CW 265: How National Debt Impacts Millennials, Generation X and Baby Boomers with Laurence J. Kotlikoff Author of ‘The Clash of Generations’

Jason Hartman hosts an interesting interview with Professor Laurence Kotlikoff, author of The Clash of Generations: Saving Ourselves, Our Kids, Our Economy, regarding the problems with the economy and the effect that the astronomical national debt and government spending will have on generations to come.

Professor Kotlikoff paints a picture of the magnitude of these issues very clearly, explaining that the fiscal gap is $211 trillion. He explains that we would have to raise every federal tax immediately and permanently by 64 percent or cut all non-interest spending by the government (Medicare, Social Security, defense spending, etc) by 40 percent. “The country is broke, totally broke,” says Professor Kotlikoff. He emphasizes that this applies to today, not 75 years down the road.

Jason and Professor Kotlikoff also discuss why the 2007 quadrupled money base through money printing hasn’t hit the streets yet in the form of hyperinflation. Essentially, banks are being bribed to hold money reserves by the Fed.

In simplistic terms, the Federal Reserve prints the money, lends it out at very low interest rates to the banks, and then the banks deposit it back with the Federal Reserve and get a higher interest rate. This makes banks more solvent over time without the public ever knowing what is going on. Professor Kotlikoff also talks about a proposal to fix the financial system, which he refers to as a fragile system, presently a “trust me” banking system where the public is unaware of what the banks are doing with their money.

Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, a frequent columnist for Bloomberg and Forbes, and a blogger for The Economist and The Huffington Post.

Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President’s Council of Economic Advisers.

Professor Kotlikoff is author or co-author of 15 books and hundreds of professional journal articles. His most recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), and The Coming Generational Storm (co-authored with Scott Burns, MIT Press).

Professor Kotlikoff publishes extensively in newspapers, and magazines on issues of financial reform, personal finance, taxes, Social Security, healthcare, deficits, generational accounting, pensions, saving, and insurance. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations.

He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.


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, and we are at episode number two hundred and sixty-five today; thank you so much for joining me. Today we are going to talk to a highly esteemed professor of economics at Boston College. He is the author of over 15 books, and hundreds and hundred of professional articles. I think you’ll find the interview to be very interesting, as we talk about the clash of generations, and what all those demographic and economic issues means to all of us as real estate investors. Or actually, you know, I should be corrected again—income property investors. Because we don’t necessarily like real estate. We like income property. There is a difference. And if you want to know what that difference is, and you’re a new listener, listen to some of the prior episodes, and you can find out all about it.

But I hope you enjoyed the last show on financing. And we have got so many shows coming up for you. I know I have been saying that, and we’ve been a little slower than I’d like at publishing them. We’d like to get two or three episodes out to you every week. But gosh, we are so busy right now, it is amazing how the market is, and how people want to just grab up income properties like they’re going out of style.

Which reminds me! I want to do that too. So if you are interested in partnering with me, or selling me an interest in a property that you already own, keep in mind, we would be interested in doing that! And I’ve explained kind of the way I work with my partnerships with our clients on the show before. But you know, let me know if you’re interested! Inquire through the website; just let one of our investment counselors know, through the website, and they will put you in touch with me. They can explain the way that works. But, any property that you might be interested in through our network, I would be interested in potentially almost 100% partnering on that property with you, because I am looking to expand my ownership footprint myself.

And also, when speaking about different than the usual just buying properties for your own account: private lending and hard money lending—boy, we have a lot of you doing that. One of the challenges we’ve found lately is that it’s hard to place loans. But get in the queue. Get in line. And when we have properties come up for you that make sense, you can fund those deals for our local market specialists. And it’s a real different relationship than typical traditional hard money lending. I know many of you have called me about that over the prior months, and actually the prior year. And we are interested in doing hard money or private lending within our network, because we have a very unique, very special arrangement when it comes to the dynamics that take place within our network in properties that we have all over the country. And you can earn well over 12% as a note rate, plus fees, so depending on how fast the loan pays off, whether it be as short as 28 days, or I’ve had one of mine pay off that quickly, my return on investment there was over 20% annually. Or, it may be as long as six months or so. And your return on investment there would be just over probably about 12½, 12¾%, all in with your fees. So, some great opportunities there.

But when you speak of great opportunities, I want to also mention something to you before we go to today’s guest, and I’ll keep this really short. But I was doing hot yoga last night. Now, how many of you have tried hot yoga before, or yoga in general? This doesn’t especially apply to hot yoga. But, I really like hot yoga. Now, that may come as an odd surprise to you, because I live in Arizona, and the temperature in the room, the yoga studio in summertime, is sometimes actually a degree or two or three cooler than the temperature outside. I know, I just have to laugh when I say that, because it’s so ironic. But it is much more humid inside that room. And if you haven’t tried hot yoga, I would highly recommend it. I think it is like the fountain of youth. It’s pretty amazing how you feel. Those endorphins just flowing through your blood steam when you come out of that class are pretty awesome.

Anyway, what I was thinking about as I was doing one of those yoga poses last night, and I was looking at the dot on my yoga mat as I was on one foot, kind of in a flying position, in one of the warrior poses. And I was looking at the dot, to try and keep my balance. And in yoga, they call this a drishti. This is called a drishti, okay? And the drishti is the place on which you focus your eyes that helps you keep your balance. Why am I mentioning this now? Well, here’s why. We’re moving into a somewhat crazy market where people in the income property business and the real estate business are out there starting to hock all kinds of strange and creative deals.

And what does that mean? Well, when we get into this kind of market, every scam artist and their brother comes out of the woodwork. How do I know this? Because I’ve been through it. I’ve been through several cycles now with my many years in the business as an investor and as a real estate salesperson, as a real estate agent, owning a few different real estate companies, seeing all the people that come to work for me, all the different people that come present different deals, all the people that call us all the time that want to present deals to you, our clients, or our listeners, our audience, through my company. And when the market gets like this—when it gets frothy, and it gets crazy—and it is getting like that nowadays—be careful. Focus. Keep your eyes focused on your goals.

Keep your eyes focused on rational, prudent investing on the tried and true rules that apply to income property investing that we have talked about on the last 264 episodes of the Creating Wealth Show. And even on my other shows as well. So, keep focused! That is your drishti. That is what you need to do, is you need to stay focused on what is prudent, what makes sense. And that is all I will really say about it.

But the thought just went through my mind, in that 104 degree, 90% humidity room last night, as I was trying to keep my balance. I thought nowadays more than ever—well, not more than ever, but more than ever in the past maybe five or six years, until back in 2005, 2006 when it was crazy then, and even before, and back in various points in the early 2000s, and in the 90s, and back in the 80s, and I don’t even want to talk back further than that, because then I start to show my age. But every time you get a crazy market where properties are flying off the shelves, all of the scammy people come out of the woodwork. Not to say that they’re not there in the more mellow markets like we had even just two or three years ago. They’re there in those markets too. But I think more so in this kind of market. So, focus. Keep your eyes focused on your drishti, on your goals. Make sure you don’t fall over. You don’t get sucked in by some scam; if it sounds too good to be true, it probably is, as the saying goes. And I just want to mention that to you.

Look forward to a couple of events we’ve got coming up. Again, we’re still trying to confirm dates on those, but we’ve got our Meet the Masters of Income Property event—this one is going to be rather different than the ones you’ve come to in the past. We do that twice a year. That’s coming up later this year. And also, our Creating Wealth in Today’s Economy Boot Camp, and property tour, in Atlanta, Georgia. So, we will announce those as soon as we firm them up with the venues, and they are coming very, very soon. So, let’s go to our guest today, and let’s talk about demographics and economics, and we’ll be back with that in just a moment.


ANNOUNCER: Jason provides an extremely unique service: deal evaluator. Are you interested in a property outside of our network? Need a second opinion? No problem! Let our experts evaluate the deal. Find out more about it at!


JASON HARTMAN: My pleasure to welcome Laurence Kotlikoff to the show! He is a professor of economics at Boston University, and the author of several books, including The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy. Larry, welcome! How are you?

LAURENCE KOTLIKOFF: Great, thanks for having me.

JASON HARTMAN: My pleasure. Well, we are in quite a peril. I have many times referred to it as the $60 trillion time bomb—that’s trillion with a ‘t,’ of course—but you are calling it a much bigger time bomb than that. And you do propose some solutions, and we’re looking forward to hearing them. First of all, the background—what is the problem? Just outline that for the listeners, if you would.

LAURENCE KOTLIKOFF: Okay. Well, the economy in like a business, has a balance sheet. And the government has assets, which are taxes that are coming due through time. They have a certain present value. And there’s also liabilities. So, there’s the assets—the taxes. The liabilities are in the official debt plus the present value of all the future expenditures that are scheduled to occur for Social Security benefits, for Medicare, for Medicaid, for defense expenditure. All of these things also have a present value, and if you look at the combination of the official debt plus the present spending liabilities—that’s the unofficial debt—the two things together exceed the assets, which is the present value of the taxes, by $211 trillion. So, that’s what we economists call our fiscal gap. And these numbers that are underlying this calculation are coming from the Congressional budget office. So, they’re not numbers that I cooked up, or some economist. They’re coming right out of the government.

All you have to do is do some arithmetic with the government’s projections, and you see a colossal fiscal imbalance, a colossal problem, much bigger than anything anybody has been talking about. The $60 trillion figure you’re talking about it, I think, based on just looking out 75 years. But there’s no reason to stop the projection 75 years from now. Because the kids today are going to be around 75 years from now. So we have to think about the benefits we’re gonna have to pay to them. In addition, the way the accounting works, the cash flows aren’t really well defined. We use particular words to describe government receipts and payments. Some of them we call taxes, and some of them we call borrowing, on the receipt side. On the payment side, some of them we call repayment of principal plus interest, and what choice of words we use here doesn’t change the fundamental economics, but it does change the cash flows that are being projected over any finite horizon—over 75 years, for example.

And so, that’s arbitrary. The only thing that’s really not arbitrary is what we call the infinite horizon present value and fiscal gap, and that’s $211 trillion, and that’s enormous. And to get some idea about how big that is, we would have to raise every single federal tax immediately and permanently by 64% in order to come up with $211 trillion in present value. Or, we could cut all non-interest spending by the government by 40%. So, you go to your mom’s Social Security benefit, Jason—I don’t know if she’s collecting, but let’s say that she is—has to be cut 40%. Her Medicare benefits have to be cut 40%. If she’s collecting Medicaid, they have to be cut 40%. The defense spending has to be cut 40%. That’s the magnitude of the problem that we’re facing. The country is broke. It’s totally broke. It’s in worse shape than Greece.

JASON HARTMAN: So, Larry, yes. Of course, when you look at the balance sheet, it’s—we are in much more dire straits than Greece, for example. And Greece is in a terrible mess. However, we do have the reserve currency, at least for the moment. While the world still appears to have some faith in us. We also have so many other advantages in terms of military, we can sort of throw our weight around a bit, and manipulate situations with it, and so forth. We can’t really, in all fairness, be compared to Greece in the same way, just from a balance sheet perspective, can it?

LAURENCE KOTLIKOFF: Yeah, absolutely it can be compared. Because we have taken it upon ourselves to be the policeman of the entire globe—

JASON HARTMAN: An expensive proposition.

LAURENCE KOTLIKOFF: An expensive proposition. Greece doesn’t have to deal with that. Greece has had some pension reforms. They’ve got a healthcare system that’s under control. They decide how much to pay for the doctors. They hire the doctors directly. They hire they—they build the hospitals or not build the hospitals, they decide what drugs the public are going to get. So, their control over their expenditures going forward is much better than ours. So, we’re actually—and the fact that we can print money is not really much of a blessing here, because what happens if you print? You know, we’ve got a $211 trillion problem. So, our basic money supply, called the M1 money supply, is about $2 trillion or so. Maybe $2½ trillion. If we were to print $20 trillion? What would we end up with, Jason? We’d end up with hyperinflation.

JASON HARTMAN: Yeah. Which I think we’re already going to end up with. Some degree of hyper—hyperinflation unfortunately has no academic definition, but whatever you perceive to be hyperinflation, I think it’s going to be pretty severe.

LAURENCE KOTLIKOFF: Absolutely. The government since 2007 has quadrupled the monetary base. In other words, that’s the basic amount of money that it has printed has been quadrupled since 2007.

JASON HARTMAN: Since 2007? So, let’s examine that. So, it could really be argued, and I guess maybe the reason, and I’d love to have you address this—that we haven’t seen quadruple inflation since 2007, because we’ve created so much more money—is because that money hasn’t hit the streets yet? It’s sort of in the hands of the banks, and it hasn’t trickled down to Main Street, it’s still on Wall Street? Is that the reason that the inflation hasn’t happened? Because the true academic definition of inflation, of course, is just money printing. The result of money printing that we see is an increase in prices, that most people call inflation. But why haven’t we seen the inflation yet?

LAURENCE KOTLIKOFF: Well, the Federal Reserve has been paying the banks to hold what are called excess reserves. So, they’ve injected this money into the economy. It’s been deposited in the banks. And then the Fed is, in effect, bribing the banks not to lend it out. And so on the one hand, we’re trying to stimulate the economy. On the other hand, the Fed is doing everything it can to keep this money from hitting the streets, as you said, because once it does, it could lead to inflation taking off. And then, once the prices start to rise, people start to treat money as a hot potato, and then the money becomes in effect faster. It just—the same money starts circulating more rapidly. Velocity increases, and now we can have endogenous inflation. Inflation just takes off on its own. So, we have the basis in place now for a quadrupling of the price level. And that’s scary enough, let alone trying to print our way out of a $211 trillion problem. It keeps getting bigger, you know. The fiscal gap grew by $6 trillion between last year and this year, because the members of Congress are arguing over $2 trillion, saving that, over ten years.

In one year alone, the fiscal gap rose by $6 trillion, because all the Baby Boomers are one year closer to getting these very significant benefits. My generation, when we’re fully retired, we’re gonna be getting $40,000 per person in today’s dollars. Three-quarters of per capita GDP—actually, sorry. It’s gonna be about 85% of per capita GDP every year for our full retirements. So, that’s gonna be an enormous bill, about $3 trillion in total in today’s dollars every year the Boomers are in their retirement. And who’s gonna pay for this? Well, it’s gonna be people in your generation. Or not. The whole thing could blow up into the Boomers’ face. So this is the kind of thing we’re talking about in this book, The Clash of Generations, Scott Burns and I, in our new book.

JASON HARTMAN: Two things I’d like you to address that you just mentioned. Fascinating things. Number one, you’re saying that the Fed is actually bribing the banks not to lend? I mean, if you listen to Bernanke and Geithner and Obama, it’s all about, let’s get money lent into the hands of small businesses, and into the housing market to stimulate it! I mean, that’s just window dressing, isn’t it? And how are they bribing them not to lend the money? Because they’re certainly still pretty tight with lending. Better than they were at the depths of the financial crisis three years ago, but still, very tight.

LAURENCE KOTLIKOFF: The way it works is the Federal Reserve is paying interest on these excess reserves. They could make that interest, rather than 25 basis points, which doesn’t sound like a lot, but it is a lot in this environment, they could make it zero basis points. Or negative basis points. They could tax banks for holding excess reserves. They could get the banks to make loans. No question about it. And they’re worried about inflation. They’re worried about—see, part of what’s going on here is they, under the cover of method of restoring the banks’ balance sheets, so, giving the banks free money, if you like, you let them borrow money at low rates, and then they—well, the banks basically are able to get a return on these 25 basis points, which is more than they could get on the market.

JASON HARTMAN: So in other words, the banks, all they’re doing is buying treasury bills with the money, right? Because that’s basically a no-risk solution for them, and they’re arbitraging the rate at which they borrow, and the rate at which they invest?

LAURENCE KOTLIKOFF: Well, they’re either borrowing—holding treasury bills, or just they’re holding excess reserves and getting the 25 basis points directly from the Federal Reserve as interest.

JASON HARTMAN: What an unbelievable, frankly, scam, that’s going on, isn’t it? It’s really a scam, right?

LAURENCE KOTLIKOFF: Exactly. The way it works, just to be clear, is that the Fed prints the money, it lends it out at very low interest rates to the banks, and then the banks deposit it right back with the Fed and get a higher interest rate. So that’s where the banks—they borrow at low rate, and they earn a higher rate, and no risk, they can be made over time more solid without the public ever seeing what’s really going on.

JASON HARTMAN: One of the things that Bernanke said on his first 60 Minutes interview—which is such a historic thing, because a sitting Federal Reserve Chair has never been interviewed on 60 Minutes, or I don’t think has done media interviews like that at all. And one of the things that he said was, he said that when he was asked about, well, aren’t you worried about inflation with all this stimulus? Back then we were QE1, and now we’re way into it. And he said, you know, we have tools, that when inflation starts to rear its head, we’ll rein it in with our tools. And that is, in my opinion, such a complete lie. Because you think you can just close Pandora’s box with a couple strokes of a pen or a mouse? And that’s simply not true. And I think one of the reasons it’s so untrue is what you said earlier.

When money becomes progressively more and more valueless, as it’s debased by inflation, you get this sort of hot potato syndrome. That was a great metaphor you just used. The hot potato syndrome. And when you look at inflationary examples throughout history, whether it be Weimar Republic, or Zimbabwe, or Hungary, or Argentina, people treat money like a hot potato. They get it in their hands, and they can’t wait to spend it, because they want to trade it for goods and services before it goes down in value more. So, the velocity increases, and the rate of inflation—it just grows exponentially, doesn’t it? So, you gave the example of 2007, the monetary base is increased by x amount—what, four times?


JASON HARTMAN: And so, that would say that the rate of inflation will be 4x. But really, when you throw in the velocity, the hot potato problem, it becomes much worse, doesn’t it?

LAURENCE KOTLIKOFF: Absolutely. It would go up much more rapidly than four times. When prices start to rise, people will naturally try to economize on money, and it will become a hot potato. So—

JASON HARTMAN: Do even the laymen in the economy that really don’t get it, the uninformed, they even understand that you should treat money like a hot potato when it’s going down in value, right? Spend it now. In the Weimar Republic, there are stories of people who as soon as they got paid they would rush out to spend their pay, because they knew that if they waited even till later in the afternoon, it would go down in value.

LAURENCE KOTLIKOFF: Absolutely. People were being paid with real dollars, money, at lunchtime, and going and spending it immediately, in that episode. So, when Ben Bernanke says that he’s gonna have complete control of these events, every central banker has made these kinds of statements before things got out of control. Now, the thing that he doesn’t have control over is the fiscal policy. And the fiscal policy is going to put enormous pressure on the monetary authorities, just like we’re seeing in Greece right now. Why is Greece talking about moving away from the Euro? It’s in order to have their own printing press. And in order to try and use inflation as a way, as a hidden way of taxing people, and increasing expenditures without somehow this becoming apparent to the public. But it will culminate in inflation, if not hyperinflation in Greece. So, going off the Euro is fundamentally not an answer for Greece.

JASON HARTMAN: It’s just a way to kick the can down the road.

LAURENCE KOTLIKOFF: Exactly, it’s more that. And Bernanke is not gonna be in a situation to somehow avoid the pressure of $211 trillion where the government can’t come up with $211 trillion in present value. I’m not saying it’s all due today, but increasingly over time, whether it’s Bernanke, or whoever is in the position of the Chairman of the Fed, they’re going to come under enormous pressure to ease monetary policy, to print more money, and way this is gonna work is that over time, we’re gonna start running large and more official deficits so the public will finally see what I see just by doing the present value bookkeeping. We’ll see it showing up in the official debt numbers, how bad the situation is. At some point, there will be a run on US bonds, in the sense that people will start dumping US treasuries. Interest rates will spike, and then the Fed will be called upon to lower interest rates. And how do they do that? They print money and buy up the bonds. So, the pressure to keep interest rates is really the pressure to print money, to keep the interest rates from soaring. But, if you get into one of these inflationary spirals, the more money you print, doesn’t lead to lower interest rates. It leads to higher interest rates. Because inflation gets embedded in the interest rates. Because people aren’t going to lend money to the government if they expect their money to get paid back in watered down dollars. They expect prices to rise.

JASON HARTMAN: What do you think the real inflation rate is right now? I mean, the official statistics, ever since certainly I think the latter part of the Jimmy Carter era, have woefully underestimated inflation. If you ask me, it’s 9-10% presently. Your thoughts?

LAURENCE KOTLIKOFF: Well, they’re changing the basket of goods and services, which are being valued. So, as things become more expensive, we start twitching towards less expensive products. And the CPI is being adjusted, taking into account the change in the bundle. So, and there’s been some other adjustments in the CPI. I don’t know. To look at ice cream cones, that’s my measure of inflation. And they’ve been going up like crazy. And I think, on an ice cream cone basis, price level has tripled, or quadrupled, actually. But, it may be 10 years or 15 years. But, I think the BLS is doing a decent job at this. It’s not a perfect science. And I don’t think it’s that we’re dramatically understating inflation. I think it’s that the economy is in—frankly, in its shape, there’s not a lot of pressure on prices. But again, if the banks start lending $1.6 trillion, and again, if inflation—if interest rates start moving up, they’re gonna have a big incentive to do that. The Fed could try to pay more interest to bribe them to keep the money from getting into circulation, but that becomes kind of, again, another kind of Ponzi scheme situation where you have to kind of print money to try to stay ahead of the ball game here. If you print money to keep people from lending out the money, and that leads to interest rates going even higher, then you’re gonna have to print even more money, and it becomes something that you lose control over. And many, many countries have gotten into this boat. 20 countries in the last century ran hyperinflations. And it wasn’t because they had central bankers who didn’t think they could control things. They all had central bankers who thought they were in charge of prices, and that they could stabilize prices. But they weren’t able to.

JASON HARTMAN: Just one thing I wanted to say to listeners who may be a little new to this stuff. You talked about how central bankers like Bernanke at the Federal Reserve are only in control of one side of the equation, and that’s the monetary policy, not the fiscal policy. So, government controls fiscal policy, and that’s taxing and spending. Monetary policy—creation of fake money, or fiat money, is controlled by central banks like the Federal Reserve.

LAURENCE KOTLIKOFF: Let me just say, that’s true, except that when the federal side doesn’t have enough tax revenue to cover its spending, then they go to the monetary authorities and try to have them print money to pay for the things they want to buy. And so, monetary policy is very much an element of fiscal policy.

JASON HARTMAN: Sure, sure. They most definitely interconnect, for sure. But they’re just not under direct control of each—talk about the time frames, if you would, for a moment. Because I thought the time frames were actually much shorter. On this call, you cheered me up just a tad, maybe. Because I really have always kind of called it the $60 trillion time bomb. I’ve heard people say it’s $110 trillion. You say it’s $211 trillion, and of course, that always depends on the time horizon. Because the time and the amount at which we’re underwater—they interplay with each other. And so, the $60 trillion part—I was always thinking that that was about 15-20 years out. By the time we’re at 2025, 2030, we’re underwater about $60 trillion, with the entitlement expectations. Is that true, or is the $211—

LAURENCE KOTLIKOFF: The only number worth thinking about is the $211 trillion. All the other numbers are made up by actuaries or accountants who don’t really understand economics. None of the numbers actually have any ground whatsoever in economics. First of all, there’s this labeling problem, which is that how you label receipts and payments will affect how you project the cash flows to be over the next 20 years, 30 years, 50 years. It’s only this infinite horizon present value calculation that’s label-free. So, we have a problem in economics where certain measurements are not well defined. Just like in physics, time and distance aren’t well defined. In economics, the deficit, current taxes, current transfer payments, they’re also not well defined.

Because you know, your Social Security contributions this year, Jason, I could call those a loan from you to the government. In other words, we could view that as borrowing by the government, rather than a tax from you to the government. And your future Social Security benefits, we could say hey, part of those benefits are not a transfer payment, they’re really a repayment of principal plus interest on this loan that I’m making to the government this year. So, we’re free to use whatever language we want. These things are not concrete. But in present value, you see the true story, which is $211 trillion. So, we’re not broke in 20 years, or 30 years. This is a credit card bill that’s due today. It’s $211 trillion. It’s not in the future that we’re broke. We’re broke today.

JASON HARTMAN: So, where does the 75 years come into play, then?

LAURENCE KOTLIKOFF: The 75 years is some accountant, or some David Walker, who’s a lovely guy, who’s the head of the General Accountability Office for many years. He came up with this calculation. Social Security actuaries do a 75 year projection. But they’re also doing an infinite horizon projection. Why did that happen? Well, a very good economist named Kent Smetters was involved under the second Bush administration in advising the actuaries, and he got them to put it into this infinite horizon calculation. That’s the one people should focus on. And if you look at that calculation and take, well 4B6 of the Social Security trustee’s report for 2012, you’ll see that Social Security is 31% underfunded. The 75 year projection is about a third of the problem, in terms of the calculation. So, again, these truncated calculations make no economic sense.

It’s just like saying, gee, the measurement of the distance of this table that I’m sitting in front of today is a certain size, and that’s the absolute truth, but Einstein taught us that the size of this table can be dramatically larger or smaller depending on our frame of reference, our language, our labeling, in effect. And that’s the same thing in economics. So you need to be focused on the infinite horizon present calculation. And it’s in Table 4B6 for Social Security. It’s not being done for the entire government sector, except by people like me, an economist. The IMF actually did the calculation. They came up with a number for the infinite horizon that’s even bigger than $211 trillion. They did that last summer. So, there’s a right way to do economics, and the wrong way. And it starts with having actually an economist doing the calculations.

JASON HARTMAN: Let me take a brief pause; we’ll be back in just a minute.


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JASON HARTMAN: Yeah, another one of your words is entitled Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking. Now, I assume you’re referring to the Jimmy Stewart of It’s a Wonderful Life. Tell us about that, and limited purpose banking.

LAURENCE KOTLIKOFF: Okay, so this is a proposal for how to fix the financial sector. The financial system. And the financial system is a trust me banking system, where the bankers say, trust me. Give me your money. I’ll be safe with it, I’ll pay it back, and then they go off and gamble, and if they make a killing, they take the upside, if they lose money, they turn to the taxpayer to bail them out. So, they don’t let people see what it is they’re investing in. So, it’s opacity and leverage. They’re borrowing, and then they’re investing in things and not telling you what they’re doing with your money. So at the slightest sign that they’re engaged in some kind of fraud or malfeasance, people want their money back out. So you can have runs quite rapidly occur.

And you saw this in It’s a Wonderful Life. Jimmy Stewart, this very honest banker, experiences a bank run on, I think it’s Christmas Eve or whatever, and he barely escapes insolvency for his bank. He tries to commit suicide, he finally gets rescued by an angel, he comes back and makes a great speech, and he saves his bank. But you see in that movie, the fragility of the banking system. You see the dependence of all the trust on one person. And as soon as people start losing trust in Jimmy Stewart, that’s it. Now, that’s the situation we have here. We have all these people at the top of these banks, who are the only ones who really know what the banks are doing. In the case of JP Morgan we see that Jamie Dimon doesn’t even know what his company’s up to. And as soon as people lose trust, they start moving away from the banks. And that’s where you have runs on the bank. So you have a very unstable financial system, and that’s what we saw in 2008 when all these different financial companies went broke, went down.

We saw trust take a holiday. So, limited purpose banking is a very simple reform. It’s been endorsed by five Nobel Laureates in economics—actually seven, at this point, including two guys who got it for finance. It’s been endorsed by George Shultz, a former Secretary of State and Treasury, Bill Bradley, Robert Reich, former Secretary of Labor—just a long list of very prominent policymakers and economists, in addition to the Nobel Laureates. And here’s what it does. It says looks: let’s take all the financial corporations and make them operate as mutual fund holding companies that issue 100% equity financed mutual funds. And let’s do all the financial intermediation through 100% equity financed mutual funds. A mutual fund is like a little bank that takes in its money by selling shares, and then it invests in the things that it specialized in. So mutual fund, because it’s not leveraged—it’s not borrowing—cannot go bankrupt.

So, limited purpose banking changes all the banks into non-leveraged mutual fund companies, and they can never go broke again! And then, the other aspect of limited purpose banking is that there’s a single government agency called the Federal Financial Authority that discloses and verifies on the web, in real time, all the details of the securities that the mutual funds would be buying and selling and holding. So you have full disclosure. So, the two problems that occurred in 2008, and are still plaguing us, are opacity—in other words, lack of disclosure, lack of transparency—and leverage. Limited purpose banking turns the lights on, and it also eliminates the leverage of the banking system. And it moves us from trust-me banking to show-me banking.

JASON HARTMAN: That’s a great way to put it. The question is, could it even happen? Because, like everything in life, and this country is just degraded in so many ways, with this problem, there’s so many entrenched interests who have set up these iron triangles that want to keep things the way they are, because they’re all prospering from them. And with limited purpose banking, who would be the loser? I assume all the traditional bankers that are doing it the way—

LAURENCE KOTLIKOFF: Traditional bankers—

JASON HARTMAN: I don’t want to say traditional, because that’s only a fairly modern tradition. But I guess it’s the traditional banker, the older banker—who would lose, in that system, and who would block this type of reform?

LAURENCE KOTLIKOFF: Well, the big banks wouldn’t be happy with this. But we have to realize that limited purpose banking is already, in large part, in place in the US. We have a mutual fund industry; about 25% of our mutual funds—excuse me, it’s 25% of our financial assets, and our financial intermediation, is occurring through equity financed mutual funds. There is a small segment of our mutual funds—well, not that small. But our money market funds, but they’re leveraged, because they’re making a promise to back the investments to the buck, and that’s really a form of leverage. So that would not arise under limited purpose banking. So, we have a glass, it’s about 25% full already. You could move to limited purpose banking on a asset by asset basis, so you could start with, for example, mortgages.

If you go to a mutual fund system for mortgages, you end up with what they’ve had in Denmark and Sweden and Germany for centuries, really, which is the covered bond mortgage system. So, there’s a bill in Congress to move our mortgages market to a covered bond system. This would be moving to limited purpose banking on that asset. So, we could do this asset by asset, and actually get there pretty quickly. Now, yeah, there will be opposition. Very well [unintelligible] opposition. But the public has a lot more votes than the bankers. So the real issue is getting the word out to the public. If enough people read Jimmy Stewart is Dead, go to the Purple Financial Plan, which is on my website—it’s a website that I set up for fixing the financial system, and then I’ve got other purple plans to fix other things, like healthcare, and Social Security—

JASON HARTMAN: Why is it called the purple plan?

LAURENCE KOTLIKOFF: Purple is to say that this is something that both red republicans and blue democrats can agree to. And red plus blue makes purple. So, we can get behind a reform that would actually work. The fact that so many prominent people have endorsed this—the fact that Mervyn King, who’s the governor of the Bank of England has publicly spoken about limited purpose banking, and said it deserves serious consideration; the fact that I’ve been asked to go talk to heads of central banks in Sweden and Holland, and in Ireland—last week I was asked to speak about limited purpose banking to the Federal Reserve Bank of New York; I spoke about it in China. So, the word is getting out. There is a way to fix things, and keep us safe. If we had limited purpose banking in place in 2008, we would not have had a financial collapse of any kind. If they had limited purpose banking in place right now in Europe, we would not be seeing a sovereign debt problem. We wouldn’t see Greece being forced to possibly leave the Euro, which again, I don’t think is really going to help it. We would not have the prospect of a massive run starting this week, this coming week, in Greece, which could easily spread to Spain and Italy, and all the other—

JASON HARTMAN: Portugal, yeah.

LAURENCE KOTLIKOFF: Portugal, Ireland, and into Belgium, France, and it could come right across the ocean to the US, because the system as created is extremely fragile. We’ve got a system that’s built to fail. Mervyn King, who’s the governor of the Bank of England—he’s been the governor of the Bank of England for many years now. He’s a very distinguished economist, a brilliant man. He described the design of the banking system as now exists, as the worst possible design, in a speech in 2010 in New York called the Buttonwood Conference. That’s where he was speaking. And in that speech, he said, we need to have radical reforms. There are three or four proposed—four proposals for radical reforms. He went through three of them, and he rejected them in his speech, and then he came to limited purpose banking and he said, this proposal deserves serious consideration. So, all you have to do is look at his speech, and you see where he’s coming from on this. Now, he’s Bernanke in the UK. So—

JASON HARTMAN: And I like—I’m looking at the website now. I like your much flatter tax system. I mean it is—the federal tax system is totally broken, there’s just no question about it. It’s gotta be simple, flat, transparent.

LAURENCE KOTLIKOFF: Yeah, this is the purple tax proposal, which is really a very simple proposal for fixing taxes. I don’t know if you have time, but I can tell you about that?

JASON HARTMAN: Sure, I’d love to hear it! But I can instantly think, the whole, like you said—people have more votes than bankers, but the problem is, bankers have more lobbyists than people. And I can see instantly with your first point on the principles of tax reform with the purple plan, you know, the CPA lobby is gonna be lobbying against that. It’s just such a mess! But go ahead, tell us about it, if you would.

LAURENCE KOTLIKOFF: I think good ideas will take over. I think they’ll drive out bad ideas and bad policy. I’m confident. Maybe I’m overly optimistic. But, as all this is described in more detail in The Clash of Generations, how to fix the economy, and how to save ourselves personally, because the politicians may not fix things. But it’s very simple, how to fix the tax system. You get rid of what you’re doing now, which is a mess. You get rid of the federal income tax. The personal federal income tax, you get rid of the corporate income tax, which is really a tax on workers, not a tax on rich people. Because the corporations can move to other countries where they pay less taxes.

JASON HARTMAN: And they certainly do that. They have no loyalty to US shores. And you look at Apple did that with California, a more micro example of it, how they skirted a whole bunch of California tax by simply setting up another division in Nevada.

LAURENCE KOTLIKOFF: Yeah, absolutely. This happens all the time. It really just leaves the California workers behind. Boeing is moving out of Seattle for competitive reasons. Or, Washington State. Trying to move to California—or, I think, South Carolina. There again is another example of corporations being able to move, leaving workers behind. So, get rid of the corporate tax, which will produce lots of investment in the country, because we’ll have the lowest corporate tax rate of any developed country, which is zero. Get rid of the personal income tax. And then do the following. I’d also, get rid of the state and gift tax, which is another employment act for lawyers. And all this may sound very regressive, before I even say what I’m going to do, to some of your blue listeners. But let people understand, I’m not a republican or a democrat. I’m an independent. I think we need to have a highly progressive tax system that treats the poor much better than the rich. And here’s how I would do that.

I would take the payroll tax that we now have, and make it highly progressive. It’s the most regressive tax that we now have. I would turn that around and make it highly progressive. I would take—I would start taxing consumption. Retail purchases at the store, I’d put on a federal retail sales tax, and I would not only tax our purchases of consumption at the store, but also our consumption from sitting in our homes and enjoying our other [unintelligible]. We’re getting consumption services from those, and they would be subject to the same tax rate, which would effectively be 15%. So we’d have 15% payroll tax at the top. There would be no COM on the payroll tax, so, rich people would pay taxes on every single dollar they earn. The poor would only pay 7½% up to $40,000—I mean, workers would pay, the tax would be only 7½% up to $40,000, and then 15% above that. So we make it a highly progressive payroll tax.

You have this consumption tax, plus it comes with a demogram. A monthly payment to each household that’s large enough so that poor people will get a monthly check that’s big enough to cover their payments of the sales tax at the store, so that they will pay no sales tax on net. In other words, the consumption tax on balance with the poor will be zero. And I’d also maintain, by the way, the earned income tax credit and run it through the payroll tax, because that’s one of our major welfare programs. It’s very important to have, for tax [unintelligible] to maintain the earned income tax credit. And then I have a progress inheritance tax where the first million dollars of gifts or inheritance that you receive is tax free. Above that, you pay 15% on anything above that. So, we have a 15, 15, 15 plan that’s highly progressive. The top rate is 15, 15, 15. And nobody has to send in an annual tax return. So, people that like the fair tax, because it’s very simple and transparent, and you don’t have to send in a tax return, should love the purple tax, because it also has that feature. Those features, that you don’t have to do an annual tax filing. Neither businesses nor individuals have to do that.

JASON HARTMAN: Quite a bit simpler, for sure. Just kind of, in wrapping up here, what do you see? What does our future look like? Hopefully some of these reforms will occur. That would be very helpful. But a realistic view of our future out the next 10 years or so, 15 years. What can people expect?

LAURENCE KOTLIKOFF: Well, the most realistic view is pretty bad. Because we’ve spent decade after decade—really, six decades—running this massive Ponzi scheme. We have all these liabilities are off the books. By careful choice of labels, Congress has kept most of the $211 trillion fiscal gap off the books. The official debt’s about $11 trillion. So you’ve got about $200 trillion that Congress isn’t publicly telling us about, that we’ve been ignoring. So, unless we do radical surgery of the type that I’m outlining in the purple plans—and they do get the fiscal gap down to zero, and even make it negative, if we do all those things in the purple plan, including the health reform—unless we do these things, things will just get worse and worse, and it’ll be too late to really save the day. And we will end up with hyperinflation, and a really tough situation. Because I don’t see either party coming up with the proposals needed to really address what’s necessary.

JASON HARTMAN: Can you put a number on what you call hyperinflation?

LAURENCE KOTLIKOFF: Well, for us, a 10% inflation would be a real shocker. But, hyperinflation is 50, 100%, price increases a year. And then it can go up from there. So, I think for us, we’re going to see—if things continue this way, we’re not immune from standard economic law, which is that if you print more and more money, and you inject it into the economy, it gets out there, it will lead to price increases. The correlation over the centuries between the money supply and the price level—not on a monthly basis, or daily basis, or a yearly basis, but over decades—there’s a very strong correlation. And it will continue. It will effect us. It could be that I’m wrong, and that I’m overly pessimistic, and that the Chinese will start using the dollar instead of the Yuan, but—

JASON HARTMAN: That would be funny.

LAURENCE KOTLIKOFF: Well, yeah. More likely, people will start using the Yuan, and other currencies that are going to retain value, and there will be a movement away from the dollar. The pound used to be the world’s currency, but that lost value after World War II. It lost it’s role as the world reserve currency. So, that will happen to the dollar as well, unless we change our way.

JASON HARTMAN: Give out your website, and tell people where they can learn more, if you would.

LAURENCE KOTLIKOFF: So, it’s, will give you all access to all the purple plans, where you can go and read about the plans, and endorse them if you like. The Clash of Generations is the new book with Scott Burns, that tells you about the magnitude of the problem, and how to save your own—yourself, if we can’t save the country. And Jimmy Stewart Is Dead is this book about how to fix the financial system. It’s not a how-to book; it’s primarily a book about, from an economist’s perspective, about what really happened here. How to really understand the financial crisis. It’s only at the end that I talk about limited purpose banking. So, I think people will enjoy—even if they’re not into the details of how to fix the financial system, which are only two short chapters long, because it’s a very simple fix—they’ll enjoy I think the rest of the book.

JASON HARTMAN: And I have to ask you one more question, because you mentioned it—what people can do on an individual level, to help solve their own problems. Assuming the world is going to hell in a hand basket, as it may well so, what can they do?

LAURENCE KOTLIKOFF: One thing we can do is to make the most of our current situation in terms of getting the highest living standard safely. And I’ve developed, through my company, this offer program, we have a basic version of it, which was rated #1 by Money Magazine as the best financial planning program on the web. It’s perfectly free. If you go to, this simple version of our software can be run for free just by clicking begin planning at the bottom. And you can find ways to safely raise your living standard. For example, using a Roth versus an IRA: which is better? Well, this program can help you figure that out. Should you take Social Security at this age versus a different age? Should you convert your IRA to a Roth? Should you take a job in Texas, where the pay might be lower, but there’s no state income tax, and the housing costs are lower? These are the kinds of things that you can decide very quickly with our software. And that’s one answer. The other thing is that the book is full of suggestions, The Clash of Generations, suggestions about how to improve your financial situation. And one thing is, not to get taken by brokers. Not to spend a huge amount of money with these folks who typically underperform the market.

JASON HARTMAN: Very good points. Alright, well good. Larry Kotlikoff, thank you so much for joining us today. Interesting, scary, but it’s better to be aware than sticking one’s head in the sand, because there are some defensive strategies, and really some offensive strategies, people can take in their personal lives. So, keep up the good work out there. And keep promoting the purple plan. I would love to see reform in this area. It would just be a wonderful, wonderful thing. Thank you.

LAURENCE KOTLIKOFF: Thank you, Jason. I really appreciate your having me on.


ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit, or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate, or business professional for any individualized advice. Opinions of guests are their own, and the host is acting on behalf of Empowered Investor, LLC. exclusively.

Transcribed by David

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