CW 261: Monetary Policy, Fiscal Policy and Governmental Irresponsibility with Dr. Kirk Elliott (Part 1)

Countries around the globe are teetering on the brink of bankruptcy, with our own country no exception. Jason Hartman interviews Dr. Kirk Elliot, Ph.D., investment adviser with ICA, on monetary and fiscal policy and the irresponsibility of governments around the world.

Using Greece as an example, Dr. Elliott states that when governments run out of money, they start doing crazy things. The one fundamental issue in Greece is public debt, over which they lost their autonomy and are now under the rules of the EU. Italy, Iceland, Portugal, France and others are on the verge of bankruptcy and due to that, the EU has been unable to bail out Greece.

Across the pond in the U.S., we have lost our credit rating and are losing the reserve currency status with a lack of interest in our Treasury bills and notes. The definition of inflation is an increase in the money supply, and price increases are a symptom of inflation.

As more money is printed, it loses value and nobody wants it, which is sending the U.S. down the same tube as other countries in economic crisis. People around the world have lost faith in the U.S. dollar and the country’s ability to repay its debt. Dr. Elliott says when interest rates go up, it will open a whole new can of worms with the bond market, which will come crashing down hard on retirees and insurance companies. But it’s not all doom and gloom. There are counter-cyclical investment strategies that people should take advantage of that are attached to physical assets, such as precious metals and real estate investments (commodities with universal need.)

Kirk Elliott has been an investment adviser with ICA in Durango, Colorado since January of 2002 and has been working in the financial services industry since 1994. Dr. Elliott is passionate about educating and equipping his clients with the information they need to safeguard their hard-earned assets. Dr. Elliott earned his Ph.D. in Public Policy and Administration from Walden University.

His dissertation is entitled, “An Empirical Identification of an Appropriate Inflation Definition and an Inflation Targeting Monetary Policy.” Dr. Elliott also earned a Master of Arts in International Studies from the University of Denver, and a B.S. in Business Administration from the University of Colorado. Dr. Elliott has served as adjunct faculty for Fort Lewis College, Liberty University and Walden University in the areas of Economics, Public Policy, and International Business.

In addition he makes frequent appearances at economic and geopolitical forums and has been interviewed on radio talk shows across the country such as Family Talk with Dr. James Dobson, and Freedom it’s up to Us with John Michael Chambers.  Dr. Elliott has also appeared on local and national television networks including Daystar, SkyAngel and local networks in Columbus, OH and Orlando, FL.

Dr. Elliott is founder and president of Philanthropia, a non-profit 501(c)3 charitable foundation established to care for those in need around the world. Dr. Elliott also serves on the board for Patrick Henry College in Purcellville, VA. Dr. Elliott lives in Southwest Colorado with his wife and two children.


ANNOUNCER: 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, this is episode number two sixty-one, and today we’ve got a lot of stuff to talk about, not the least of which is monetary policy, inflation, investing, gold, silver, coins, all of that good stuff. But before we get to that, a couple of things as usual in my monologue portion of the show.

First of all, are you amazed? Have you noticed all of the new construction? It is like someone turned on the faucet, and it’s just coming out of nowhere. And that is a fantastic sign for us as investors, because we, the last several years, have been buying properties far below the cost of replacement, below the cost of construction, and I’m looking at a postcard here that I just got for a development in the greater Phoenix area. And it says, grand opening! Tired of renting? Own a home for $679 per month, no down payment required. And this is a builder that’s building properties—3, 4, and 5 bedrooms. They’re in a little bit of an outlying area—that’s the thing you always have with the newer properties. The locations aren’t as close into the core areas as they are for the resale properties. So you know, you trade off new and nice, and get the benefits of new, for some things in terms of location. Usually a much longer commute.

But, in this example, 3, 4, and 5 bedroom homes, $15,000 worth of upgrades included, appliances included, VA financing available, and in so many markets nowadays, you can own for equal to or lower than the cost of renting. And the interesting thing about that is that it would make you think everybody is running out to buy a home. And many of them are. But so much of the market right now is actually driven by you and I! Investors. Investors are buying the properties, because the financing is fantastic, if you can get it. And that’s the problem: people just can’t get it. The financing is just so hard to come by that it makes it very, very desirable for investors, because so many of these people are still forced to stay in the renter pool.

Facebook is the big news lately. Facebook’s IPO, right? And now, all of the litigation has begun, as the criminal activity rears its ugly head, right? Facebook is getting sued, and there are several lawsuits going on, I guess. This is an Associated Press article; I’ll read you a couple clips from that of New York—group of shareholders filed suit against Facebook, its executives, and the good old none other than Morgan Stanley, the lead underwriter in the company’s IPO last Friday. The lawsuit filed in US District Court in New York claims that the company’s IPO documents contained untrue statements and omitted important facts, such as “severe reduction in revenue growth” that Facebook was experiencing at the time of its public offering. The suits three plaintiffs claim they were damaged. In the statement, Facebook said the lawsuit is without merit. Well, of course they said that. And of course Morgan Stanley declined to comment.

Meanwhile, a Senate panel said it was reviewing Facebook’s high profile IPO stock offering amid allegations that the bank handling the IPO may have provided only select clients with a negative assessment of the company. Well, I guess those insiders got to sell their stock first, didn’t they? And you know, in the early days of the Facebook IPO that’s now what, a week and a half, two weeks old—you know, it was interesting, because basically all of the sellers—not all of them, of course, but virtually all of the sellers, the big selling activity—was from six major players. And that included all the insiders, as usual, right? And not just the insider executives, founders, Zuckerberg, etcetera, but Goldman Sachs, Morgan Stanley, and institutions that have a lot of that stock. They were dumping, dumping, dumping that stock. Regulators are examining whether Morgan Stanley selectively informed clients of an analyst’s negative view of Facebook’s prospects before the stock offering. So again, it would be crazy not to be a direct investor.

Another article, new home sales rose 3.3% in April. Washington, D.C.—well, that’s the source. That’s not the location. That’s the byline. Sales of new homes rose solidly last month, adding evidence to a gradual improvement in the housing market. And what’s so significant about this, folks, by the way, my comment—this is new homes. This is not resale homes. And this means for you to have new home sales, what do you need? You need development activity. That means builders are able to build based on this equation: land cost, construction cost, plus builders’ profit. So, they’re able to get those three components out of the deal. Otherwise, you wouldn’t see them building. And that is an amazing sign. It means you’ve already locked in your profits pretty much, as long as you have purchased below the cost of construction, and you got the land for free. So there you go. It says, a pick up in hiring, in cheaper mortgages, combined with lower home prices in most markets, has made home buying more attractive. Builder confidence has increased steadily since last fall, a sign that some expect the market to improve as the year goes on. Still the sales of new homes is well below the $700,000 annual sales that economists equate with healthy markets.

So that’s what it was back in the hey day. Of course, I don’t think you could have more new home sales, because why? Because there hasn’t been enough new home construction yet. But that is certainly coming online. And it’s amazing; my LinkedIn newsletter, it just shows, here are just the headlines. Prices show strongest year-to-year gain in six years, according to National Association of Realtors. Now is the best time to buy, according to Ebby Halliday, and that’s the big real estate company in, I think they’re Dallas-based. And they do a lot of activity there. In my AZ Central newsletter, here were all of the headlines. It said next up for Dimon—of course, this is Jamie Dimon with JP Morgan—he has to face the shareholders about his $3 million loss, but look at the other articles! US economy provides some relief to markets.

Next headline: US stock futures up 47%. Next headline: US factory output rose in April. That means there were consumers buying those goods. Next headline: housing starts rose to 717,000 in April. So, amazing, amazing stuff. Now, here is some positive news out of the sort of the Wall Street stock market cartel. This isn’t Wall Street per se, because it’s in England, but this was—I was proud to see this article. And my hat’s off to this CEO. The article says, Tesco CEO refuses bonus due to poor results. Wow. Someone on Wall Street—or, not Wall Street, but a publicly traded company—a CEO actually doing the right thing, making a nice gesture here. Very, very nice to see this. It says, London: the chief executive of Tesco PLC, the UK’s largest supermarket chain, says he will refuse his annual bonus, because of the company’s disappointing performance in its home market. CEO Philip Clarke was due for a bonus of £372,000, and that’s $587,000 US, on top of his annual salary of £1.1 million. Tesco reported Tuesday that 5,000 managers had their bonuses reduced to 16.9% of the maximum possible award, and executive directors will get 13.54% of the maximum. But, the CEO, Philip Clarke, my hat’s off to you. I’m totally impressed. You refused to take your bonus, because the company wasn’t doing well. Very, very nice gesture. Thank you for that.

Now, here’s one that’s going to blow your mind. And you know, some of my talk on here, again, I want to make the usual disclaimer—some of my talk in all of the past episodes, I really think—I love capitalism. I’m a total capitalist, obviously. However, Wall Street is not the least bit capitalist at all. It’s a game for insiders. It’s a rigged game. Well, here’s an interesting story, when you see the divergence of CEO pay and executive pay, whether it be the board of directors, the other C-level employees, or other big execs with companies, has totally, totally departed many, many years ago from rank and file workers. And this would be fine if the shareholders and the other stakeholders, not just shareholders in these companies, were getting their fair share. But they’re not. And this is why I say you must be a direct investor. Do not put your money in anybody else’s deal. Control the things in which you invest.

Well, this article—this is going to blow your mind, when you just look at the startling, startling numbers here. It says, this man makes more than you would in 3,500 years. David Simon’s 2011 pay package, worth more than $137 million. This is a Newser article. And this article really shows us a few things. Number one, it shows us that we should be investing in real estate, because that’s what this company is all about, that I’m about to tell you about, okay? So, it says, you might want to wait to read this until you’re somewhere where it’s okay to scream. It would take the average American worker 3,489 years to make as much money as one top CEO took home in just one year. David Simon, shopping mall developer for Simon Property, snagged a pay package last year worth more than $137 million, and AP offers up some comparisons to illustrate just how crazy that really is. A minimum wage worker would need to toil for about 9,096 years to equal Simon’s 2011 earnings. And it would take three years for that person to make what Simon made in just one hour. As for a person earning the national median salary of $39,312, it would take that worker slightly more than one year to earn what Simon made in one hour. Simon also makes about 342 times what we pay President Obama, and far more than the $110 million that goes to the top 600 government leaders in the US combined. Now, that is really, really amazing. Although most CEOs took home just, “just,” $9.587 million dollars. So, 9½ million—basically $10 million, rounding—it would still take the average American almost a month to earn what the average CEO makes in one hour. Wow. Amazing.

Now, here’s another amazing story, and then we’ll go to today’s guest that I’ll tell you about in just a moment. And this is pretty awesome. I just got this today from the newest member of our team, Steve, so thank you Steve, for sending this over. And it’s pretty darn awesome, so listen to this. In a Forbes article that lists the happiest cities for job-seeking college graduates, the happiest cities for job-seeking college graduates. And what this article does is, it compares job prospects for these grads—how is job creation, are there new jobs being created in these cities—and it compares cost of living in these cities to the typical pay that these grads would receive in these jobs. So, what does that equation look like? Well, you know what the #1 best city in America was? We just got back from there. It was the place where we just had a market tour, and it was, yes, good old meet me in St. Louis. The Gateway Arches City, the #1 city in America for college graduates seeking jobs. #4 was another market of ours; it was Memphis. #5, another market of ours: Indianapolis. And #7, yet another one of our markets: good old Houston, Texas. So, pretty darn amazing that we are doing the right thing in terms of our investment recommendations.

Well, hey. You know how I feel about gold, and the gold bugs. I think they have the right premise, I think they’re absolutely accurate on that. I disagree a bit with their conclusion, although I think their conclusion is okay, because I think gold is a great defensive strategy. I think silver’s a great defensive strategy too. And my favorite thing, because it doesn’t have the seven flaws I pointed out, is income property. Because you can finance it, you can rent it out to other people, it produces income, it’s the most tax favored asset in America, you can trade it tax free all your life, and you get tax advantages while you own it, while you’re making money. And with the metals—hey, I think they’re better than dollars or any depreciating fiat, fake, counterfeit currency around the world. Because the one thing pretty much everybody on earth agrees, is that gold and silver are money. They are money. But here’s the distinction, folks. Money is great to have. I’d rather have it than not have it. But money is not an investment. It’s just money. And it’s good to have some money, so should you buy some gold and silver? Absolutely. Because you want to store your wealth. You want to have something that is readily liquid and tradable. I would only do that if you take physical possession of it. I would not keep it in my house. My grandfather was a bit of a gold bug himself, and he suffered a home invasion robbery, so you never want to talk about owning this stuff, and you don’t want to keep it in your own house. I’ll leave it up to you where you might want to keep it. That’s debatable. Again, you don’t want to have a home invasion robbery, so you don’t want to do that. But the only way to have it, in my opinion, is the actual, physical metal. Because everything else is just a symbol. It’s just like our own currency—our Federal Reserve notes, or the currency you have in any country in which you might be listening to me right now. Those are currencies. Those are not money. There’s a difference between currency and money. And every currency on the globe right now is a fiat currency, meaning it’s just by authority, by decree. It’s not real. It’s not money. It’s not attached to anything.

So, we’re gonna talk about that with our guest today, Kirk Elliott, a fascinating guest. And we’ve got a lot of great shows coming up for you, by the way. Check out our latest property offerings at And be sure to call in and talk to me, and ask your questions, for later broadcast here on the Creating Wealth Show. That call in number, again, 949-200-8009. 949-200-8009. Or you can call my on Skype, for later broadcast on the show, JasonHartmanROI. This is an interactive show. Ask your questions, share your problems, share your ideas with other investors, become part of the show by calling in. We’d love to hear from you. So, we will be right back with our guest in just a moment.


JASON HARTMAN: Did you know that you can call in to the Creating Wealth Show? Yes, you can call me and talk to me direct, for later broadcast on the show. The number is 949-200-8009. Or via Skype, JasonHartmanROI. Please make sure you have a good connection when you call. Get your questions answered, participate in the show, and share your experiences with other investors. Call in, 949-200-8009, or Skype, JasonHartmanROI, and participate in the Creating Wealth Show.


JASON HARTMAN: My pleasure to welcome Dr. Kirk Elliott to the show! He is an investment advisor with ICA in Durango, Colorado. Beautiful place, and he’s been there since January 2002, and has been working in the financial services industry since 1994. He’s passionate about educating people about how to safeguard their hard-earned wealth, and talking about inflation monetary policy, fiscal policy, etcetera. So, let’s get into it! Kirk, how are you?

DR. KIRK ELLIOTT: I’m doing fantastic! Thanks for having me on today.

JASON HARTMAN: Well good, welcome, welcome. So, maybe the place we ought to start is Europe. It’s just unbelievable to watch what is going on out there, and how eerily it might be a foreshadowing of our future. Although I don’t really think so, exactly, in the United States. But, let’s get your take on Greece, and Germany, and Italy, and Spain, and Portugal, and Ireland—I mean, what a mess! It’s just crazy.

DR. KIRK ELLIOTT: It is an absolute mess. And you know, when you look at Greece, all of these things including what’s happening in the United States, really boiled down to one fundamental issue. And that is too much debt. Literally, that’s what it boils down to, because when you look at Greece, they’ve got a lot of public debt, and what has happened—you hear the word “austerity measures” being flipped around a lot. Well, all that is, that’s code for hey, how is the government going to try to fix the budget crisis? Well, in Greece what they did, is they raised taxes by 25%, they decreased government employees’ wages by 25%, and they froze their pension accounts.

So, no wonder there’s rioting and looting and civil unrest and everything else going on in Greece! The government has run out of money, and when the government runs out of money, they start doing crazy things. And the thing, I always have to ask myself, Jason, is, Greece is small potatoes. They are not a big country. They are not a manufacturing superpower. So why didn’t the European Union bail them out months and months and months ago? Well, the reason is, is because there’s bigger fish that they need to fry. You’ve got Italy, Iceland, Portugal, Spain, France, that are all on the verge of bankruptcy as well, and so the European Union knows, hey, if they bailed out Greece, they’re not gonna have money to actually try to tackle some of these bigger issues that are coming down the road. And, it was the middle of February, Greece realized that they were no longer an autonomous nation. They had lost their sovereignty. They basically became a colony to the European Union, because now the Eurozone countries and the IMF said, what they can print, what kind of treasuries they can offer, what kinds of spending, how their budgets are supposed to be, and they had to comply. They basically lost all control over their own economy, because of what? Because they had too much debt that they could no longer pay back.

JASON HARTMAN: Well, you know, this is really—basically, there’s kind of two, maybe, analogous things here. One is that the Greek citizens seem like a bunch of spoiled children that have been given so much. And there’s been so much socialist largess, that now it’s being taken away to not even normal levels, what would be considered reasonable. They’re still pretty overly indulged there, in my opinion. But it’s being rolled back a bit, and now the spoiled children are crying, and getting upset, and they’re rioting in the streets, and destroying their own country, and all this stuff. And then it’s also, what you said about, they’re not a sovereign nation anymore—it’s basically similar to what happens to a person or a company when they get into bankruptcy. A trustee is appointed, and basically that trustee says, look. You’ve not been responsible with your finances, so now we’re going to have to manage it for you. So in Greece’s case, maybe they’ll sell off a couple islands—I know that was bandied out about a year ago. Who knows what’ll happen. But yeah, they lost their sovereignty, didn’t they?

DR. KIRK ELLIOTT: They did. And when you kind of come across the pond—when you come over here to the United States, that per capita—we have much more debt than Greece ever had. You know, out of all the treasuries that we have issued over the years, 9.1 trillion of them are owned elsewhere. So that basically means—actually, there’s an old adage that says, the borrower is a slave to the lender. Well, that’s true for the individual, and it’s also true for a nation. So at some point, we are gonna have to answer to the people that own our treasuries, or that lent us the money to actually allow us to get the $15.3 trillion of debt. At some point down the road, if, if we lose our reserve currency status, we are in no different shape than Greece is.

JASON HARTMAN: Okay—wait, wait. Hang on. Just, whatever you were going to say, just hold that thought. Because I gotta take issue with a couple things on there, okay? Let me play devil’s advocate just for a couple of things. When I do my seminars, teaching people how to invest in real estate, I always ask this question. I say, how many of you have ever loaned money to a friend or a family member? And virtually every hand in the room goes up. And this is over the years maybe 8,000 people that I’ve asked that question of, right? And I said, who was in control of that transaction? And invariably, when they think about it, they always think well, the borrower was, really. So, just a distinction that I want to make, okay? For a moment here. And I agree with you that Greece has lost its sovereignty. But there’s an old saying that he who has the gold, makes the rules. That’s the gold rule—he who has the gold, makes the rules, right?


JASON HARTMAN: But here’s the distinction that’s so funny about it, Kirk. Is that yes—the lender, when they have the gold, they do make the rules. They make you just through all the hoops to qualify to get the loan, right? Or buy the treasury, or whatever—they vet your treasury bonds, and see if they’re going to be good T-bills to buy. So, then they’re making the rules, because they’re going to give you the gold in exchange for the paper, right? But, ultimately, once the borrower has the gold, then the borrower kind of makes the rules. To some extent. So I just wanted to kind of point out those subtleties. And then I want to talk about how this might happen to the US, the most profligate, ridiculous spender the world has ever seen.

DR. KIRK ELLIOTT: Right. Well, see, and I do agree with that. I do agree with that. However, there’s—at some point down the road, when we have so much debt, and we’re printing money basically like it’s monopoly money—I mean, the rest of the world is actually starting to view us as having absolutely no discretion on our monetary policies, because we are a fiat-based currency. There is no tangible backing on our currency, other than the full faith and credit of the United States. Well, people lose faith in the United States! And we don’t have credit anymore. At some point, you do have to pay the piper. And I know I’ve heard you say that before. And we are coming to that point. In fact, earlier in 2011, it was the first quarter, actually, of 2011. China dumped 97% of their treasury bills. Now, treasury bills just have a one year maturity or less, so, there’s still the treasury notes, and so forth. But that means that all of these treasury bills, treasury notes, treasury bonds, that we have issued throughout time, they’re losing interest. They’re losing demand. It is that basically reserve currency status that the US dollar has had since 1944, that agreement at Bretton Woods, which is the only reason why our currency actually has any demands to it, because when you print, print, print, print, print, like there is no tomorrow, with stimulus programs, and trying to actually provide liquidity to keep the economy going, it devalues the currency. And inflation is not a general rise in prices. That’s actually a symptom of inflation.

JASON HARTMAN: Yeah, the academic definition of inflation, what it really is, is just creation of money.

DR. KIRK ELLIOTT: Yeah. It’s an increase in the money supply. And for your listeners, the reason is quite simple. We—and I just want to explain it really quick—about 70% of everything that we consume in this country is an import. We get it from China, Malaysia, Indonesia, or wherever. Well, when we’re paying them in US dollars that are devalued because we’re printing and printing and printing—if you’re China and you’re saying, come on, United States! We’re giving you valuable products and services—TVs and electronics and everything else—and you’re paying us in this devalued currency. So therefore, we are going to request more of your devalued currency in exchange for the value of products and services. So really, inflation is nothing more than an increasing money supply. The rise in prices is just a symptom.

JASON HARTMAN: Okay, so hold on, because there’s a bunch of things I want to ask you to address in there. First of all, you talked about the US dollar of course being a fiat currency, and of course it is. But my question is, compared to what? Every currency on earth, so far as I know, is a fiat currency now. So it’s really just a race to the bottom. I mean, all countries—really, I guess you could say—well, in a way, except China, because they artificially suppress their currency—do this. They’re all guilty of it; it’s just that the US has taken so much liberty, and they’ve been so unfair, really, to the rest of the world, in a sense. Because we’ve had the reserve currency status, and the US throws its weight around in that sense, and other sense. Militarily and so forth as well. It’s just a race to the bottom. I mean, they’re all fiat currencies.

DR. KIRK ELLIOTT: They are all fiat currencies. And this is why currencies that don’t have this world’s reserve currency status, like the Greeces of this world—

JASON HARTMAN: They’re in real trouble. They can’t do anything about it.

DR. KIRK ELLIOTT: They can’t do anything about it. And if we didn’t have the reserve currency status—which, all that means is that since 1944, international settlements have been traded in the US dollar, just to simplify things to the greatest extent. If you are in Mexico buying something from Canada, you’re not using pesos; you’re going to use the US dollar. If you’re Russia buying something from China, you’re not paying for it in rubles—you’re paying for it in US dollars. In simplest terms, that’s what the reserve currency means. So, when all international settlements, petrodollars and so forth, are traded in the US dollar, there is a built-in demand for our currency. If we lose that, because the United States has basically squandered its time in the sun with an indiscriminate amount of money that they’ve printed, well, then we’re really no different, other than our vast infrastructure, our creative abilities that we have and so forth—we’re really no different than the other countries of the world, that when they print too much, nobody wants it anymore. When there is no demand for your currency, bad things start happening. And your central bank is going to start monetizing your debt, which means they have to buy their treasuries from auction, because nobody else around the world wants it. And that’s exactly what the Fed has been doing for about the last year to year and a half—they have been buying our own treasury issues, which is the beginning stages of a very inflationary, hyperinflationary cycle.

JASON HARTMAN: Well, I’ve thought that too. So here’s the question: if the Fed is looking out there—if the illegitimate banking cartel called the Federal Reserve and other central banks around the world, they’re not stupid. They must see what’s going on. I mean, the Fed is basically, by buying US treasuries, is participating in the Ponzi scheme. They’ve filled the shoes of China and Japan, to some extent! I mean, whey would they do that? They can’t be that crazy. At least China and Japan have a justification; they can say okay, well, this is our customer. The US is importing stuff from us; it’s buying stuff with these deflating dollars—or, inflating dollars, whichever way you want to look at it—but, dollars that are losing value, and being debased, just to be clear. But the Fed, all they sell us is fake money. Well, I guess we do import from the Fed. In that sense.

DR. KIRK ELLIOTT: Yeah, and you’re right, Jason—it is just a private banking cartel. There’s nothing federal about it. There’s no really reserve about it either. And so—

JASON HARTMAN: But why would they buy the treasuries though? Why would Bernanke do that deal? I mean, what’s in it for the Fed? I mean, they’re buying stuff that’s losing value, but—they’re obviously in control of how much value it loses.

DR. KIRK ELLIOTT: They are. And I think, you know, without even getting into conspiracy theory type stuff, when they buy US treasuries, which are obviously a sinking asset, what are they buying them with? They’re buying them with something that all Bernanke has to do is go over to the printing press and press the red button. They’re buying it with something that is almost meaningless. And what is their return on it? The US government is basically paying interest to the Fed. So it’s in the Fed’s best interest to keep creating debt, because they’re getting interest payments on it. If the authority to print money actually came from Congress, like the founding fathers originally envisioned, well, then it’s in the best interest of the country to not have debt. However, currency creation is not controlled by Congress. It’s created by a cartel that can print money out of thin air that has no tangible backing. So, who cares if they’re buying a deflating asset? They’re buying something that they print out of, mysteriously, just out of thin air.

JASON HARTMAN: Yeah, but it seems that it would be so much better to pawn those treasury bills off on somebody else. I mean, they know the scheme that they basically created. That has to be their very last choice. I mean, they cannot like the idea of buying those—I mean, that must show you that things are really desperate at the Fed. The jig is up. That has to be their very worst choice, is to buy US T-bills. I mean, they’re buying the treasury bill of the monetary unit they’re debasing. I mean—

DR. KIRK ELLIOTT: Well see, I think this is still in their best interest; if they don’t buy it, well then really, not many people are. There’s no real foreign demand for US treasuries. It is diminishing, at least for the short term. Now, you still have quite a bit, about $5.8 trillion of treasury notes still out there. But when China is dumping 97% of their short term T-bills that matured in one year or less, then they’ve been the largest buyer. Now the Fed is the largest owner of US treasuries. Even more than China. Even more than Japan. They are the largest owner. So if they don’t buy them, then nobody is. And really, like you said, the jig is up! It’s done! It’s over with, until somebody has got to do to keep this can being kicked down the road as long as possible. And I think this is like the dying patient; this is their last grasp for air. And, see, but what this is going to help [unintelligible] culminate in, is rising interest rates. It has to, because when devalue your currency so much, you are going to have to make it more attractive to foreign investors. How do you do that? The exact same way Paul Volcker did in the early 80s. You are—

JASON HARTMAN: You pay them a higher rate.

DR. KIRK ELLIOTT: Yeah. You’ve been very involved in real estate for a long time, and remember in the early 1980s when interest rates if you were going to buy a house were 15-20% on your mortgage?

JASON HARTMAN: Sure, yeah. No, I remember my mother talking about that when I was a kid.

DR. KIRK ELLIOTT: Yeah. Why did they get to that point? Well, the late 70s, we had inflationary pressures. Taxes were sky high. Our economy was in a recession. Unemployment was through the moon. There was an oil crisis. I mean, literally, our economy stunk. And because of that, so did our dollar overseas. So Volcker came in and said hey, I can fix this! All we have to do is jack up interest rates sky high; now all of a sudden, if you’re China, for example, and you’ve got these trillions of dollars of capital that you need to invest, why would you invest in the US dollar if it’s only paying 2%? Well, the answer is, you wouldn’t. But what if they’re paying 10 or 15%? Well then it’s like, alright, they might kind of stink, but at least there’s a risk to reward there. That is how you stimulate demand in an alien currency. So, this is the key here though, why nothing is really being done about it; because it’s different than it was in the early 80s. Right now, everybody has debt. We’re in debt up to our eyeballs. Consumers are. Municipal governments are. State governments are. The federal government is. Corporate America is. If you raise interest rates, which is exactly the medicine that the doctor is ordering to fix our currency—

JASON HARTMAN: Right, and that’s exactly what Volcker did. He broke the back of inflation by doing that. And the one area of debt that I say is the next big bubble—and this bubble is going to be an ugly bubble, because it is not dischargeable in bankruptcy—and that is student loans.


JASON HARTMAN: Yeah. But go ahead, with what you were saying.

DR. KIRK ELLIOTT: Absolutely. So, this medicine, that is required to fix the US dollar, is the exact same medicine that will kill the patient. You know, it’s not a good result. Because when we’re in debt up to our eyeballs and you start raising interest rates, everybody who carries debt is going to feel the pinch even more. And people are already feeling the pinch with the lowest interest rates in the history of the country.

JASON HARTMAN: Now, that’s people, though—I mean, they would have to take on new debt, to really feel that pinch. And they might have a need to take on new debt, if they can even take on new debt, or if they have adjustable debt.

DR. KIRK ELLIOTT: Sure. Yes, so like credit card debt, and a lot of California, which actually still has adjustable rate mortgages, because—

JASON HARTMAN: They can’t afford it any other way. Yeah, right.

DR. KIRK ELLIOTT: And so the people who still have arms, which, shockingly, there is a lot of them who haven’t been able to refinance, for example, because equity has gone down on their homes, and they haven’t been able to refinance; they’re stuck with these things. Well yeah, it’s just that revolving credit, it’s these adjustable rate, it’s the variable rates—they are going to get crushed. Because if interest rates, for example, go from 2% to 4%, that’s not a 2% increase.

JASON HARTMAN: No, it’s a 100% increase.

DR. KIRK ELLIOTT: Yeah, it’s doubling.

JASON HARTMAN: It’s a 100% increase. I cannot believe how many people can’t do flipping math. It’s mind-boggling. Like when in California they’ll raise the sales tax, they’ll raise the state income tax—oh, it’s only a 1% increase! No, it’s not. It’s a 20% increase! It’s a 17% increase!

DR. KIRK ELLIOTT: And imagine if you had a mortgage payment on a 4% adjustable rate mortgage, and you’re paying $2000 a month, and they say ah, it’s gonna go to 8%. Ah, it’s going up 4%. No it is not. Your mortgage payment goes to $4000 a month! Don’t be silly! Yeah. I mean, this is where—this is where we are heading. But this also opens up an entire new can of worms, and that is the bond market. The bond market could be the next asset bubble that completely bursts. Because as interest rates rise, the value of bonds come down.

JASON HARTMAN: Yeah, they just plummet. That’s countercyclical, remember that, everybody. When rates go up, all the existing bonds are devalued, because those are paying a fixed coupon rate. So if a bond’s paying 4%, and the market rate is 8%, that bond’s value just plummeted. Who’s gonna buy a 4% bond in an 8% market?

DR. KIRK ELLIOTT: Nobody. And some of those are actually going to be illiquid. You are not going to be able to get out of them. It’s going to be a massive stampede out, and the bond traders in the pit, in New York and so forth, they are not gonna know what to do. And they are going to be illiquid, and the value’s going to come crashing down, and they aren’t going to be able to get out of it. And who owns bonds in this country? It’s basically retirees. It’s basically pension funds. It is insurance companies. Insurance companies, by and large, are allocated into bonds 80-90-100% of their portfolios. This is not a good sign. You thought the AIG debacle was bad—what about when it’s company after company after company in the insurance industry that starts getting hit, and at some point there isn’t enough stimulus money to bail these things out?

JASON HARTMAN: But isn’t there always enough stimulus money? Because they can just create it out of thin air? And you know what’s funny? Is you, and I used to do it too, but I kind of catch myself doing it, talking about printing money. Which is such an old fashioned idea. I mean, nowadays, Kirk, money is just created! I always wondered, and I’m just sort of being sarcastic here—if the Federal Reserve and the Treasury Department, wherever they keep this magical computer, it must be in a corner, and someone goes and they move the mouse around—maybe it’s Bernanke, or Geithner—I guess it’s Bernanke, really. But it’s really the two of them. Maybe they sit at two computers next to each other. It’s like, turning the key when you see the nuclear missile launch on the submarine, right, in the movies? They gotta turn the key at the same time, you know? And so, you know, I just wonder—they just go over to a computer, they just change the reserve ratio, they just flood more money into the economy, they open the discount window, they do all the things, they do all the “tools” that they have—with the click of a mouse the money is created now! It’s lent into existence. It’s not even printed anymore! It’s amazing how quickly it can be done. And how hard it is to put that genie back in the bottle. But I just really wonder, Kirk, is that magical computer—is it a Mac, or a PC?

DR. KIRK ELLIOTT: Boy. It’s got—it’s actually gotta be a Mac, because it can do some pretty amazing things.

JASON HARTMAN: Okay, I know where you are. Alright, go ahead. Enough silly business here.

DR. KIRK ELLIOTT: Okay, but I want to address your question. You said, well, isn’t there always enough stimulus money? And the answer is, as long as there’s demand for the currency, yes. But if we look back in history—look back to Weimar Republic, Germany. After World War I, when they obliterated basically the rest of the planet, and the Treaty of Versailles came up and said hey, Germany, you were the big kid on the block. They were like the United States today. This is the best direct comparison that I can find throughout history, because their stock market was booming; their real estate was booming, their arts district was phenomenal. They had orchestras, and symphonies, and they were it. They were the big kid on the block. And now all of a sudden, the Treaty of Versailles—you gotta pay back your war debts. Well, they didn’t have enough money to do so, so they abandoned the gold standard so they could print without discretion. Then they started running the printing presses, and they ran it and ran it and ran it. And now, all of a sudden, the rest of the world no longer wanted the German currency anymore. And they entered into a hyperinflation, where literally they were being paid in wheelbarrows of cash. Just twice a day. Because if they didn’t get paid at lunchtime, the load of bread could have possibly doubled by the time they went home at night.

JASON HARTMAN: And see, I just want people to understand. Inflation stimulates bad behavior. Because what the people in the Weimar Republic would do, is they would rush out to spend their money, because saving was so disincentivized. Because you knew that if you saved anything it would be worthless. So people instantly wanted to exchange their fiat money for goods and services. And literally, like you said, they had to be paid so often, because they had to spend the money right away. They would rush to spend it. And when you have an inflationary environment, you promote bad behavior. Because you promote not saving. And remember, saving is what builds wealth. And what creates the wealth of individuals, and the wealth of nations. But, why the heck should you save? I mean, I remember when I was a kid. I’m a bit of a spender; I’ll be the first to admit it. I kind of like to spend. I like being a consumer. And my mother used to criticize me as a kid, and she used to say, Jason, you spend money like it’s going out of style. And you know what? I guess I was right. It is going out of style!

DR. KIRK ELLIOTT: Well, and you’re—yeah! In an inflationary environment, inflation creates malinvestment. Inflation creates boom and bust cycles. And they’re cycles! This is the key. They will always boom, and they will always bust. We’ve had a boom time from the early 80s until basically close to now. So, you are going to have a bust cycle. These cycles always, always, always complete themselves. And when you are—there is no incentive to save, because you think gosh, if I don’t spend it now, things are going to be more expensive down the road. It creates a lifestyle of conspicuous consumption, and that has never basically done well. It has never boded well for anybody in the long term. And sadly, we are now entering into a bust cycle, and you just have to allocate your own assets and resources accordingly, to take advantage of it. I don’t want to leave the listener out there, Jason, thinking oh, it’s all gloom and doom and there’s nothing we can do about it. There is, and there are things that you can do. There are counter-cyclical investment categories, there are things you can do to create wealth so you can actually thrive. And not just survive; you really can thrive, even in a hyper-inflationary collapse of a currency type state. You can.

JASON HARTMAN: Yeah, right. No, you definitely can. I mean, one of the ways you can really thrive is, first of all, you know what I would say, Kirk? Is, denominate your assets in things. Things do matter, okay? Things represent resources. They’re real. They’re not fiat. Denominate your assets in things; denominate your liabilities in fiat currencies, because those fiat currencies are debased. So, you know, again, incentivizing malinvestment and bad behavior—I’m not saying that by the old fashioned pre-1971 pre-Nixon taking us completely off the gold standard, this was not a good idea. But stock up on long term fixed rate debt attached to things. That’s what you gotta do now. Because the things have value; they’re indexed to inflation, to some extent. Of course, it depends what kind of things they are, and so forth. And then that long term, three decade long fixed debt—you basically get paid to borrow money. And so, I call this the ultimate investing equation. If you can get that debt that doesn’t need to be paid off until 2042, and it’s cheap, low interest rate debt, and it’s fixed rate, of course. And attach it to commodities that have universal need. And then, even better, outsource the repayment of that debt to a third party. I call them a tenant. You got a pretty good deal going for yourself there. Now, granted, it has some sets of potential problems. But compared to anything else, there’s not much else to do. There are a few other things. Certainly precious metals are a great store of wealth. You know, one thing that 6, 7 billion people on earth agree with, is that gold and silver are money. I mean, they are real money. They have intrinsic value. And it’s interesting, because one time I got into an argument with a gold bug friend of mine, and I said, you know, gold isn’t really used as an industrial metal or anything like that, that much anymore. Not like it used to be. And I said, what is its purpose? And I said, it’s only money! And he looks at me with this face and goes, yeah. I guess I was right. He kind of had me on that one.

DR. KIRK ELLIOTT: Yeah. Well, it’s a tangible asset. And what I love about gold and silver is that they’re small, they’re portable, they’re valuable, and they are ultimately the only legitimate currency there is. Why? Because they do have value. They’re something; they are things. And you hit the nail on the head. What else are things? Real estate is things. The only problem that there may be with real estate is, it becomes illiquid. In a time of a hyperinflation, a $500,000 property today might be worth a billion dollars in a hyperinflation. True, it is going to go up, because it is a thing. That’s what inflation does to things. However, it might be illiquid if nobody can afford to buy it. So, but I think you have to have a combination of both. I really do. You have to have the things that will hold value over time, and you have to have things that you can trade, that are actually—that can act as a legitimate currency. That are smaller, that are portable. See, we are at a time in history where we actually have to start thinking of like this—paper assets in a hyperinflation would do absolutely no good whatsoever. The bond market in a rising interest rate environment is going to stink.

JASON HARTMAN: Bonds are like one of the worst things. I would never do bonds. I mean—

DR. KIRK ELLIOTT: I wouldn’t touch them. Municipal bonds are absolutely toxic.

JASON HARTMAN: Totally, totally. I mean, municipal bonds—can you imagine anybody think that governmental agencies are well managed? That you should buy their bonds—and basically when you buy their bonds, you’re lending them money. Who the heck would want to lend money to any sort of government agency? Especially one that isn’t allowed to print money, to print its way out of its own mess and kick the can down the road? Because when you lend it to a state or a municipality, they’re really, really stuck. They’re like Greece, you know? In that metaphor. They’re not like the United States—they’re like Greece. They gotta get a bailout from somebody, because they can’t print their way out of it.

DR. KIRK ELLIOTT: They have to. And you have to look at their revenue streams. How do they make money? Well, through sales tax revenues. Well, people are losing their jobs and not spending as much.

JASON HARTMAN: They’re not buying stuff, yeah.

DR. KIRK ELLIOTT: Their sale tax revenue streams come down. And property tax revenues. Well, if people are walking away from their houses, property values are coming down.

JASON HARTMAN: And property taxes go away.

DR. KIRK ELLIOTT: Property taxes—and sometimes you have special fees, like toll roads, and things like that. But look—

JASON HARTMAN: What if gas prices are $32 a gallon? How many people are going to use the toll road?

DR. KIRK ELLIOTT: Yeah. That’s why municipalities are toxic. Because their revenue streams are drying up! You wouldn’t invest in a stock. You wouldn’t invest in a stock company if you realized, oh my word, nobody’s going to be buying their stuff anymore, their revenues are going to drop—why in the world would I buy that stock? The same thing for municipal bonds. Or anything, for that matter.

JASON HARTMAN: Couldn’t agree with you more. Couldn’t agree with you more. Now, where do you fall in line on the kind of, the societal collapse scenario? I mean, a lot of gold bugs are really into the whole end of the world doomsday scenario. And they say, you know, that’s the only thing that’s gonna be left when the currencies collapse, and so on and so forth. I just want to kind of see where you are on that. Because we’ve never talked before, other than a few minutes before this show. How do you fall in line there?

DR. KIRK ELLIOTT: Well, I view everything as cycles. As having my Ph.D. and looking at being an economist, and looking at things, and I look at the big picture, and I look at things in cycles. And this, to me, is more than us just having to protect our finances. I really believe that we are on the verge of losing our freedoms. I think that once faced with reality, people will willingly give up their religious freedoms, their political freedoms, their personal freedoms, their economic freedoms, in exchange for perceived safety. It doesn’t even have to be real safety. It’s perceived safety. See, this is how Hitler came to power. And by no means am I comparing what we’re going through now with Hitler, but the theory behind it is the same. And that is, he didn’t hold the gun to people’s head and say, hey, you, vote for me or else.

JASON HARTMAN: He was elected freely.

DR. KIRK ELLIOTT: He was elected. They were coming off of that hyperinflation in Germany, and he campaigned on hope and change, and I can fix things. And people basically said, they couldn’t afford to feed their babies. And when they couldn’t afford anything, and society was collapsing—yes. I will give away these freedoms in exchange for safety. Take care of me. Well, look at what’s happening in the United States. I’m not necessarily talking about you and me, or even the listeners on this show. But as a society, give me healthcare! Give me these entitlements! 84% of everything we bring in now on $2.5 trillion of tax revenue, in 2012, this is the projection: $2.1 trillion go out in mandatory payments. That’s Social Security, Medicare, Medicaid, Food Stamps, Women and Infant Children programs; 84% of everything we bring in goes out to entitlements. We have—the government is not bad at everything. The government is absolutely fantastic at creating a dependent state. We have become a nation of takers, rather than a nation of givers. And because of that, I think that we are at the end of a cycle. And comparing us to the hyperinflated Germany—we are willingly, almost now, giving away some of our freedoms in exchange for safety. And to me, that comes to basically the—not the end of civilization. Civilization will always be there. But we could be at the end of a democratic society.

JASON HARTMAN: Sure. The more dependent you are, the less freedom you have. I mean, look at the parent-child relationship. Children aren’t free, because they’re beholden to the parents. They’re dependent on them. And when you become an adult, hopefully you take responsibility for your own life. And you become independent, because you do not ask for things for your parents. Look at adults that are still dependent on their families, or someone who marries, and their spouse is part of a wealthy family, and that wealthy family kind of pulls the strings in that relationship a lot. It’s just—nobody wants to be—I mean, nobody with half a brain—wants to be dependent on anybody else. They should want to make their own way in the world. And the government is doing such a good job at really trapping people into dependency. Even if their core belief is that they should be independent. They make it hard to get out! You look at our president now, the Food Stamp President, as I believe Newt Gingrich coined that—they make it hard to get out of that dependent cycle. It’s tough!

DR. KIRK ELLIOTT: It is. It is ridiculously tough. And it’s because people, once they realize that they can vote largess out of the treasury, they are going to vote for the candidate that promised them the most. And candidates want to become reelected. And somebody emailed me something yesterday, and it is so ironic, and I just want to share it real quick. It is, the Food Stamp program—because you brought it up—the Food Stamp program, as part of the Department of Agriculture, is pleased to be distributing the greatest amount of Food Stamps ever. Meanwhile, the Park Service, also part of the Department of Agriculture, asked us to please do not feed the animals, because the animals may grow dependent and not learn to take care of themselves. When I saw that it’s like, this is ironic! And I started laughing out loud. But it’s really not funny.

JASON HARTMAN: No, it’s not funny at all. Well, you know what they say. A government that robs Peter to pay Paul can always count on the support of Paul.

DR. KIRK ELLIOTT: Yes they can. Yes they can.

JASON HARTMAN: That’s the way it is.


JASON HARTMAN: This interview ran a little long, so we divided it into two parts. Catch part two on the next episode of the Creating Wealth Show!


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America’s Looking Younger Every Day
Understanding Inflation

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