In this Flashback Friday episode of the Creating Wealth podcast from May 2012, Jason Hartman and returning guest Dan Amerman discussed federal policies and interest rates as well as who they hurt and who they help. They explained how the artificially low interest rates are not working, and they’re creating higher prices through inflation.

They also covered current inflation rates, and why the official numbers do not represent true inflation the way that American citizens experience it though their purchases of food, fuel and utilities.

Hartman and Amerman then discussed rental housing and how to go about arbitraging the inflation. Amerman explained options to take advantage of the Fed policies, by understanding cash flow real estate investing and setting a safety margin. It’s important to consider interest rates over price when it comes to a mortgage.

Is It Really Recovery?

Hartman opens the episode by announcing that if you’ve been listening to the news lately, there has been talk of economic recovery, but he is hesitant to agree. Though it looks like a recovery, he states that he doesn’t call it that because recovery is supposed to mean that every wins and this is not the case.

Housing affordability is high, and markets are going up. Hartman reminds listeners that because statistics are a few months behind, the market is doing better than we’re being told.

He recalls that during the worst of the financial crisis, he remarked that the economy was in its first phase, a depressionary and deflationary phase. The second phase is an inflationary one, and for many people it will be quite painful to handle. Those who have not accumulated commodities or denominated their assets into real things that people need may struggle.

As we see the inflationary side of the economic cycle, we see a good deal of people making big fortunes. Hartman remarks that hopefully the listeners are those people if they’re following his plan for investment success.

Four Pillars of Extreme Wealth

Hartman mentions a concept that fortunes throughout history can be boiled down to four different pillars of extreme wealth: real estate and resources, banking and insurance, media, and technology.

Concerning real estate and resources, Hartman explains that upon gaining real estate, resources are quick to follow. Investors gain resources from real estate. He recalls a guest he had that was running for congress who states that all wealth comes from the land, which is true.

The pillar of banking can be very powerful but included in this pillar should be insurance. Hartman explains that he isn’t referring to life insurance, because it isn’t technically an investment. Insurance companies do not want their customers to understand inflation, so they aren’t aware that they’re being ripped off. The same can be said for annuities and bonds.

Hartman explains that in banking, he loves being a borrower, opting for thirty-year fixed-rate borrowing. He states that the country of Greece has been borrowing too much with people expecting to retire at 49 and they are in too much debt. Hartman notes that interest is about 25% annually to borrow in Greece, likening this to loan shark rates.

The third pillar of wealth is media. We see it all the time in celebrity culture, and Hartman notes that it’s disturbing that there are people who are famous for almost no reason. There are legitimate people in media, like Ted Turner and others who create content and podcasts to present real information.

Technology is the fourth pillar of wealth, with Facebook having their IPO soon. Hartman explains that the people who make the most money in tech-related stock deals are the insiders. Great deals aren’t usually open to the general public.

It’s unlike income property which is open to everyone. It doesn’t take a lot of money to get started. Hartman mentions that there are properties available in St. Louis for $5,000 down. Most listeners can come up with this sum of money, even if they need to network with the three Fs (friends, family, fools).

When it comes to technology, Hartman considers healthcare a part of that industry, as well as several others like insurance and medicine.

How Many Pillars Are You In?

Hartman mentions that of the pillars of wealth, he is involved in real estate and resources as well as banking. He mentions that real estate has a good deal in common with banking and refers to people thinking about parking their money while inventory is scarce. It’s practically impossible to do that, not being a safe bet at all.

Hartman advises being a hard-money lender, with the opportunity to earn 12.25% or more from smart lending deals.

He explains that one of his local market specialists emailed him recently, stating that they took down sixteen new properties and there were a lot of funding opportunities available. Though there has been a terrible inventory lately, it looks like a break is coming. By making connections through Fannie Mae, ninety new properties are coming in, though Hartman explains that not all of them will be fit for investors.

Hartman states that the only pillar he isn’t really involved with is technology. He uses it but doesn’t own any proprietary technology. He’s in the media business, though with fifteen podcasts being published, eleven books, and newsletters.

Median Families Qualifying for Mortgage

Hartman explains that recently, median families have exactly enough income to qualify for mortgages, though they might not have sufficient credit. This is part of what makes rentals work for investors.

He notes that if the housing index was at 100, there would be exact affordability for the median family, but since the index has been created, it hasn’t been as good as it is right now. The number it currently sits at is 205.9, and since it was tracked in the 1970s, it has not been this high.

Builder confidence is also high, the highest it has been in five years, which is hopefully a sign of modest improvements in the housing market.

Of all the positive headlines in the news lately, Hartman mentions that there is a negative, the student loan issue. Student loans are crippling an entire generation, with college students needing upwards of three jobs to pay off their debts. The default rates have doubled. Hartman mentions that one drop-out mentioned in an article states that he has $70,000 in loans and hasn’t finished college yet.

He states that this is a big reason why Gen Y needs rental housing, because it’s going to be a long time before they can afford a home. He advises investors to provide rental housing and expand on both the choices and inventory.

Arbitraging Federal Policies

Fourth time returning guest Dan Amerman is the creator of a reading series and teaches a course on turning inflation into wealth. Recently, he wrote an article about arbitrating Fed policies with cash flow real estate investing.

Amerman states that the Federal Reserve has total control over interest rates and keeps them as low as possible to help the government. He wrote an article last fall on approximate market rates and Federal Reserve deficit. Fed methods are beneficial for Wall Street and banks, but it hurts average people, especially those saving for their retirement.

Hartman explains that the picture gets worse than what we’ve seen, and that the low interest rates create higher prices through inflation. When the government increases the money supply, it not only kills the average person on the money they saved all their lives, but the money is debased because of this monetary policy.

Government Can’t Pay Its Own Bills

Amerman explains that we have the Fed that has abandoned the long-term goal to be a steward of the value of currency. We know they’re creating trillions of dollars out of nothing to support a government that can’t pay its own bills. In many ways, he says, this is the most inflationary situation we’ve seen.

Hartman notes that in a textbook scenario, interest rates would be close to the inflationary pressure so that people wouldn’t end up completely devastated, but now both trends are working in opposition.

He recalls that during the Carter era, his mother had a Dean Witter account that was paying 17-18% but he notes that the issue was, the value of the money was decreasing faster than that rate was increasing. The spread wasn’t that devastating at the time, but it is now. Having read a lot of articles, he mentions that he thinks true inflation is somewhere between 9-10%.

No True Inflation

Amerman states that there is no true inflation, because it impacts everyone differently, depending on our stage of life, where we live, and other factors. We have a complicated calculation that needs a huge number of assumptions that factor in on how it’s calculated and what we include with the figure. The rosier the inflation stats look, the better the economy looks, and the less money has to be paid out for cost of living adjustments. The lower the inflation, Amerman says, the better off incumbent politicians are. The way we calculate inflation has changed and become a moving target.

He refers to how much he pays for dinner, healthcare, groceries, and utilities. Personally, he notices that those are climbing at 10% per year, even as the government lies and says there is no inflation.

Hartman notes that he has never paid as much attention to his utilities as he has in the past two years. He used to have it all on autopay and left it at that, but he notices that utilities are skyrocketing, same with groceries. Inflation is hidden in this sense, because prices remain the same, but the products get smaller. Same bag, fewer chips, same price.

Amerman recalls attending a dinner date with his wife at their favorite restaurant when he noticed that the same food they always ate was up 33%.

Understanding Cash Flow Real Estate Investing

Hartman mentions one of Amerman’s charts that points to ways that investors can use this to their advantage by understanding cash flow real estate flow real estate investing

Amerman explains that he got out of graduate school in 1983, one of the worst years to become employed as a new graduate student. Within a couple of months of getting out, he closed his first multi-family deal with the interest at 13.5%. He was consulting on the deal, which he notes was tax exempt. This was great being that the tax rate was at 15%.

Using this situation, he refers to the peak annual interest in 1981 on his chart, which was 16.63%. It was difficult to make housing cash flows work when paying high interest. He explains that if there was gross coming in, vacancies had to be taken out and offering expenses needed to be examined. The biggest payment is the principle and interest on the mortgage.

Price Isn’t the Main Point

He explains that many people don’t understand, and they are focused on the price, especially when they want to flip and resell the home. If you look at real estate as an investment, nothing is more important for establishing cash flow than the P&I payments.

Hartman notes that for the first time in his long career, he has noticed that private lending in single family housing is working. It might be because we are in a time where you can borrow from a hard-money lender and the deal makes sense for the borrower. Mortgages have been subsidized by the government for so long, but now, on a five-year private loan, the deal works for both parties.

Amerman states that he wrote the article on his website because there was such a misunderstanding regarding price being the most important factor in an investment. If you’re a cash flow real estate investor, that isn’t true. It’s important to look at what matters most, how much money is coming in vs going out, what kind of return you’re getting, and your safety margin. Interest rate is more important than original price.

Fed Accidentally Subsidized Mortgages

Amerman explains that in their effort to help the government, the Fed has accidentally subsidized mortgage rates and it is leading to fatter cash flows.

He notes that there are two factors coming together, one being a sharp decline of prices. On a national basis, we are experiencing unprecedented interest levels as well. If those factors are considered together and presented on a graph, it’s like the floor drops out, Amerman says. We have never seen mortgages so low, and there is an opportunity to enter a property with a substantial safety margin.

Hartman adds that in these situations, debt becomes a big asset because inflation destroys the debt through inflation-induced debt destruction.

Amerman’s Three Graphs

Amerman mentions that the three graphs in his article, representing a twenty-year history of financing costs is an eye opener regarding the changes. One chart illustrates thirty-year fixed mortgage charts with record low interests. The second chart represents the average price of a single-family home. Putting these factors together in a third chart illustrates inflation-adjusted mortgage payment.

There was a big spike in the real estate bubble in 2005-2007 and now it’s way below the line. Amerman explains that he hasn’t seen this relationship before, because the Fed is now intervening in the marketplace to keep mortgage interests below market level.

Hartman notes that prices with from $900 in 1992 to over $1,100 in 2007, and now it’s down to $570 when adjusted for inflation.

Amerman agrees that rents are up, and vacancies are down, but notes that the media is missing out on covering the interest rates because they’re absorbed in the idea that the original price matters more.

He explains that in his charts, he uses a combined approach, because for years he has written articles stating that the official rates weren’t trustworthy. He uses the CPI-U, noting that numbers look better with realistic inflation rates rather than official numbers.

Artificially Low Inflation

Hartman returns to the topic of artificially low inflation and mentions that with the way that the Fed and Treasury operate, they can’t keep the rates artificially low forever. He questions how they’re keeping it up and wonders at what point the rest of the world is going to decide that they’ve had enough.

Amerman explains that the reason the US dollar is maintaining value is because we are played for suckers with employment. Other nations don’t want the reserve currency because workers will become too expensive in that care. Governments around the world are happy to participate in the illusion because it benefits them as well.

He mentions that on his website, he has an article called Bullets in the Bag, and it explains how manipulation of currency works. The Federal Reserve is controlling all of it and has created over a trillion dollars for insider use. The government will buy a mortgage and manipulate the rates from the bank and will pay the bank in Excess Asset Reserve Balances, which only exist because the Fed decided to create them.

He notes that people treat this information like it’s obscure and explains that if you base your knowledge of the world around you on media and old economics classes, you have no idea what’s happening. The government is counting on us not to know anything.

In wrapping up the episode, Amerman explains that as hard as the government tries to control things, they’re human and they’re going to mess up. Tremendous pressure is building up between government manipulation and free market. They’re like tectonic plates moving against each other.

For more information, articles, and charts by Dan Amerman, visit his website at