BRICS, South America will join that, probably most of Asia, and as these countries see them using the dollar to settle their international accounts, the demand for dollars in the currency market drops.
Whereas the Fed can print all the money it wants in order to support bond prices, it can’t print foreign currencies in order to support the dollar’s price. As these new mechanisms go into effect – for example, Russia is creating its own clearing system so it will no longer use the SWIFT system, the BRICS are creating their own IMF in the World Bank and the transactions these countries are entering into with one another are in their own currencies; they don’t use the dollar. I think you’ll see such a strong drop in the use of the dollar that it will affect the dollar’s value.
Jason:
So that means inflation is coming, right? Where we’re finally going to see the inflation we seem to deserve?
Paul:
We may see it from two sources; certainly, a collapse or just a fall in the dollar’s exchange value will raise import prices, and since the United States is now import-dependent, having off-shored so much of its industry and so many of its professional service jobs, the prices of all of that will rise. So when people go to Walmart, they’ll think they walked into Neiman Marcus or something like that. That’s one source of it.
Now, when the economy falls out, we will see more money creation – they’ll try to stuff the money into the economy. So far, we’ve had the situation where the money created with quantitative easing has been hung up in the banking system.
Jason:
The question is when will that hit the street, if you will?
Paul:
Well, it’s hung up in the banking system and it’s not hitting the street because the banks are in such a bad situation. They can’t lend and because the consumers are so heavily in debt, they really can’t borrow. But when you start seeing a substantial increase in the current recession and things start worsening rapidly, then there’ll be efforts to stuff money into the economy, beyond the banking systems. You would have a second fall in inflation, and that would be the ordinary price inflation from domestic money creation. You’ve got both sources of inflation and they could hit.
Jason:
Okay, so aren’t you, Paul, pre-supposing that the US will just sit by and let this happen? I mean, I understand that they can’t necessarily do anything about it from a monetary standpoint directly because, like you said, they can’t prop up the value of the dollar vis-à-vis foreign currencies, right? But they can have sanctions, acts of war, all kinds of ugly things that are not fair or ethical, but the fact is the world’s a tough place.
Paul:
It’s going to be tough for Americans, it’s going to be tough for Washington. Look, what the morons in Washington have succeeded in doing is creating a strategic alliance between Russia and China.
Jason:
Yeah, that’s a good point.
Paul:
Washington might be full of itself, but if it thinks it can take on that, it’s going to get its ass kicked from one end of the world to the other. At any time the Russians or the Chinese can basically destroy our economy.
Jason:
How can they do that, though? We’re their customer. Well, especially China. We’re far and away their biggest customer; why would they want to destroy us?
Paul:
Why would they care about that? If you’re trying to hurt a country, it’s a lot cheaper for them to destroy us and lose a few customers than to go to war.
Jason:
Well, compared to going to war, I agree with you, but compared to just having inflation..
Paul:
The customer business doesn’t bother them in the least. Look, what can the Russians do? Well, suppose they say ‘Look, since you’re mucking around with our currency for political reasons, we don’t think we’re going to pay you the loans when they come due.’ What do you think that would do to Europe? Those banks are so thinly capitalized, one of them has 62% of its capital tied up in a loan to Russia. All Russia’s got to do is say “Well, we’re not really going to default, but since you’re beating up our currency, we think we’ll have to wait until the ruble recovers before we pay you.”
Well, the European banking system would collapse. Think about all the derivatives.
Jason:
What would that do to the US?
Paul:
Well that’s one thing they can do that doesn’t take but a few words. They don’t even have to load a gun! What else could they do? Putin can destroy NATO in 5 seconds. All he has to do is call up the Europeans and say ‘Hey, we’ve decided we no longer sell natural gas to members of NATO’.
What does Europe face? Germany faces the close-down of some 30-40% of its industry. We’re talking about unemployment rates at about 30-40%, freezing people in the winter – this would be throughout East and West Europe. How long do you think NATO would exist? It would instantly cease to exist.
What could the Chinese do? Well, they could simply sell all of the dollar denominated assets. It’s true that the Fed could print the money and step in and buy them to prevent the price of treasuries from tanking, so they could prevent the sale of the Chinese treasury position from destroying the US bond market. [Call cuts out] But they can’t stop the next step because when the Chinese get the petroleum plus dollars, they dump those. There’s no way to buy those dollars of them, so what would happen to the dollar if the currency market collapsed? If it collapses, the whole financial house of cards collapses. It sky-rockets, all the big banks would fail, everything would fail. The whole Western world can be destroyed in a few minutes by either of those two countries.
Why don’t they do it? Well, because what the United States is trying to do to them is not really hurting them that much. I don’t really know what the impact of the fall in the ruble’s value is on Russia. If I was Putin or the Russian Central Bank, I would be sitting there saying ‘Hey, this could be a good thing because let’s hope they drive the ruble down really, really low because we’re sitting on a huge stock of dollars and we can buy up all the rubles at practically no cost, and get them out of the foreign exchange market. Then they can’t bother our currency anymore.’ I’m not sure that what’s happening is actually hurting Russia. We get a lot of propaganda from idiots and fools and liars and propagandists who like to pretend they’re so powerful and can lord it over other people, but if it’s not really hurting them very much, I suspect that what Russia and China will continue to do is simply ignore it and go on and re-create the world over. This time, under their leadership. There’ll be a new trade bloc, larger than the last one, that has nothing to do with the West, and that’s what’s happening in front of our eyes right now.
When the Chinese Foreign Minister said yesterday or today that any help Russia needs, they’ll get it from China, it shows that they understand that they have common strategic interests and a common enemy. China, of course, unlike the United States, has massive reserves. The United States hasn’t got any unless it can borrow them from Japan or the European Central Bank. You’re faced here with a situation where the arrogant fools in Washington are wallowing in their hubris by picking a fight with two countries that are much better positioned economically than the United States.
The only source of strength the United States has is the reserve status of the dollar, because that lets the United States pay its bills by printing money. It’s the main source of American power.
Jason:
It’s a pretty good deal for the US, that’s for sure. It is, as long as it can keep it going; it’s a big sham but it’s a good position to be in while you have it.
Paul:
But it’s a house of cards because the fundamentals don’t support the dollar. It’s supported by these rigged mechanisms. Japan has to print dollars faster than America. The European Central Bank has to print them as fast, so does Switzerland, so does everybody else that’s part of the Western system, or they aren’t part of it. Being an American vassal means you support the dollar. Of course, China, Russia, India, the South American countries, and much of Asia are not American vassals and you see increasingly these currency swap agreements made between China and even American allies like Great Britain.
I think that the Washington people.. I spent 25 years there, I never met 12 intelligent people.
Jason:
[Laughs]. I love it!
Paul:
And what they’re doing is they’re picking on people that can whip their butt, and it could happen. Or, as I suspect, simply Russia and China are going to turn their back on the West and create their own world economy. It will exclude the Europeans and the Americans and the Canadians and the Australians and the Mexicans.
Jason:
Alright, can I chime in here for a moment? Listen, just so you know, I am by no means being an apologist for the US. I used to beat this drum about currency collapse and all of this stuff, and I still think it’s possible. I still think we could see some very significant inflation. However, I just want to temper it with a few concepts.
We have that reserve currency status. If Russia and China really had their own middle class base of consumers, I would be right there with you. Granted, we don’t want to get into military stuff, but even if it’s financed by fiat currency, the US still has the biggest military the world has ever known. Also, Russia and China have giant demographic problems that in the next 10 years.. Russia is a dying country, quite literally. And China with this one-child policy, 10 years from now, has got a major demographic problem starting to hit it. Whereas the US – granted, it’s not through birth rates of European Americans, but we’ve been very receptive to immigration and we’re immigrating our way out of a demographic problem. At least there are some young people coming in to support the older people. Granted, it’s still a mess and social security is insolvent, I know that, but it’s not as bad. I’m just making a comparison to other countries.
And then the last thing I’d like to just point out is – look at the innovation and the technology that might just save our rear ends. I don’t know. It’s not all exclusive to America, but America’s certainly a pretty innovative place, you’ve got to admit that.
Paul:
No it’s not.
Jason:
No? Okay.
Paul:
Not at all.
Jason:
Alright, tell me more.
Paul:
Well, when you off-shore your manufacturing, you lose the ability to innovate because you’re no longer in touch with the production process – you don’t have the foggiest idea of how to innovate anything.
Jason:
Okay.
Paul:
Of course, the United States doesn’t have a middle class any longer.
Jason:
Well, the middle class is diminishing.
Paul:
All the middle class jobs have been off-shored for the last 15 years. It’s not just the well-paying manufacturing jobs, but all of the jobs that college graduates used to take, such as software engineering and information technology. All of these are off-shored.
Jason:
Even call centers. I agree, it’s diminishing, but it’s still better than it is..
Paul:
But there’s no middle class there. When you see the new Federal Reserve report from a week or two ago, they surveyed and they were trying to find out why the bottom is falling out of first-time home-buyers. They did a survey of the 25-year-olds and 30-year-olds and they found out that almost 50% of the 25-year-olds were back home, living with their parents. 30% of the 30-year-olds, and these are people that should be well advanced in their career, were back home, living with their parents. Why is this? Because they cannot get jobs that pay enough for them to have an independent household.
I think the figure was 47 or 48% of 25-year-olds, and many of these are college graduates with extensive student loans. They’re living at home with their parents in their childhood rooms.
Jason:
Yeah, it’s amazing. It’s the boomerang generation, I agree.
Paul:
There’s no middle class, and of course, the Russian birth-rate has turned around. It was down during the period of the dissolution of the Soviet Union, when our agent Yeltsin was running the place for us, and when they had that crazy austerity policy imposed on them by the Harvard idiots, but that’s not there anymore. Their birth-rate has now turned around.
The Chinese have such a massive population, but besides, in 10 years, the dollar will not be the reserve currency. It certainly is not going to last 10 years, it’s a house of cards. We don’t know what’s going to come out of it. The falling price of oil has got to disrupt all the oil derivatives. All of the fracking companies who are conducting massive loans when oil was over $100 a barrel – there are now 60. How are they going to service it? They’re not. So in all of that loans are mixed up. It’s like mortgage-backed securities. What you’re looking at is all the economic vulnerabilities are in the United States.
The vulnerabilities the United States have are mountains, they’re like the Himalayas compared to the mole-hills in China and Russia.
Jason:
Right. Very interesting. So do you have a prediction as to how much inflation we might see and when? Any thoughts on that? It’s a very important question to investors.
Paul:
Well, you know, we already have substantial inflation, it’s just that they don’t measure it. Since I was in the Treasury, the way they measure inflation has been altered in two ways that lead to a dramatic understatement of inflation. One thing they do is if a price goes up, they simply say it’s a quality improvement and don’t count it. Now, in some of those cases, it actually is a quality improvement, but it’s overdone. The other way they do it is if the price of something in the Index goes up, they throw it out and put a cheaper thing in. It’s the substitution. They say ‘Well, consumers do that’, but it no longer measures the cost of a constant standard of living, it measures a falling standard of living.
If the price of a prime rib goes up and you stick to round steak in order to avoid counting that as a price rise, then you are measuring a lower standard of living. As John Williams has pointed out over and over..
Jason:
Shadowstats, yeah, I had him on the show.
Paul:
In the 1990 official methodology, the inflation rate’s over 5% annually. If you use the 1980 official methodology, it’s close to 10%. And if you talk to anyone who does grocery shopping – I see it myself.
Jason:
I see it too and I agree. I was beating the drum about how much inflation we really do have, until about a year ago. It really did seem to subside, even with the BS and the way they measure it – weighting, substitution, and hedonics.
Paul:
It certainly has started in food, but anything that we buy. Listen, in the last 3 years, I’ve been undergoing massive home improvements and repairs, really. Just watching the price of the same material over 3 years – it’s at least a third higher. When I tell you there’s no inflation, the reason they concocted these inflation measures is so they don’t have to pay the social security costs of living increases. They cheat the people on social security and they cheat anybody.
Jason:
Well, all the government employees, all the entitlements, everything. It saves the Government money to lie about inflation and it gets people re-elected, too.
Paul:
It’s quite high, actually, in terms of materials and food.
Jason:
How bad do you think it’ll get? Do you think we’ll see 20% inflation? Worse than Carter era type stuff?
Paul:
Oh, it could be hyper-inflation.
Jason:
Which means 100% annually? What does that mean? Hyper-inflation doesn’t have an exact definition so I always like to ask my guests what theirs is.
Paul:
Well, hyper-inflation has a huge range, but it could certainly be much more than 20%. When you’re import-dependent, as we are, you have to keep in mind too that more than half of our so-called imports are actually the off-shored production of American firms. When it comes back in, it counts as imports. Unless these American firms are just going to go out of business, if the dollar drops and the cost of the off-shore production rises, all those prices have to go up when they bring it all back in. This is why I say the time will come when people walk in Walmart and they think they’ve walked into Neiman Marcus because prices will be so dramatic.
If the dollar falls, then the exchange rate will cause very high inflation. That will produce a crisis and the Federal Reserve’s likely response to the crisis will be money creation, and not the kind that just goes to the banks for their reserves, but the inflation kind.
Jason:
It’s about the only tool they really have, unfortunately.
Paul:
That is to print money. Of course, once you get inflation, they can’t control bond prices, so the interest rates explode.
Jason:
And the bond market will collapse.
Paul:
Even though the economy is dropping. You can have a situation – this is what people understand – where you have inflation and depression at the same time. We’ve never had that.
Jason:
Yup, that’s the misery Index times 5!
Paul:
That’s right. We’ve never had that and economic policy has no solution to that.
Jason:
See, that’s what people don’t understand and I’m really glad you pointed that out. What has to give in that equation is the standard of living. The standard of living just has to decline. A lot of this wealth is illusory, it’s just a smoke and mirrors illusion that we’ve been living in, maybe since 1971, I don’t know. I’m referring to the Gold Standard, of course.
Paul:
Well actually, the real family income is actually lower than it was in the late Sixties. People are already suffering, and we have a record percentage of the population on food stamps, we have record homelessness and there’s still a lot of home mortgages that are underwater in the sense that the house is not worth the mortgage, but people are still paying it because they’ve got to have a place to live.
There’s plenty of room for a lot of suffering, and of course, the wealth of the so-called 1% is paper. When this hits, all these paper assets drop like a stone too, so all the billionaires will disappear as well. It’s not, in my opinion, a hopeful outlook, and I think it’s very foolish of Washington to be picking fights with the Russians and the Chinese, and it’s very foolish of Washington to be convincing these two well-armed nuclear countries that Washington is the enemy.
The so-called American military is not clear that it’s all that good, either. We fought for 13 years in Afghanistan against a few thousand lightly-armed Taliban and we weren’t able to win. We were in Iraq for 8 years and we weren’t able to win. And not long ago, we sent one of our newest super-duper missile ships into the Black Sea and stationed it right there near the Russian Naval Base in Crimea to show what a powerful technological marvel we were, and the Russians flew one jet fighter over it and every communication system in the ship went down. So the notion that we have all this is just propaganda from the military complex that wants the money.
Jason:
Right.
Paul:
And it wasn’t long ago when we were prancing around that the Chinese sent up a missile and blew one of their own satellites out of space. That told us they can make us blind whenever they want to. This notion that we have some kind of military superiority is nonsense, and if the United States has no possibility of invading Russia or China – if we were to invade Russia or China, the whole army would be destroyed. The war that they’re heading toward is nuclear and there’s no winner there.
Jason:
No, there’s certainly no winner of that. Okay, so Paul, what is the solution? You’ve done a great job outlining the problem, but what should we be doing? We should curtail our spending, we should not pick fights with big enemies like that, or anybody for that matter! We can’t get out of this mess with curtailing our spending and raising taxes – we’re just too far in the hole, aren’t we? It seems like the only way out is to inflate. The only question is whether that is severe or moderate.
Paul:
That’s what they’ve been trying to do because they believe in the Phillips curve and they believe that if you want economic growth, you have to pay for it with inflation.
Jason:
Right, right, and as long as the GDP is increasing and the population is increasing proportionately, that isn’t the end of the world, but that’s not happening, is it?
Paul:
That’s right. If it was, you wouldn’t see declines and not in family income. No, you can’t grow an economy without growth in income or credit and Greenspan used up the credit. He substituted the growth in credit for the missing growth in income with his real estate boom. In other words, the low interest rates drove up housing prices so people could re-finance their mortgages and spend equity. That kept the economy growing during the Greenspan era.
Jason:
And before that, they did it with the stock market. It’s like these people move from bubble to bubble. It’s just ridiculous. And Bernanke did the same deal. I don’t know, we’ll see what Janet Yellen’s like.
Paul:
It’s all bubbles now. There’s no basis for the stock values, the largest purchases of stock are the companies buying back their own shares, the main source of profits is lay-offs, there’s no retail sales supporting anything and so the whole thing, as I’ve said over and over, is a house of cards, standing on the dollar which, itself, is a house of cards.
I think we’ve covered it. Now, just because there are problems doesn’t mean there are solutions. I think we’ve passed solutions, and the solution is going to be some kind of collapse. I don’t think it’s avoidable. It may already be starting to unwind. I mean, let’s come back to the question: What is the state of all the fracking loans, based on the $100+ barrel of oil? What is the state of those? Who holds them? What are the derivatives drawn off on them? What are all the credit default swaps? What does this picture look like? And did they think about it when they decided to try to hurt Russia through the oil price? Or to hurt Russia through the ruble’s exchange value? Did they think?
No, they didn’t, they’re not smart enough to think about it. They’re full of hubris, they’re arrogant. I know them, I spent 25 years with them. To repeat myself, I never met 12 intelligent people in Washington.
Jason:
[Laughs]. I love that! I think you’re probably right!
Paul:
I think we’ve covered it. I need to go now. I’m sorry I don’t have any solutions to give you because we don’t need a $1.1 trillion military security complex; the only enemy we have are the ones we create for ourselves in order to keep the military security entitlement going. It’d be cheaper just to give them our share of the budget and not even have them make the weapons. That would be a lot safer than having to go around starting wars so that we can take the tax-payers’ money to give to the military security complex, which we don’t need. All the enemies we have, we create.
Look, we’ve been bombing and murdering people in 7 countries over 13 years. Now they’re picking on Russia.
Jason:
And that’s a big fight to pick, so let’s hope that we don’t do it. Hopefully, Obama will just get busy planning his library and he’ll be on his way out soon.
Paul:
Yeah, but the military security complex won’t be on its way out.
Jason:
They’re there all the time.
Paul:
Well, I enjoyed speaking to you.
Jason:
Okay, and I just want to give out your website, it’s www.PaulCraigRoberts.org, and Paul, thank you so much for joining us today, I appreciate it.
Paul:
You’re certainly welcome, goodbye.
Outro A:
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Outro B:
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Outro A:
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Outro:
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