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 Jason Hartman, your host, and this is episode number two sixty-two. I’m talking to you today from beautiful New York City, where I’ve been attending the BlogWorld New Media Expo all week, and that’s been really informative and interesting. Made a lot of great new contacts, and I have a few new guests from that show that we will be interviewing later, so I think you’ll enjoy that. Today we have the continuation of Dr. Kirk Elliott’s interview, and that will be up here in just a couple of moments. But wanted to also address, many of you have asked us, what do we have coming up this fall, in terms of events? Well, we are thinking of two events. Number one, we’re thinking of a Creating Wealth Boot Camp, and a property tour in Atlanta, Georgia. So we’re working on that right now, for maybe, oh, I don’t know, probably early September or something around that area. And then, of course, our semi-annual Meet the Masters event. And we are thinking, although it’s not confirmed, of holding that in Phoenix, so you’d have the opportunity to look at some properties as well when you attend the Creating Wealth in Today’s Economy Boot Camp.
So those are the two things we’re thinking of; look at the website, look at www.jasonhartman.com, and stay tuned to the show for full details on those as they develop, and as we confirm them, and have all the details for you. Also, we have been very fortunate lately to get some good new property inventory. We’ve been suffering, as you probably know as a regular listener, from a shortage of inventory of properties, due to the market, and due to all of you buying so many of them, frankly. Things have been very, very, very busy, and inventory has been scarce. You can never quite get the supply and demand thing just right. It’s a constant struggle in our business.
But check the website, the property section at www.jasonhartman.com, and I think you’ll be pleasantly surprised at some of the new inventory we’ve been able to obtain in many of our markets, including Dallas, Houston, Memphis, a little bit of Atlanta—not as much as I’d like—some new stuff in St. Louis, and Indianapolis as well, and a little bit in Phoenix, slowly trickling out. So again, we are area agnostic; we’ve got property in many, many different markets, so you can build a properly diversified portfolio of properties that makes sense the day you buy them. So that’s good news. Also, the call-in line: please use the call-in line! We would really like you to do this. You remember, you can call into the show by calling 949-200-8009. Again, that number: 949-200-8009. You can call in, talk to me, get your questions answered for future broadcast on the show. So, please take advantage of that. And we will be back with Kirk Elliott in just a moment, right after this.
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JASON HARTMAN: With all this stuff going on, what is your prediction of when the crap is gonna hit the fan? And what’s it gonna look like when it happens? And, see, the thing is—the thing that has never happened before in history, and this is the wild card, really—there’s a couple big wild cards about it. The reason we’re not Greece is because we have the reserve currency. The reason we’re not Greece is because we have the largest military on earth. And we also have very, very abundant natural resources. If the—I’ll call them, for lack of a better word, sarcastically green weenies—the environmental Nazis out there—and you know, listen. Nobody wants a bad environment. I don’t like pollution any more than the next guy. But I think some of these things done in the name of the environment are really just another form of communism. Another form of let’s control everybody. Green trees have red roots, as they say. And you know, we’ve got abundant natural resources in this country. We have got oil galore, that we could drill for ourselves. And we could be energy independent for a long, long time to come, right here with good old US oil. But then again, we’ve got some moose and [unintelligible] that might not like a pipeline or an oilrig there. When the reality is, in Alaska, they sleep under the pipeline, because they like the warmth. But I guess they’ll be dependent on the warmth. It’s just kind of ridiculous. But that’s why, I mean—I don’t know if the US really can collapse. Maybe we can just kick the can down the road forever. When is the breaking point? How does anybody know?
DR. KIRK ELLIOTT: You know, nobody has a crystal ball, so to speak. Nobody does. So whenever you hear anybody saying oh, it’s gonna end this year—they’re lying. Or they’re just guessing. I mean, seriously—nobody knows. However, when you look at it, I see this as being so close to the edge of the cliff. I mean, literally, you cannot have 84% of everything you bring into the economy going out towards entitlement, and run the rest of your country on 16%? You can’t do that when you have defense, and you’ve got all the federal workers, and you’ve got roads and bridges and infrastructure, and everything else. It just can’t happen forever. This is an election year, and the can, I think, will be kicked down the road for the rest of this year. Politicians can somehow pull a rabbit out of their magic hat during election years. They always do. So, I actually do think that interest rates are going to soar, and go through the roof, but I don’t think that it’s gonna happen this year. Because, it’s an election year! But that begs the point of, okay, then there’s 2013 and 2014. And really, if I could peg it down to a time frame, I think it’s somewhere between 2013 and 2015 that we could see the reserve currency status of our US dollar taken away, in exchange for some kind of like an International Monetary Fund special drawing right, or something like the Euro, except on a global scale.
JASON HARTMAN: What’s a special drawing right? What does that mean?
DR. KIRK ELLIOTT: It’s basically like, all the countries, you know, put money into the IMF to bail out other nations and so forth. So it’s going to be a conglomeration of funds that basically—you draw on that as a currency. I think it’s gonna be—basically, view it as the Euro, except on a global scale. I think a reserve currency like the Chinese currency—one country having it, I think those days are done.
JASON HARTMAN: Let me say something. A global fiat currency—you know what I call that? Checkmate.
DR. KIRK ELLIOTT: Absolutely.
JASON HARTMAN: That’s checkmate. Because if we have a global fiat currency, then the value of everything we can buy, the price of everything, is completely up for grabs to one single power. And let me just tell you, I bet that power will not be charitable.
DR. KIRK ELLIOTT: No. And, because absolute power corrupts absolutely. I don’t think it’s going to be charitable at all. But this is how it will be marketed. Look. The United States squandered their time in the sun of the reserve currency. Great Britain did before the United States had it. The Euro is the poster child for regionally traded currency. Look, they’ve completely fallen apart. And so they’re gonna have great marketing behind it, and people are going to think it’s an attractive deal. It is not—coming with it is going to be power and control and manipulation, and it’s not gonna be good for anybody. However, people are going to buy into it, and this is just the way that I think—you know, just one guy’s opinion on how I think it’s going to come to be. And I don’t think it’s going to be good. And I do think that the US loses that reserve currency status, because of our debt situation. Just like we started this show with Greece. The exact same thing I think is ultimately going to happen to the United States. I don’t think it’s going to be this year. I really don’t. However, I do think we’re possibly within 2-5 years away from this happening, because things are spiraling out of control.
JASON HARTMAN: Okay. So, your view of it is, loss of reserve currency status; is that the first thing that happens? Or, before that, does the US government try to seize control of everybody’s IRA and 401(k)? I think that’s a strong possibility. You know, a hungry government is always looking for money, anywhere they can get it. Or, does the US not voluntarily relinquish its reserve currency status? Does it use economic hit men like John Perkins’ book, Confessions of an Economic Hit man, or does it use its military to throw its weight around and say, no, we’re going to be the reserve currency, regardless of how poorly we manage that responsibility?
DR. KIRK ELLIOTT: Well, they’re gonna try. I think we are going to try—we’re not going out without a fight, that’s for sure. But I think ultimately it’s a fight that we can’t win, because we have just way too much debt. With $15.3 trillion that’s been amassed since 1776 until now, that’s just—
JASON HARTMAN: And $4 trillion in the last three years under Obama alone.
DR. KIRK ELLIOTT: Alone. And then, when you start adding up all the unfunded future obligation, things that Congress has already passed, like future Medicare and Medicaid payments, and Social Security, and you name it—all these unfunded future obligations, the number bumps up to, I’ve seen it as much as $200 trillion!
JASON HARTMAN: I call that the $60 trillion time bomb. But I’ve heard people say it might be up to $130 trillion. Either way, it’s a hell of a lot of money.
DR. KIRK ELLIOTT: It is a lot. And the reason why you see such huge discrepancies, it just depends on how far out you project it. I’ve seen everything from 70 something to 200. Well, the reality is it’s somewhere in between. But this is what we have to come up with down the road. How do we come up with it when it’s almost mathematically impossible to pay back 15.3 trillion—
JASON HARTMAN: You know how we come up with it? We’ve gotta have a yard sale. We’ve gotta sell off some assets in this country, because we’re just going to be forced to. And we’ve got to start using our own natural resources. And we’ve got to drill for our own oil. We’ve got to supply our own energy, and possibly export it, if we can. And things have just gotta change. We have got to exploit our own natural resources as responsibly as possible, but we have got to do it. And hopefully, there will be some innovation, some discovery that helps the whole world, that can be exported to the whole world. But maybe the US, or the western world will have control of it, and it will enrich those countries.
DR. KIRK ELLIOTT: Well, we do—and it’s energy. I mean, we—you are absolutely right. We have enough oil and gas in just the western slope of Colorado, in the shale, to basically supply our nation for hundreds of years. Let along you’ve got the Bakken oil field in North Dakota; you’ve got the stuff in Alaska. You’ve got the Gulf. You’ve got the gas off of the coast of California. We have enough natural resources to actually take care of our own country and be the largest exporter of oil to the world, and we could be as wealthy of the Saudi Arabias of this world. It just means tha basically we have to come to that point politically, where you know what, the environmentalists, sorry to say—and I’m with you. I want a clean environment—
JASON HARTMAN: Listen. Let me tell you. Environmentalism is a luxury of rich society.
DR. KIRK ELLIOTT: Yeah. You know, and that’s why I think when we—when we hit critical mass, I do think that we are going to start drilling. We just have to, because we’re not going to starve to death. And the solution—
JASON HARTMAN: I just hope that we put the first oil well right in front of Barbara Streisand’s house in Malibu, California. Let’s just put the first oil well right out there, a couple hundred feet offshore, right in front of her view, okay? Because she’s such a hypocrite. That’s all I say.
DR. KIRK ELLIOTT: I agree. And you should. And in front of—you know what? In front of Alec Baldwin’s house, and everybody else’s who—but you know, the recipe for success here is to drill, so we can actually produce what we have deficiencies in—that’s it. And then you lower taxes just like Reagan did in the early 80s, because what do we do better than anybody else on the planet? We spend money. When we have more money to spend, that’s going to have a trickle up effect. And the government has to cut spending. Well, what are they doing now? They want to raise taxes, and they’re increasing spending. That’s exactly the opposite of what needs to be done—
JASON HARTMAN: Yeah, of course it is. It’s trickle up poverty, is basically what it is. What do you think about—I mean, we can’t go on forever here, this is an interesting discussion. But what do you think about the stock market? I mean, I can’t believe the stock market is holding its own like this. It’s kind of shocking to me.
DR. KIRK ELLIOTT: Well, it’s really what it boils down to is, stimulus money, first and foremost. Where has all these trillions of dollars that have been printing—
JASON HARTMAN: They’re propping up the stock market.
DR. KIRK ELLIOTT: Yeah, it’s going into the banks just like it’s supposed to—into Chase, into Citi, into Bank of America—but it’s a classic liquidity trap. Interest rates are so low, and the banks are unwilling to lend it out to consumers and small businesses like they should have. In theory, the stimulus should have worked. If they would have lent it out, we would have spent it, we would have created jobs, we would have done all this. But all that they’re doing is creating inflation by printing money, injecting it into the banking system, they are not lending it out, but what are they doing with it? They’re injecting it into the stock market, which is why, in light of declining revenues and people losing jobs and everything else, the stock market’s still hovering around 13,000. Well, that is just the tip of the iceberg. The rest of it is, if you look at mutual fund managers, they invest in equities, and they have cash positions in mutual funds. Their cash positions have been exterminated. They have gobbled all of them up. So now, mutual funds, basically across the board, are about 100% allocated into equities. They have no more cash to spend, and the US consumer isn’t doing it. So therefore, this is just economics 101. This is just supply and demand. There is gonna be very little buying, moving forward from here. And this has happened twice before in the last decade—once in 2000, once in 2007, when the cash positions in mutual funds had been extinguished. And what happened in both of those years? Major stock market corrections. And I think we’re going to see the same thing in 2012.
JASON HARTMAN: Yeah, many people are saying that this upcoming correction is going to be much worse than the one we saw when the financial crisis began in the late part of Bush’s term. What do you say to people like—and I have no idea if you’re a follower—but people like Harry Dent, and Bob Prechter—you know, Elliott Wave, Bob Prechter—I’ve had them both on the show. And as much a fan as I am of Harry Dent, I gotta say, I just don’t buy his deflation scenario.
DR. KIRK ELLIOTT: I don’t in the sense that most people buy it. Now, because—
JASON HARTMAN: He does, by the way, say there’s going to be huge stock market correction. He says, and it’ll—it will be much worse than it was. Because part of Dent’s philosophy is looking at the demographics. I remember back in the 90s, he predicted that by about 2012, starting around 2011, 2012, the Baby Boomers will pull money out of the stock market. Just demographically speaking. And I totally buy that. I think that’s very, very relevant. But he’s even predicting more things going on. But he also says, gold and silver are going to deflate. And he’s like, don’t buy gold. He’s definitely the anti-gold bug, I’ll tell you that.
DR. KIRK ELLIOTT: Yeah, and I disagree with his deflationist argument, because money is being printed like there’s no tomorrow. And that’s inflationary. Now, you might have an economic slowdown. For sure, you’re gonna have an economic slowdown until some things you are going to see price deflation on, and people can’t afford it, but the financial metals sector is not one of them. Now, where I do agree with him on deflation, is if you look at gold and silver as an actual currency. You know, you look back 10 years ago, and how many ounces of gold did it take for you to buy a house? More than what it did now. So really it’s taking you fewer ounces of gold to buy a house right now. So that is deflationary, isn’t it?
JASON HARTMAN: Right, right. Yeah, the gold-to-housing ratio is fantastic right now, folks.
DR. KIRK ELLIOTT: That is deflationary.
JASON HARTMAN: You can bring in a lot fewer pieces of gold and buy a house now, than you needed back then. So, yeah. Great point.
DR. KIRK ELLIOTT: So in a sense, that is deflationary. When you look at a true, legitimate currency, but everything else is inflationary—so, I just disagree with Dent on his description of deflation. I think gold and silver are going to go through the roof. And what you can purchase—
JASON HARTMAN: But the only question is, are the gold and silver going through the roof, or is the dollar just going down?
DR. KIRK ELLIOTT: Both.
JASON HARTMAN: Both at the same time? Or, you’re really just storing wealth, or if you will, treading water, because you’re just keeping pace with inflation, with the gold and silver. See, to me, just let me put this thought out there for you. To me, it seems like that the gold and silver have a good advantage in the—for the uncertainty play. World War, geopolitical problems, societal collapse—gold and silver are good there. And then they’re also good if none of that happens. And they’re good for just general inflation, because they are a legitimate measuring stick. And that’s why, as much of a gold bug as I’m not, okay—I mean, I have some. I think it’s okay. I don’t think it’s bad. I think it’s much better than money. Sorry—much better than currency. It is money. Currency is fake fiat dollars. Or Euros, or whatever. But I don’t think—I don’t know that you’re really gaining—but sometimes, look. Economics is a relative thing. If everybody else is losing ground to inflation, and you’re keeping steady, if you’re treading water and everyone is drowning, hey, you’re ahead! Because if your net worth is $100, and your neighbor’s net worth is $50, you’re rich!
DR. KIRK ELLIOTT: Right. But if you look back for the last ten years, let’s say, back to 2002, the US dollar has lost about 38% of its value. Which is a huge amount. I mean, that—there is no doubt that is—
JASON HARTMAN: Terrible.
DR. KIRK ELLIOTT: But since that time, gold has gone from about $260 an ounce to over $1700—about, what, 500% increase. So, that is, yeah. Does gold cost more because the US dollar has diminished? Yes, it does. It takes more US dollars to buy gold. However, gold has been outpacing the devaluation of the dollar by a lot. And silver, even more. And so, that’s why I say it’s actually some of both.
JASON HARTMAN: Yeah. And I sort of wonder how much of that is the fact that the real inflation—it’s there. But it just hasn’t shown up yet. In other words, the inflation has already occurred. But the banks are holding onto that money, and they haven’t released it. But the people who invest in the metals know that the inflation is there. It’s just a symptom of it hasn’t fully exposed itself. You know, maybe a good way to look at that would be, like, say you contract a virus, God forbid, right? And this virus, it’s in your body. It’s there. It’s multiplying, it’s working. But you’re not really sick yet. You still feel kind of okay. And the sickness is going to show up in a few days, or a few weeks, or I guess, some even take longer to incubate. In other words, the inflation is there—it’s just incubating. And it’s on the sidelines, because the money has not trickled down into the system yet.
DR. KIRK ELLIOTT: Yes, and no, actually. I think—you know, unofficially, inflation’s really hovering around 10% right now. Not the three point something percent that the government says it is. CPI is completely bogus. However, when you look at—how do I say this quickly. Okay. In China, for example, you’ve got warehouses full of electronic goods. There is a global economic slowdown. It’s recession, no doubt. People are buying fewer things. Well, we all know when we buy a computer, or electronics, for example, they’re almost obsolete six months from now. So when they’ve got warehouses full of stuff, they’re going to have to sell it at major discounts to get rid of it before it goes obsolete. So there are some things right now that even in an inflationary environment, we are seeing price reductions on it, because they have to get rid of it.
But when they have to start remanufacturing some of these things—you know, over the last 18 months, copper is up over 80 something percent. Steel is up over 100%. Oil is going through the roof. The cost of remanufacturing these things once they extinguish their inventories goes through the ceiling. You look at groceries right now, and marketers are tricky, masking real inflation. For example, let’s just use a hypothetical like a box of Lucky Charms. The price hasn’t gone up. However—at Wal-Mart. However, the box is still the exact same size, but where you used to get 15 ounces of cereal in there, you now have 12.2. People think oh, the price hasn’t gone up! The box is still the same size! It’s still the same cost. However, you get 20% less ounces of cereal in there. That’s a 20% increase in price.
JASON HARTMAN: Yeah, they’re just tricking you. Yeah.
DR. KIRK ELLIOTT: They’re tricking you! Where they can’t trick you is at the gas pump, which is why—
JASON HARTMAN: You mean, a gallon today is about 8 pounds—128 ounces—that’s a gallon. So, soon a gallon will be 110 ounces, but it’ll be more expensive.
DR. KIRK ELLIOTT: See, that they can’t trick the consumer on. Other stuff, they kind of can. And so, at some point, we really do hit critical mass. And people realize, oh my word, the box only has half of what it used to be. Or when you go to the gas pump, people are going to go with what they see at the gas pumps, because that is a real thing; there’s no masking that whatsoever.
JASON HARTMAN: Well, you know, that’s an interesting point that you bring up. And I know we’re going really long. Maybe we’ll just cut this interview into two parts and do it into two shows, if you don’t mind. Do you mind sticking with us a little longer?
DR. KIRK ELLIOTT: No, that’s perfectly fine.
JASON HARTMAN: Okay. What’s really scary, frankly—it’s not interesting, it’s scary—is that I heard that for every increase in the gasoline price of 10%, it impacts food prices in the neighborhood of 20-30%. So, it’s got a nasty multiplier effect to the downside for all of us as the consumer, because energy is in everything. Energy cost is buried into every single product and service. And so, if we are looking at increase in the price of gasoline or oil, it’s more expensive to build a house! To build an apartment building! To bring food to the grocery store, and to the restaurant, to manufacture all the raw materials that go into building a house or anything else. So it all gets expensive. And my mother said it kind of funny, when I remember a few years back when gas prices were skyrocketing before. I was complaining to her about it, and she says Jason, just buy some oil company stocks! What are you complaining about? And she says, I made a bunch of money with Exxon. And I’m like, well mom, you’re kind of right. That’s a pretty good idea. So….
DR. KIRK ELLIOTT: Right. I mean, food inflation is going to—it is going to be devastating. And when people are already living at the margin, you know—we are so blessed in this country—
JASON HARTMAN: We’re not living at the margin, most of us. Even now.
DR. KIRK ELLIOTT: Even a 10-20% increase in food prices in this country—what does it amount to? Basically a nuisance. Really. What about the rest of the world? When 10-20% is probably the difference between eating and not eating. And this is where you start to see a lot of global civil unrest, when the prices of these things go up, because of what you said—oil going up does have a multiplier effect. And this is the scary part. When people get hungry, when people can’t put food on the table, even wonderful people can turn into monsters. I mean, it’s just—we are going to see that on a global scale, and when people run out of money, just like when countries run out of money, they start to do irrational things. And this is, sadly, what I think we have to look forward to, in not so good of a way, in the months and years ahead.
JASON HARTMAN: I agree with you. Well, any other advice or thoughts that you have for listeners about just kind of anything we’ve covered? Or even haven’t covered? What else should we be talking about? One other interesting point of it is, the Chinese suppressing their currency—I was listening to a commentator recently on one of the news programs, and he was saying, we should devalue our currency so we can export more. And I remember watching a really interesting documentary that I recommend to everybody. I mean, I guess it’s not that interesting. But it just kind of shows you what goes on in geopolitics, or really, geofinance. It’s a movie called—or, a documentary called Life in Debt. And it was about Jamaica, and how they made a deal with the international bank, and they wanted to build infrastructure and so forth—they had to devalue their currency, to encourage exports. And basically, what all the companies did, is they came in and they hired laborers for much less money. They paid them very poorly in these sweatshops. And what about China artificially suppressing the value of its currency? And the US maybe should intentionally do that? I mean, I don’t think so. But, some people do.
DR. KIRK ELLIOTT: Well, you know, from the politicians’ standpoint, they’re gonna speak out of both sides of their mouth on this issue. They’re gonna say they want a strong dollar, because that’s what gets votes. But really, a weaker currency does make your exports cheaper everywhere else, and so, they’re going to have policies that favor a weaker currency, but they’re gonna be talking about strengthening the currency. This is classic doublespeak on the behalf of politicians. And China is no different. It’s in their best interest, because they are the exporters to the world. To have as cheap of a currency as they can, while people are still buying—once the rest of the world becomes so poor, you know, and if they weren’t buying anything, well, then that doesn’t make any sense. But because they still are major, major, major exporters, and everybody’s gobbling up their stuff, it makes sense for them to have a cheaper currency.
JASON HARTMAN: Very true. Not the US, though? Could we turn that around if we just devalued our currency? Everything would get much more expensive for Americans, just instantly, which is probably gonna happen anyway. But, would the equation work? Could you bring enough jobs back to America quickly enough that the equation would work?
DR. KIRK ELLIOTT: That brings up another question, which is, how do you bring enough jobs back quickly enough? The infrastructure’s already been set up there. This is just capitalism at its core. Cost of least production is where goods are going to be produced. Well, it’s cheaper in China. When China’s no longer the cheapest, it’s maybe gonna go to Africa, let’s say. I mean, I think, unless you have some kind of a competitive advantage in something, I don’t think we’re gonna get jobs back in this country real soon. The only caveat to that is what we talked about earlier, and that is, if we open up oil. This is our ace in the hole. This is our area of superiority, because we have so much oil and gas. That’s what we have to produce. We don’t have the trump card on cost of cheap labor. So we might as well forget it. You know, but what we do have is natural resources that we could produce and export to the rest of the world.
JASON HARTMAN: Yeah. Well, there you go. That’s good. Good stuff. So, my other question, before I sort of got into the devaluation of currency—any other thoughts, advice?
DR. KIRK ELLIOTT: You know, when we get to times like this, we have to make sure that our lives are right. You have to be spiritually grounded. You have to make sure that you have your paper-to-asset tangible ratio of your own investment portfolio adequate to basically withstand the inflationary pressures that we are going to see. Having too much paper will crush you. Having too much of anything will crush you. You should never be completely out of balance. Unless we are on the doorstep of hyperinflation, you should not have 100% of your portfolio in precious metals, for example. In a hyperinflationary state, you’d be goofy to not have almost all of it in there. But you have to balance off your paper, your real estate, all of your other positions, with precious metals, and make sure that everything is in balance. When you’ve got those things in line, well then you know what? You’re going to be able to withstand the storm, and you are going to be able to prosper. And you’re going to be able to thrive. If you honestly, when you ask yourself this question, am I adequately prepared for a hyperinflation? How much debt do I have? How much credit card type debt? Not the kind of debt you were talking about earlier—
JASON HARTMAN: Investment grade debt.
DR. KIRK ELLIOTT: Low fixed rate long term debt—
JASON HARTMAN: That’s investment grade debt.
DR. KIRK ELLIOTT: I’m not talking about that. That actually can help you in an inflationary scenario. I am talking about credit card debt. Revolving debt. Adjustable rate type debt. If you’ve got too much of that—oh my word. When interest rates start rising, you are going to get shlacked. It is not going to be a friendly scenario for you and your family. But you know, in this hyperinflation and inflationary scenario, precious metals are going to be your friend. Tangible assets are going to be your friend. And so you have to allocate accordingly. And this isn’t always the case. You know, precious metals during the 80s and 90s were a horrible investment. Why? Because interest rates were coming down. The dollar was strong. This were blooming. People were fat and happy. I don’t think that there’s really any such thing as a bad investment, per se. There’s just bad timing for investments, if that makes sense. And so, we just have to be students of history, be students of the market. Identify the fundamentals that cause markets to move, and then act accordingly. And have old rules of the game where when stocks are bad you go into bonds, and bonds are bad you go into stocks. And when everything is driven by revenues right now, those old rules of the game do not work. You have to have tangible assets as a solid, substantial portion of your portfolio if you’re expecting to survive an inflationary time frame.
JASON HARTMAN: Kirk, last question for you. There’s no academic definition for “hyperinflation.” How much inflation are we talking about? What is that? What does it look like? Give people a sense of your—of course it’s your opinion. Just one man’s opinion here. But, some people say, hyperinflation that would just be devastating would be 20, 25% annually. And I think that’s nothing! I think it could be far worse than that! I mean, you look at what’s happened in other countries, and I’m not talking about Zimbabwe. I’m just talking about countries with resources—Argentina, Hungary, Weimar Germany—I mean, I think we could easily have inflation at 100% annually. Or 50% annually.
DR. KIRK ELLIOTT: I would agree. And generally—
JASON HARTMAN: It doesn’t have to be 2 million percent annually.
DR. KIRK ELLIOTT: No, it doesn’t. I mean, that would absolutely destroy everything, but even if you had—just as kind of a general rule, 20-25%, in my opinion, is just inflation.
JASON HARTMAN: It’s just normal inflation.
DR. KIRK ELLIOTT: Yeah. Now, superinflation is probably going to be anything over 50%, up to 100%. Anything over 100% a year, is generally classified as hyperinflation. Well, with prices doubling every single year, let’s just say that went on for four years. Ridiculous! Imagine milk going from $3 to $6. From $6 to $12. From $12 to $24. That is just 100% inflation. This isn’t even millions of a percent of inflation like Weimar Republic, Germany. Hungary, Poland, Zimbabwe. This is just 100% a year for four years.
JASON HARTMAN: It’s not that—historically, it’s not that much.
DR. KIRK ELLIOTT: It’s not. And could you imagine paying $30-$50 a gallon for milk?
JASON HARTMAN: Well, they used to call—well, they still call it—they jokingly call Starbucks, they call it Fourbucks, because that’s what it costs for a drink. And you look at old movies, and you used to see someone saying, brother, can you spare a dime for a cup of coffee? And then it’s four bucks, right? Well, soon Starbucks will be 50 bucks.
DR. KIRK ELLIOTT: Absolutely it will.
JASON HARTMAN: It’s not funny. This is gonna be—when people only have—when they’re, like you say, living on the margin, and they only have a small amount to pay for stuff, their standard of living just plummets. And think of what happens in that environment. If inflation is just 100% annually, and you have a million dollars in real estate debt—long term fixed debt—in a year, basically your debt’s been wiped clean. But then the question is, and I’m sure you’ve thought of this, Kirk—well, Jason. If it’s that bad, who’s gonna be able to afford to rent my house from me? Well, it’s gonna be a different person than affords it now. The standard of living will be declined. There will be people that move down that socioeconomic ladder, because they didn’t play their cards right. Because they didn’t store wealth in tangible assets. And I’ll give you this, like the metals, even though I’m not as much of a gold bug, but I agree, it’s a great store of wealth. Has been for many years, obviously. And the people who didn’t do offensive things, like my strategy, and they’re gonna slip down that ladder several notches. They’re gonna go from living in a 3,000 square foot house to living in a 1,000 square foot apartment. They’re just gonna move down. Someone will be there to afford it, but it’s just gonna be the same person that used to live four times better, is now living one fourth the lifestyle.
DR. KIRK ELLIOTT: Or you might even have two or three families renting the same apartment. I mean, and you’re right. I look at gold and silver as insurance protection against the collapsing currency, and I’ll end with this—if you went back to 1920, when a $20 bill was convertible for one ounce of gold—you could have either—actual gold was currency back then! Well, what would that buy you? That same 20 bucks, or a one ounce gold piece, which has a $20 face value on it, would buy a finely tailored men’s suit, a shirt, a tie, a belt, and shoes. Fast forward to today. What does that $20 bill get you? It doesn’t even get you a date night out at Chili’s. However, what does that one ounce of gold get you? Gold is worth over $1700 an ounce. It still gets you a finely tailored men’s suit, a shirt, a tie, a belt, and shoes. See, gold has maintained—
JASON HARTMAN: But Kirk! You didn’t tell people that 5,000 years ago that one ounce of gold would have bought you a toga and a pair of sandals!
DR. KIRK ELLIOTT: It maintains its purchasing power. It is insurance. It just happens that you’ve got a double whammy right now, because it’s drawing on average over 20% a year like clockwork for the last decade. But see, this is your insurance policy. And it’s also, right now—right now—a good investment. Now, it’s not—you know, over time, it’s just an insurance policy. But we’re looking at it right now as wow, this is a phenomenal way to protect and preserve everything you’ve worked your entire life to accumulate. And this is basically what I would kind of summarize the thrust of this entire conversation that we’ve had, is tangible assets are key to preserving your wealth.
JASON HARTMAN: And I couldn’t agree with you more. Again, you’re much more of a gold aficionado than I am, but I definitely see your point. I agree with your premise completely. And I just think you’ve got to control resources. There’s only a few ways wealth has really been created, if you look at this world. You control real estate and resources. That’s one. You make money in the media, that’s another. And media could be, you know, your Rupert Murdoch or Ted Turner, or it could mean you’re a celebrity. Both ways. Media—that’s still the media business, okay? Another way is technology. You know, Steve Jobs, Bill Gates, etcetera, etcetera, way down the list. Or banking. That’s really—there’s really about four pillars to real wealth: real estate, resources, banking, technology, and media. I don’t know. That’s kind of how I look at them. And, you know, banking is obviously, there’s a lot of dimensions to it. So, we’ll talk about that. But, you know, Kirk, it’s been a great conversation, and we’ve gone really long here, so I appreciate you sticking with us. And we’ll slice this into two interviews, do it over two shows. It’s been so interesting. Thanks so much for joining us today! Your website is www.kirkelliottphd.com. What is your doctorate in?
DR. KIRK ELLIOTT: It’s in public policy and administration. My emphasis was on public economics, inflation.
JASON HARTMAN: Wow. Excellent, excellent. Good stuff. Well, this has been fascinating. And it’s www.kirkelliottphd.com. Thanks so much for joining us today, appreciate it.
DR. KIRK ELLIOTT: You’re welcome. It’s my pleasure.
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Transcribed by David
The Jason Hartman Team
Episode: CW 262: Monetary Policy, Fiscal Policy and Governmental Irresponsibility with Dr. Kirk Elliott (Part 2)
Guest: Dr. Kirk Elliott
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