Craig R. Smith is the Chairman of Swiss America, a national investment firm specializing in U.S. gold and silver coins. He is also the author of, “The Great Withdrawal: How the Progressives’ 100-Year Debasement of America and the Dollar Ends.” He joins the show to give good examples of progressives today. Mr. Smith founded his company in 1982 out of a bedroom in his home with $50.00. It has since grown into one of the largest and most respected firms in the industry known for its dedication to consumer education and safety.
Mr. Smith is an expert in many forms of tangible assets including; oil, precious metals and U.S. numismatic (collectible) coins. He is often sought after by the media for his common sense insights on breaking news, world events, and financial trends. Over the past two decades Mr. Smith has been interviewed on over 1,500 radio and TV programs. He has also been featured in various print publications. These include: FOX News, CNN, CNBC, ABC, NBC, CBS, PBS, CBN, TBN, Time, The Wall Street Journal, The New York Times, and Newsweek. Craig is a frequent guest on Fox’s Your World with Neil Cavuto and Harvest TV’s Money Moment. He also writes a weekly editorial for WorldNetDaily.com.
Mr. Smith’s free market economic worldview offers audiences a breath of fresh air amid today’s failed ‘big government’ approach. He believes we need a revival of self-government and free market principles to help rebuild the American economy; unlike the current administration’s belief in multi-trillion dollar ‘cradle-to-grave’ government dependence.
Mr. Smith’s latest book, “THE GREAT WITHDRAWAL: How the Progressives’ 100-Year Debasement of America and the Dollar Ends” explores why Detroit failed, why other liberal cities may soon follow, and how this could drag America into insolvency and prolonged Depression. As a result, freedom-loving Americans have begun a historic withdrawal march – withdrawing their resources, time and talent in search of a restoration of self, family and local government.
Smith explains how important the next Election cycle is to the future of the world. He thinks this can be the end of Progressivism if the Democrats keep getting their way.
The conversation then shifts to how American citizens can decentralize and diversify their lives to survive and prosper. Smith shares some ways that people can protect themselves and their families in today’s shaky, vulnerable economy.
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 this is episode #369. Our guest today will be Craig Smith from Swiss America talking about some economic issues, which I think you’ll find very interesting. But I’m going to fit as much as I can in here with Steve, talking about a few things before we get to our guest. Steve, welcome. How you doing?
STEVE: Good! You’re gonna try to cram a bunch of stuff in with me as the guest?
JASON HARTMAN: Yeah, well, you’re not the guest. You’re just the co-host of the intro portion.
STEVE: Well, I think of myself as the guest.
JASON HARTMAN: I think you’re a guest too. Hey, we want to talk about a few things. One of them is rent-to-value ratios, and a few different things. So, let’s dive in real quickly here, Steve. I know our time is limited.
STEVE: Yeah, it is. Well, we’re trying to focus more on the how-to stuff, for our clients that are buying real estate, and holding it as rentals, and today, I have great news for everybody listening, because people seem to be really concerned about property management, and how good that service is. And they should be, right? Because this investment model is very much centered around property management. But I have good news! Did you know that if your property manager is doing a crappy job, you can fire them?
JASON HARTMAN: [LAUGHTER]. I hope they know that!
STEVE: Yeah, that’s great. I hope it’s not groundbreaking for many of you. You don’t have to put up with their crap. So, these property management contracts call for them to perform certain things, and if they’re not doing that, they’re in—what’s the term? Breach of contract, right?
JASON HARTMAN: Right.
STEVE: And you could terminate on those grounds. I had a client where he just wasn’t happy with the manager the other day, and he called me, and we talked through it and said, okay, we’ve gotta fire this manager. We interviewed a couple of other managers. He found one that he was comfortable with, they signed a new agreement, they went and picked up the keys, they’re now managing the property, and everything is running very smoothly. And what he did on the second run is something that I would suggest that everybody do. When you’re going on board with a property manager, don’t just sign the agreement and fade off into the background. That’s what many of them want you to do. They want you to just shut up and pay the fees, right? Well, you need to have a talk with the manager about your expectations.
Now, they can’t be outlandish, they can’t be, I want a phone call every week. None of that stuff. But things like, hey, look. If the property goes vacant, here’s how I want to be notified, and how soon. If this happens, this is how I want it to run. Let them know that hey, look, you might deal with most of your clients this certain way, but I’m not most of your clients, right? You can’t be so demanding that they just don’t want to do business with you, but they just need to know that look, this guy, he wants to be communicated with in a certain way. so, that way you can break that mold of the traditional view that people have of property managers, and have a better experience.
JASON HARTMAN: Yeah, well, that’s good advice, Steve. It really is up to the individual. It’s up to the investor. You’ve got to be engaged a little bit in this process. As I say a lot, there’s no such thing as a truly passive investment. That simply does not exist. And it certainly doesn’t exist if you want to make money. Maybe if you just want to lose money it does. But no such thing as a really passive investment. So, you’ve gotta be a little bit engaged. You’ve gotta be responsible. You’ve gotta set the tone of the relationship, and set some expectations with that property manager. And one of the great things that we offer through our network is the leverage of aggregating so much business and so many client referrals to these property managers. So, the manager really does, even if you only have one or two properties with them, they really do care more. Now, sometimes we don’t feel like they care enough. But—
STEVE: Yeah, that happens.
JASON HARTMAN: But you ought to try doing this yourself, without us. And then see how it goes.
STEVE: Yeah. Sometimes they just check out, and there’s nothing anybody can say to them. And you know, in that case, we help you switch to a different one. That’s when they’ve gotta go.
JASON HARTMAN: Right, absolutely. Well good! Anything else on that?
STEVE: Well, we’re in a hurry, but not on that. That’s just my groundbreaking news: you can fire them. So, call your investment counselor if the property manager’s just consistently underwhelming. Have a talk about it. We can tell you if what they’re doing is kind of the standard, and if you should live with it, or if it’s beyond what they should be getting away with. Feel free to talk to your investment counselor about that.
JASON HARTMAN: Yeah, absolutely. That’s one of the great things, is we can offer an outsider’s perspective where we don’t have an agenda, we don’t make any money off the property manager. We don’t have an agenda to keep you with any particular property manager. We are agnostic to property managers. We’re agnostic to areas. The only thing I would say where maybe we’re not is that when we have a lot of leverage over a certain manager because we’ve sent them a lot of referral business, usually you’re gonna have a better experience with that person. I mean, not usually. But 99.9% of the time. And we do recommend for a reason, because we exert leverage.
STEVE: Exactly, exactly. And, kind of moving off of that, but staying on real estate related topics, we wanted to talk about rent-to-value ratios very briefly, and you’ve been saying this for quite some time, that the rent-to-value ratios are going down.
JASON HARTMAN: No question about it. And I predicted that they would go down. I mean, Steve, everybody tries to make assessments, and make decisions, based on the rear-view mirror of their life experience.
JASON HARTMAN: We do this personally, we do this in business—I mean, let me give you a couple examples, okay? Things have obviously changed in the working world. I mean, a couple of decades ago—well, a few decades ago, I should say—the typical career idea was, I’d get hired by a company, I’d work there 40 years, I’d get a nice pay package, I’d have nice benefits and perks, and I’d get a gold watch when I retire. And the expectation was job security, and that certainly doesn’t exist nowadays. As we age, we have expectations of our bodies, and they can’t do what they used to do, right? We’re all mortal. And hopefully that’ll actually change. I’m doing a new show on that called the longevity show, and it’s been really interesting interviewing a lot of experts on that, because I think that one is up for a little bit of negotiation.
But not completely [LAUGHTER]. And we have expectations about our relationships, too! How many times have I thought, or heard a single guy or gal say, heck, my last girlfriend, or last boyfriend, was better looking, made more money, was nicer, whatever? Things change! Okay? My last job paid better than this job, right? Things change. And that is so true with investing, and so true with real estate. Many years ago people were playing the Wall Street game, where you just put your money in, you let it ride, and for certain times in history, people did okay with that plan! It doesn’t work anymore, okay? Things have changed. Well, they’ve changed with real estate investing, too. It ain’t what it used to be. You’re not gonna get the kind of rent-to-value ratios you used to get. And it’s getting worse.
Now, maybe if there’s another big crash, it’ll get better again for a while. And then it’ll get worse. There are always cycles. This is really the same thing that happens in what’s called the business cycle. And the business cycle is sort of a complex economic concept, and you can just look it up; I’m sure there’s a Wikipedia entry that will explain. But certain times credit becomes easy, and people go out and do things because credit is easy to get; they buy properties, they expand their business, they expand their inventories, and then they react in a certain way when inventories bulge in a business—they lower prices, and then all the buyers flood in, and then they raise prices, and then inventories shrink because they’re diminished—things all work in a cycle, right?
STEVE: Yeah. Well, let me ask you something that I’m sure the listeners are all asking themselves, then. If the rent-to-value ratios are getting worse, do I hit the sidelines until we have some other kind of a meltdown, or should I keep investing even though the ratios are down?
JASON HARTMAN: Well, I would certainly not say hit the sidelines. Now, I gotta tell you something. I had an interesting call with one of our clients just about three days ago. And he’s been following us for a long time, and he said to me, you know, Jason, one of the things I really like about you is that at the worst part of—well, really not the worst part. But kind of right before the collapse, when we were sort of on the crest of the wave in the cycle, you were actually telling me not to buy! And I was! I was saying that to a lot of our investors. To my own consternation, okay?
STEVE: It’s not in your best interest to say that, that’s for sure.
JASON HARTMAN: It’s not. But one of the nice things is that I’m comfortable. I don’t need to worry about it. It’s not a big deal. I’m much more interested in the longer term game plan of my business and my life and my mission, and you know, I hope everybody’s like that, and unfortunately, we’re not all like that. But, that’s where I am, or I’m trying to be, at least. And right now is still a very good time to be investing. It’s not as good as it was two years ago, and two years ago is not as good as it was three years ago. So, why is the RV ratio changing? Why is the rent-to-value not as desirable as it used to be? It’s because prices have gone up. And rents do react and go up; they aren’t correlating indicators with price, but they’re not as fast. They’re much more sticky. They’re slow to react. And so, you can have prices go up much more quickly than rents go up. And the reason for that is that every rental is pretty much—not every rental, but the vast majority—are set up on one year leases. And so, those one year leases always start and end at different times, and owners will generally try and raise rent every year. At least if they’re good owners they will, okay?
And the idea number right now is I would say 4% per year, if you can get it. Sometimes you can do better, sometimes you can’t do that well. It’s a cycle. But prices have gone up, rents are slowly following, but there’s always a lag time in that. And so, just to really bum everybody out and make them feel the coulda shoulda woulda really badly, okay, I’m gonna do that to you right now, listeners. And I apologize in advance. At the worst part of the market, we had high quality properties, and in places like Indianapolis, which is one example, where the rent-to-value ratios were 1.2, 1.3, and 1.4%. Steve, do you remember that?
STEVE: I do. And people were scared the market was melting down and the world was going to end!
JASON HARTMAN: All the news was bad in the media. It was literally, you could not find a glimmer of good news in the news media.
STEVE: You could not.
JASON HARTMAN: You dig and dig and dig, and it’s like, nothing was good. You didn’t hear any good news. But many people bought properties at that time, and they could pay—an example would be a $100,000 property that would rent for $1200, $1300, or even $1400 per month. And with lower quality properties, you could even do better, where you’d get a 1.5 or above RV ratio. I mean, wow. $100,000, $1500 a month or even better. But you know, lower quality tenant, and that’s always true. The lower the quality of the property and the tenant, the higher the perceived ratio will be. And I’ve talked about that extensively, so I’m not gonna go into it now, because you have some collection problems and things in the lower end that affect your true RV ratio. So, let’s not get into that. But right now, what are you seeing in RV ratios, Steve? I mean, why don’t you say? You’re on the front lines. I see it from a broad perspective, but you see it every day when you’re talking to a client about a specific property.
STEVE: Well, how about a real life example? Because we wanted to do a pro forma before we ended the intro portion of the show anyway.
JASON HARTMAN: Okay, good. Go for it.
STEVE: We’ve got a property in Indianapolis here, and that’s the example you used before, and this is built in 1989, so I would consider it to be one of those tier 1 properties. If you’re early on in your acquisitions stage, I tell all my clients, buy properties that rent for a $1000 or more per month. They tend to be more stable. And that’s what you want to stack up in the early phases of acquisition. So, this would qualify as one of those. It’s 1590 square feet, and the monthly projected rent on it is $1200 a month.
JASON HARTMAN: And it’s good looking.
STEVE: It’s a good looking house. And it’s in a good part of town. The purchase price on it is $122,900. So, we are just barely underneath a 1% RV ratio in Indianapolis.
JASON HARTMAN: Yeah, because the projected rent there is $1200 a month, so you’re just basically at 1%. I mean that’s close enough for government work to call it a 1% RV ratio. Okay, so, in this case, I mean, this is a property that three, four years ago you probably would have seen this property would have been maybe $90,000? I don’t know.
STEVE: Yeah, 90, 95, it really depends. And the rent would have been about where it is now, maybe slightly less, but not much.
JASON HARTMAN: It might have been $1150 rather than $1200, or something like that.
JASON HARTMAN: So, we gotta—in life, we really can hurt ourselves by trying to make decisions by looking in the rear-view mirror. We gotta make decisions based on what’s available today. And stop thinking, I coulda shoulda woulda. It’s that poem that I’ve read many times, the Reluctant Investor’s Lament. If you want a copy of it, go find it at www.jasonhartman.com; it’s on there, you can just search it, or you can ask your investment counselor, they’ll get you a copy of it. And it says, I hesitate to make a list of all the countless deals I missed. Bonanzas that were in my grip, I watched them through my fingers slip. And that’s because the guy kept looking at yesterday, and kicking himself, and saying, I coulda, I shoulda, I woulda, but I didn’t! And, you didn’t. It’s over. It’s done. Get over it. Move on, and do what you can today, based on what you have to work with.
STEVE: Exactly. And put your capital in play in the best possible area. And I would still argue that real estate is at the top, if not one of the very top of those areas.
JASON HARTMAN: Oh my God, there’s nothing—nothing’s as good as income property.
STEVE: Exactly right.
JASON HARTMAN: The only other thing that can even compete is starting your own business, and that’s a whole complex subject, okay?
STEVE: Yeah, you think property managers are a pain. Try employees.
JASON HARTMAN: Yeah, well. That’s for sure. So, look at this property. This is a fantastic deal. The overall return on investment is projected at 34% annually. 34% annually! You can’t do that anywhere else. I mean, that’s just unbelievable.
STEVE: Yeah, you’ve still got cash flow on the property, but you’re also experiencing the benefit of growth, which we always tell you, don’t invest just because of growth. You’re not a gambler. You’re not putting it on 27 black, right? But you’ve got cash flow today; you’re making money today. In the bank, your money is just eroding away due to inflation. But you’ve got good cash on cash, but your total return is great, because the tenant is in there, paying that principal down for you. You’re getting growth in the market, and you’re getting inflation-induced debt destruction during all of this.
JASON HARTMAN: Right, right. So, income property is a multi-dimensional asset class, and the famous thing I always say—even if it only goes half as well, your return would be projected there at 17—what is that, 18%? No, 17½%, right? Or no, 17%. So—
STEVE: We’re not great at the math part here.
JASON HARTMAN: I know, I’m trying to think on my feet here.
STEVE: Way to unwind everything we just said, Jason. Way to go.
JASON HARTMAN: You know what? Just to be really good, people, I’m not gonna ask my editor to take out my idiot move I just made, okay? Leave it in. So, fantastic. Great return opportunities. So, enough on that. Get in, make it happen, I mean, we’re not asking you to invest in something here that’s got a 1% annual return, or a negative return like the stock market does so many times, depending on where you invest there. So, good. Good stuff. Okay, Steve? Well hey, let’s get to our guest today. And we’re gonna be back on future episodes, we’re gonna talk about Janet Yellen a bit, our new Fed Chair, and what that means for real estate investors, and the future of the economy in general, and just a lot more great stuff coming up. But let’s get to our guest, and we will be back with him, in just a moment.
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JASON HARTMAN: It’s my pleasure to welcome Craig R. Smith to the show! He’s chairman of Swiss America; you’ve probably heard of that company. He’s also author of The Great Withdrawal: How the Progressives’ 100-Year Debasement of America and the Dollar Ends. Craig, welcome! How are you today?
CRAIG R. SMITH: Jason, I’m doing great. Thanks for having me.
JASON HARTMAN: Good, the pleasure is all mine. Hey, are you coming to us from the greater Phoenix area?
CRAIG R. SMITH: I am indeed. I’m actually on the east side of Camelback Mountain right now.
JASON HARTMAN: Fantastic. Well, we’re both in the Valley of the Sun, then, where we’ve got this magnificent weather. So, what are some good examples of progressivism today, and what it’s doing to our country?
CRAIG R. SMITH: Well, you know, when Lowell and I sat down and wrote the book, we went back historically, and looked at progressivism and what its real nature is. And probably a better way to put it, Jason, would be to talk about collectivism. If you were to go through—I know people will bristle when I say this, but whether it’s Stalinism, Leninism, Communism, Maoism—
JASON HARTMAN: Marxism—
CRAIG R. SMITH: Marxism. All the –isms—
JASON HARTMAN: Obamaism [LAUGHTER].
CRAIG R. SMITH: Yeah. All the collectivists believe that the collective is more important than the individual. And we believe that it’s the individual, and their personal freedom, and their personal liberty that allows them to be creative, to make the nation a greater nation. And of course, we first saw this occur in 1912 when out first openly progressive politician, by the name of Woodrow Wilson, who was the president of Princeton University at the time, became our president. And he was very vocal about it. He believed in having federal income tax, and he believed in many open policies to, if you will, help other people. Well, there was only one problem. The federal income tax had been found unconstitutional several times by our Supreme Court. So, if something is unconstitutional, well, by golly, let’s just change the constitution!
And next thing you know, we have the 16th Amendment. And that set the stage on top of creating the Federal Reserve system, which is a central bank, and then we could go into the other changes that he made, set the stage for Franklin Roosevelt, who during the Great Depression recalled gold. Basically put work programs into place. Again the collective—put Social Security into place to make that people who were in trouble had somebody to protect their retirement, and then of course, Mr. Johnson came along in 1964 with the Great Society. So, while I don’t believe that they’re evil, nefarious people that are trying to destroy the nation by their progressivism, they’re just unfortunately, their intentions are good, but the net outcomes of progressivism have always been negative, and that’s why we’re trying to change that direction through the book.
JASON HARTMAN: Yeah, I’m not even sure if their intentions actually are good. People like to give them the benefit of the doubt. But history and geography have proven that everywhere on the planet, and at every time in history, their policies don’t work, they make people weaker, they destroy countries, and if you want an example of it right here in the US, just look at Detroit! Look at any other place where the—and talk about a misnomer, progressives—I mean, with the most regressive policies on earth. Any of those places are in bad shape! They’re in terrible shape.
CRAIG R. SMITH: Well, it’s funny that you bring Detroit up, because as we were finishing our book, Detroit filed bankruptcy, and we actually had to go back and beg the printer to give us an extra two weeks, and we actually start the book off in the great city of Detroit, where originally 296,000 workers were pumping out an incredible amount of productivity of America. And then a gentleman by the name of Mayor Coleman Young, an openly progressive person, literally embraced unions and so on and so forth, and you know the outcome: Detroit, now, all of its population has left, and you’re right, Jason. If you look at world history, there is not one ism, if you will, that has ever survived that has gone on to greatness like we did in the United States of America. And that’s why we believe progressivism, if it’s not stopped, the end is a loss of freedom, a loss of liberty, and unfortunately, a destruction of our US dollar, which around the world is considered to be reserve currency and the crème de la crème.
JASON HARTMAN: So, why do you say ism, though? I mean, conservatism is an ism.
CRAIG R. SMITH: Yeah, I guess that’s a very fair thing to say. I guess I’d have to say, conservatism believes in the individual. Where when you talk about socialism, or progressivism, or liberalism—and see, the liberals couldn’t even really call themselves liberals anymore, because really, if you go back 100 years ago, what we considered liberals are conservative today! You know, small government, personal responsibility—that was the liberal approach in America. And I think that what progressives have done, is really allow the nation to believe, or lead people to believe, that we’re supposed to help one another. Well, I agree in helping each other! I love when Barack Obama quoted, you know, I’m my brother’s keeper. Little does he forget that that was quoted by a murderer who just killed his brother. But that being set aside—
JASON HARTMAN: Who was that, by the way? I didn’t know that.
CRAIG R. SMITH: Cain. Cain and Abel. But here’s what’s interesting. I believe in helping my fellow brother out. But not at the end of a gun barrel of an IRS agent, or at the end of a government that says, I want 50% of your income, so if you don’t want to help people, I’m gonna force you to help people. Years ago, the churches and charities and neighbors and friends took care of one another. I mean, I have a 93 year old gentleman who’s a client of the firm for years, and he went through the Great Depression. He remembers when neighbors took care of neighbors. I mean, people didn’t die on the streets of hunger!
JASON HARTMAN: Well, I don’t—let’s—I don’t know about that. Certainly during the days of—I mean, what era are you talking about? Give us a time frame.
CRAIG R. SMITH: I’m talking about 1929 through 1938.
JASON HARTMAN: Okay, during the Depression, then. You’re saying, before—well, we had Wilson before that, and then we were in the middle of FDR.
CRAIG R. SMITH: No, no. But I’m saying that when we as a nation were help—when we as a nation did not have a huge government taking care of cradle-to-grave mentality thinking people, we didn’t have people dying in the streets. And I think most people think, well, if we don’t have healthcare for everybody, and welfare for everybody, and—
JASON HARTMAN: Well, I think we should have free NetFlix for everybody too, don’t you think? People are entitled to watch movies.
CRAIG R. SMITH: [LAUGHTER]. Well, you know, it’s kind of like what we did with unemployment. You know? A book we wrote years ago called Crashing the Dollar, we cite the examples of up in Sweden, where they used to have five years unemployment, then they cut it back to three years. Guess what? They found out people went back to work in three years. They cut it back to two years, now it’s all the way down to a year. Well, we in America did just the opposite. We extended to 99 weeks, and when that ran out, people went on disability, and we just—
JASON HARTMAN: We’ve never had so many disabled people in America. This is the new thing. It’s the disability industrial complex [LAUGHTER].
CRAIG R. SMITH: And really, that is a progressive idea. That is an idea that comes from the progressive side of the Social Security, comes through SSI, and look. Social Security was a well-intentioned program. But Jason, the mathematics of it don’t work.
JASON HARTMAN: Well, it’s a Ponzi scheme.
CRAIG R. SMITH: And that’s why they’re broke.
JASON HARTMAN: Right, right. Well, first of all, I wonder, why are you willing to use their terms, Craig? I mean, the word progressive, to me, is a positive word. That should mean we’re moving forward, we’re advancing, progress. Who doesn’t want progress, right? Yet they have commandeered that word, and their policies are regressive. I mean, they don’t create progress. Obama wants us driving a proletariat car, as Thomas Woods calls it, which I think is a great way to put it. This is just ridiculous! I mean, it’s—this cronyism that goes on, it’s absurd.
CRAIG R. SMITH: Oh yeah, indeed. And I suppose I call them what they call themselves, because, you know, it’s kind of like, in discussing with you—if I was to bring up a term proletariat car, while I’m doing a Neil Cavuto show, I suspect it probably wouldn’t go over very well.
JASON HARTMAN: I don’t know, Neil wouldn’t disagree with you too much.
CRAIG R. SMITH: Well, no, I’m sure off the air he wouldn’t.
JASON HARTMAN: If it were Katie Couric, yes. If she knew what it meant.
CRAIG R. SMITH: I doubt I’d be invited back. But nevertheless, you’re right. I use their terms only because of this. In my book, there’s hundreds of footnotes, and we quote them. We look at their materials, and we look at their programs, and as you said earlier, they fail. They don’t work. And this is what I don’t think Americans think. I think so many people believe if we—if the rich pay enough taxes—well, hey, guess what? If you take every single dollar of every single rich person next year on all their income, I mean, that would just about cover half the deficit every year.
JASON HARTMAN: It won’t work. Taxation won’t work, obviously. There’s not enough to tax.
CRAIG R. SMITH: We have to go back to how this nation was built. And we need to change the systems. Welfare is on a crash course to destruction. Medicaid and Medicare. This new entitlement, Obamacare, if you will, the Affordable Care Act—you know as well as I do, Jason. It is already failing. It will fail. It could single-handedly bankrupt this nation if we’re not very careful.
JASON HARTMAN: Well, let’s talk about that for a moment, okay? So, several things here. First of all, you won’t believe who I had on the show last week. I couldn’t believe it either. But Mr. Noam Chomsky himself. So, one of the things he was saying—and he cut my interview a little bit short. I think I was grilling him a little too hard, and I think he was—I don’t think he had answers to my questions. But, one of the things he was saying, is he was defending all the various stimulus, omnibus plans of the money printing and so forth, saying that they’re working, and they work. That’s exactly what we should have done. We did the right thing. And that can be debated. I don’t think we did the right thing. I think we should stop letting the government pick winners and losers, and let the market sort them out. And it’ll happen a lot faster, and thing will rebound a lot faster if we do it that way. But the question is, how much is enough? I said to Noam, I said, so, you know, if you believe that we should just stimulate, stimulate, stimulate, then why not print up $1 million for every American citizens—I mean, even the non citizens! Heck! Why don’t we just give it to everybody? Maybe everybody in the world, we should just give a million dollars to. $7 billion times a million. And then they’ll go and spend that million dollars that we just handed them for no reason, and won’t that just create this utopian economy? I mean—
CRAIG R. SMITH: Well of course, and you and I know the answer, and you and I know that Noam is not on solid ground.
JASON HARTMAN: Right. But he says—here’s what he cites, just before you go on. Let me just give you some of his ammunition, okay? He says look—inflation is low. The economy is improving.
CRAIG R. SMITH: If by a loose definition.
JASON HARTMAN: Well, I agree with you. But it’s still a lot lower than it should be, Craig. I mean, it seems like the inflation would have hit much more severely by now. By all mathematical standards. I mean look, are you better off than you were $5 trillion ago? Well, seemingly. But there’s a lag time. And I mean, it seems like we should have more inflation by now. How are they keeping that genie in the box? Or that Pandora in the box, I should say.
CRAIG R. SMITH: Well, let’s first start with the premise, because I think you’re absolutely right. We have spent—the Fed’s balance sheet’s about $4 trillion right now, and there’s been several other trillion dollars that have been spent here and there, and another increase in our debt. And what do we have for it? Well, if you look at the official number, the BLS, which is 7.1% unemployment, you and I both know it’s closer to 14-15%. If we count the U6 into the number, the underemployed or those that just stopped looking—okay, let’s look at real GDP. If you adjust GDP, you know, they’re all talking about wow, now it’s 2.8%. Well, I would argue it’s—we have negative growth right now, not positive.
JASON HARTMAN: After inflation, you’re correct. Yeah. Absolutely.
CRAIG R. SMITH: And for Chomsky to be able to say that stimulus has worked, he’s incorrect. And you were exactly right. We went back, and we basically—and again, we can’t prove this, cuz it’s a theory. But we looked at what would happen if we had just stopped at the 887 billion dollar—
JASON HARTMAN: The first one. yeah, right.
CRAIG R. SMITH: Right. Put it in the economy. And then just sat back and allowed private business. Because keep in mind, that three trillion or four trillion of the Fed’s balance sheet has been expanded. That’s sitting on corporate balance sheets, now on bank balance sheets. That money’s available, it’s just not coming into the system. Why isn’t it? Because it’s not a matter of not enough money or not enough stimulus. It’s a matter of confidence. No business owner has confidence to take that money off his balance sheet. I’m a perfect example of it. I have a considerable amount of money sitting in the bank for an expansion program, and when Mr. Obama took office, and I watched him ram healthcare through, we’re still sitting on that money, Jason, because I don’t know what the next curveball is this guy’s gonna throw at me from Washington. So, what Chomsky has to realize is, you can print all the money in the world, but unless you have confidence in an economy, you’re not going to see it spent.
And Mr. Barack Obama has done more to under—or, to erode the confidence that businesspeople have in this nation, than any president that I can think of including Jimmy Carter. And that’s why we don’t have growth. That’s why we don’t have expansion of the economy. Not because there hasn’t been plenty of stimulus. It’s because we have horrible policy coming out of Washington, D.C. It’s always blaming the other guy, and then we have the gridlock when the republicans dig in, and it takes a leader to break those logjams, like we saw with Tip O’Neill and Ronald Reagan, or we saw with Bill Clinton and Newt Gingrich. You don’t see that with Barack Obama and John Boehner, and I don’t think it’s a direct result of John Boehner’s fault!
JASON HARTMAN: No, I agree. Obama just seems like a—he thinks he’s the emperor, or something. I mean, it’s ridiculous. The guy—he just won’t work with people. He somehow gives speeches and convinces his supporters, who will refuse to see any evidence whatsoever of reality, that he’s this reasonable guy. Yet he plays dirty! He plays like a Chicago thug.
CRAIG R. SMITH: Oh, completely. I mean, if you look at the cronyism, and you mentioned it early, the crony capitalism that has gone on during this administration—and look, we’ve had it in all administrations. George Bush had it, Bill Clinton had it—
JASON HARTMAN: It always exists. It’s just that only question is, will the government be larger, and then will the crony capitalism be larger, or will it be smaller, and there’ll be less of it?
CRAIG R. SMITH: Exactly. And that was my concern. And that’s what my concern is, Jason, and you know this, because you’ve studied it. Whenever the government gets this big, it squeezes the private sector. Now, is the private sector gonna do better things with the money than the government’s gonna do? Of course it is, because you have accountability, and you have success and failure, and like you said, this administration’s into picking winners and losers. I was not a proponent of the TARP—
JASON HARTMAN: Actually, we should change it. we should say, Craig, they’re into picking supporters and losers.
CRAIG R. SMITH: Well—
JASON HARTMAN: Because the people who get picked are their supporters.
CRAIG R. SMITH: Well, I find it very ironic now that they’re banging on Jamie Dimon for a $13 billion fine, when in fact, they forced him to buy the bank that caused the problem in the first place. But, nevertheless—
JASON HARTMAN: A lot of those things are window dressing anyway. They’re like watching a wrestling match on TV. It’s all staged.
CRAIG R. SMITH: Sure, and it comes in one hand goes out the other. But a perfect example, and this will show you why the confidence has been so devastated, Jason. And this is a perfect example. Bonds, for years, have been known as the gentleman’s investment. And why have they been? Because bonds were always 100% guaranteed. If you owned a bond, a bond always paid. The worst that happened was you had to hold it the duration of the bond, but you always got paid.
JASON HARTMAN: What kind of bond—are you talking about government bonds, or any bond?
CRAIG R. SMITH: No, I’m talking about corporate bonds.
JASON HARTMAN: Okay.
CRAIG R. SMITH: Okay? Because you are protected by the underlying asset.
JASON HARTMAN: Not if you own GM.
CRAIG R. SMITH: Well, that’s what I’m talking about. Now, General Motors has got bondholders. And what does Mr. Obama do? He walks in, and with the swipe of a pen, he wipes the bondholders out, takes care of all of his buddies over at the UAW who are giving him plenty of money for his 2012 campaign, and for the first time in American history, the government fiat wiped out bondholders! And now you wonder why people don’t want to make investments in certain companies for fear that the government could walk in and wipe out their investments? And that’s a perfect example of why we don’t have the confidence in this presidency to control—or, not to control, but to encourage this economy to grow. And until he moves on, you’re gonna see it this way, Jason. It’s just that simple.
JASON HARTMAN: But Craig, all those bondholders that have those GM bonds—they’re just these super rich investors, right?
CRAIG R. SMITH: That’s right.
JASON HARTMAN: They don’t need the money.
CRAIG R. SMITH: Yeah, they were trust babies to begin with. And you know, you didn’t earn it. I mean, the government helped you, for Pete’s sake. I man, that whole sense of thinking is what’s hurt us. And so, why do I call them progressives? Okay. I guess you could call them Marxists. I guess you could call them Leninists. In fact, I’m starting to hear more people refer to them as communists, and not getting the blowback that you used to get. But the reality is that that’s what they are. And if you look—and I know I’m preaching to the choir here, but if you look at the planks of the manifesto, the Communist Manifesto, we’ve fulfilled all of them, and what did Lenin say? The capstone of a great socialist society will be when we mandate healthcare provided by the government. Well, Mr. Obama just put that capstone into place, did he not?
JASON HARTMAN: Yep.
CRAIG R. SMITH: So, we’re just pointing out the obvious in the book. And what we point out in the book is, look. There are ways to change this. We hear all the time about separation of church and state, right? We’ve got to separate the church from the state! Without that we can’t—well, how about separation of economy and state? How about separation of money and state, or business and state, or commerce and state, or science and state?
JASON HARTMAN: Very good. I love those. I love those slogans. Those are great. Separation of economy and state. That would be great. Let me ask you this, though. What—I think we all know the problem. It’s pretty severe, actually probably more severe than it’s ever been. What can Americans do to decentralize and diversify their lives, and survive, and hopefully thrive during this time?
CRAIG R. SMITH: On a personal basis?
JASON HARTMAN: Personal basis.
CRAIG R. SMITH: Well, on a personal basis, obviously, in the case of your money, you diversify. You have a portion of your money in real estate, and in bonds, and in stocks, in gold, in cash—I mean, you well diversify yourself and not have all your eggs in one basket. As it relates to being a citizen, you want to demand out of your politicians things like a national sales tax versus a federal income tax, which is unconstitutional. Or, for sure we should be demanding a balanced budget amendment. I mean, can you imagine if we had a balanced budget amendment?
JASON HARTMAN: Well, let me—let me give you the argument against that, though. People—
CRAIG R. SMITH: I know, in terms of a war or something—
JASON HARTMAN: Right, I understand. And a lot of these wars are completely fabricated, too. I mean, thank you Vladimir Putin, by the way. For keeping us out of another one, about a month and a half ago, you know? Warmongers McCain and Obama were going at it, waiting for their kickback from the military industrial complex. This is like absurdity, the way they were on the warpath, and Putin—he just put an end to it. It was great. But the one argument, though—the balanced budget amendment, I agree with you, on the surface it seems like a great idea. But, businesses and individuals use debt in a prudent manner, sometimes—hopefully—and governments could even potentially use it in a prudent manner, too—to grow the economy, and grow their business, businesspeople and individuals to grow their lives. Debt can be used very strategically. Of course, the government won’t do it that way, because we know this—what governments do is they pander to voters to buy votes, and they don’t do the best thing for the country, they do the best thing to get them and their cronies elected, or to hold power. I mean, even Hugo Chavez was known for that in Venezuela. He did a lot of handouts, and the people liked him, although they never really looked at the fact that the reason the whole country’s so poor is because of him, you know? On the macro level.
CRAIG R. SMITH: But you know, it’s interesting that you say that, because that is, in essence, the problem. Okay? I mean, Alan Greenspan created a situation early on, where he realized that perpetual prosperity was possible by manipulating the money system. I mean, you know, we talk about the Chinese manipulating the Yuan and the RMB. It’s nothing compared to what our Federal Reserve does. And they wanted perpetual prosperity so people could live, like you said, at a certain point, everybody should have NetFlix, and this and that. The reality is, you can’t have perpetual prosperity. Economies are like a set of lungs. They breathe in, they breathe out. You have to have recessions, and contractions. And going back to your point, debt, when used properly, and subsequently paid back, can do phenomenal things. And you’re absolutely right. I mean, put it in the private sector. A guy goes and borrows $50 million, he buys a piece of property, he builds a factory on it, he fills it with people to produce things. That’s what’s called creating wealth. And when he’s productive enough, he pays back that $50 million. The government could do that, Jason, but they don’t. Why? You answered it. Because they buy political favors instead of taking the money and paying it back to where it belongs, they spend more of it, because they buy more votes. And until we break that cycle of money and politics, it’s gonna continue. Nothing’s gonna change.
And that’s why I believe it starts with a balanced budget amendment where they can’t borrow money, where they have to live within their means. Or a national sales tax, where you base it off consumption, and you encourage people to save, because the accumulation of capital allows people to build together. Look, I’m not one of these guys that believes we shouldn’t have any government. But I believe the government should be very limited to the scope that the constitution laid out. And when you look at that constitution—and again, I know I’m preaching to the choir here—people say, well, it was written 200 and so on years ago, it’s not applicable. It is perfect in every way, in my opinion. And when it’s brought together with free markets and capitalism, and the rule of law, and there’s where we’re missing, because, see, a Madoff can go do something and get away with it for years and then be put in jail. A bank can go rip somebody off and not be put in jail. An illegal can come across the border and not be put into jail. If we just enforce the laws we have on the books, Jason, and we go back to the constitution, and we allow free markets—and look, if some guy breaks the rules and he cheats somebody, he goes to jail! You do that, this country will be just fine. But when we stopped enforcing the laws, and stopped enforcing the constitution, and quite frankly, started ignoring the constitution, that was the beginning of what started—what’s got us to $17 trillion worth of short term debt, and now over $88 trillion worth of long term liabilities.
JASON HARTMAN: And some say—
CRAIG R. SMITH: It’s gonna break—
JASON HARTMAN: And just so you know, that $88 trillion number, some say it’s as high as $220 trillion. So, these unfunded mandates we have coming in the future. And it is unbelievable. I mean, mathematically it’s just—I don’t know how we’re ever gonna get out of it. However, I do have a question for you on that. What is the likelihood of recession, deflation, inflation—how do you see this working out?
CRAIG R. SMITH: Well, we clearly have to have inflation, and I would argue that we are on the Weimar Republic path. You said, how come it hasn’t happened yet? How come inflation hasn’t come back into the system yet? Part of it’s because of the way that we calculate the number. You know, gasoline prices can double, but if your computer drops in half, we have no inflation. So, keep in mind, in Weimar, Germany, in the years 1921, 1922, they were very productive years in Germany. Full employment, very low inflation, and then 1923, the money created velocity. Money started coming out, and it started getting into the system. That’s why—and a program I did this morning, I said the biggest challenge Janet Yellen’s gonna have is trying to drain the $4 trillion out of this system.
And she’s not gonna be able to, and that’s why we believe—you know, hyperinflation—the term hyperinflation means a 50% increase in the price of goods and services over a 30 calendar day period. I’m not sure we’re gonna see that. But are we gonna see 18, 19% inflation? You know, the 14, 15% that we saw during the Carter administration? You better believe it, and then some. Is it gonna come in 2013? Probably not. But by 14 and 15, you can assure yourself, because look. The other day, the Chinese said, we are now gonna put together the peoples’ money, and we want to start to compete in the international currency markets. And let me tell you, we lose our reserve currency status, it’s game over for the United States as it relates to inflation. Because then you would have to print everybody money, and then you will have hyperinflation, like we had in Weimar, Germany. So, let’s not think just because we’ve gotten away with it for a few years since 2008, 2009, means we can get away with it for much longer.
JASON HARTMAN: Yeah, well, that certainly seems true. You know, I just wonder, though, how long we can maintain our debt rating, our reserve currency status—I mean, what do you think? Are we in for another downgrade?
CRAIG R. SMITH: I believe we are. And I believe when we went from AAA to AA+, you know, keep in mind, AAA means you have zero risk in lending money to these people. When you go to AA+, that means now there’s risk in lending money to America, and I believe we’re going to A+, or AA. One of the two. And let me tell you why. Because the rating agencies made it very clear in 2011, the reason they downgraded us is because we didn’t come out of there with a viable plan of how to reduce our deficits! Now, we had the sequester; it kicked in. Which, by the way, Mr. Obama’s taking credit for, that he said would be the end of world. Which wasn’t the end of the world, it actually cut our deficits in half. But, they are looking for a real plan. If we go to the credit agencies, or we come out of this next budget battle, which would be February 7th, and we say, here’s the plan, and it’s a viable plan, and it’s gonna create growth, and reduction of deficits, and reduction of government spending, we’ll probably go back to AAA. But if we don’t have a realistic plan, we’re going to continue to be downgraded, and Jason, as sure as I’m sitting here, when I saw that announcement the other day about the Chinese wanting to take the peoples’ money and have it compete on a reserve currency basis, and they’re been buying thousands of metric tons of gold over the last four or five years—don’t kid yourself. The United States of America, we are the reserve currency of the world. We’re the first debtor nation to ever have that connotation, and we’re the largest debtor in the world!
And let me tell you, when you’re in debt like we are, there’s three ways to deal with it. You either restructure it to where you can handle it, you default on it, which we’ve seen South American countries do, or you inflate your way out of it. And I happen to believe we’re going to inflate our way out of it, lose our reserve currency status, and we’ll be trading oil and the other commodities in various currencies. You’ll have Russian rubles being traded for Chinese RMB, and you’ll see Brazilian real being traded for US dollars, and then America is gonna have to compete in the currency markets, and we’re not gonna be able to, because how do you compete when you’ve got the type of debt that we have? Now, what saves us in all this, is we’re still the greatest economy in the world. But don’t kid ourselves and thing we can hold onto that if we stay on this track. And that’s why things have to change. That’s why I’m doing this program with you. That’s why I wrote the book. Thank God for programs like yours that are talking about this. Because there’s still a chance to fix it! But we’d better move quickly, because if we don’t, it’s gonna break.
JASON HARTMAN: How bad do you think inflation could get? Like what kind of percentage do you think it could be? Worse than Carter, and I think the worst official year under Carter was about—was it about 14% or so?
CRAIG R. SMITH: Yeah, 14 or 15%.
JASON HARTMAN: That was the official number, which means the real number was probably 8 points higher than that, right? So…so maybe it was 20%.
CRAIG R. SMITH: I think we could easily see inflation rates, legitimately, run at 20-25% on a yearly basis. Now here’s the problem. How did Mr. Reagan deal with that? He allowed Volcker to raise interest rates to 22%, and stopped the inflation.
JASON HARTMAN: He broke the back of it.
CRAIG R. SMITH: Once inflation gets started this time, it’s not gonna be that simple. Because if we raise interest rates, with owing $17 trillion in immediate debt, my gosh! All of our revenue’s gonna go to pay the debt bill! That’s why I happen to believe we’re going to inflate our way out of this. And I wrote a report called The Uses of Inflation, and a book a couple years ago called The Inflation Deception. Most people don’t realize that inflation steals from the masses in a way that not one in a million can realize it happened until it’s already happened. That’s what Lenin said. He said it was a very, very wonderful tool, because inflation steals from people. And what we’ve been doing, Jason, over the last six years, five years, is we’ve been using financial repression. And that’s where our rate of interest that we pay a depositor at a bank, which is what, a quarter of a percent now? And we have inflation rates at, what did they say, the official rate is one and a half percent, or whatever? The difference of that is going directly into the pockets of the banks and the United States government, and coming right out of the pockets of the average American!
JASON HARTMAN: Yep.
CRAIG R. SMITH: Financial repression is nothing new. It was used after the Second World War, and set us up for the Carter years of inflation. That’s why I think it’s gonna be way worse this time.
JASON HARTMAN: It’s very interesting that the Federal Reserve and the IRS were created right around the same time, about 100 years ago.
CRAIG R. SMITH: To the year!
JASON HARTMAN: So—oh, so exactly 100 years ago! So, it was 1913 for both. I thought the IRS came a little bit later than that. But whatever. So it was the same year they created both of them. Yet if you really think about it, when you have a central bank that can create money out of thin air, there’s no reason to have an income tax, because you can just simply use inflation as the tax. The government can spend irresponsibly, and just print more money, and devalue all the money currently in circulation, and in savings, and they can tax people that way. Now what we have is we have a double taxation system, where you have an income tax that doesn’t recognize inflation properly, and then, you have an inflation tax through the Treasury and the Federal Reserve. It’s just silly that we have both of those.
CRAIG R. SMITH: Well, that’s correct. It’s funny you bring that up. In our book, The Inflation Deception, we talk about—I believe his name was Ruml—he was one of our Federal Reserve Chair people in the late 40s, early 50s. And he published a white paper entitled Taxes are Obsolete for Revenue. And his argument is what you just laid out, Jason. He said, we don’t have any need for an income tax. We can just do it through the creation of money. But at the time, we were on a gold standard, so he argued, just take us off the gold standard. We don’t need a federal income tax. We’ll just do it by using inflation as the tax. Well, the only problem is, we are off the gold standard now. So his theory—and so, you’re absolutely right. There is no need to income tax when you’re not on a gold standard. And that’s why, if you remember, it was Richard Nixon who did two things that I will never forgive him for. Number one he created the EPA, for Pete’s sake. And number two, he closed the gold window, which he was given no choice of, because you cannot continue to expand a welfare state under a gold standard. The two are incompatible; one has to give.
JASON HARTMAN: Yep. Yeah, very good points, very good points. Well folks, invest for this. Be carefully. Be prudent. One of the strategies I like is, own commodities, with long term fixed rate debt against them. My choice is real estate, yours is probably gold, but either way, you gotta have some hedge against inflation.
CRAIG R. SMITH: Well, I like real estate a lot as well, and I know that prices have been depressed, but I agree with you completely, because you’re shorting the dollar, which is gonna go lower, and you’re going along a commodity of real estate that will always ultimately go up, and that was a great strategy in the 70s. People made a lot of money, and if you remember, inflation ravaged the stock investments of the 70s, and made people that were in real estate fortunes. So, I agree with that completely. And I do believe in gold, because gold is a currency, and I think we are going to be challenged on a currency basis. And just so you know, for your listeners, Jason—I told you this earlier. If people would like to call 800-289-2646, that’s the number over at Swiss America. 800-289-2646. Mention that they were listening to your broadcast, and they will send you a complimentary copy of the book, The Great Withdrawal.
There’s no obligation, no expense. If you want information on products, just ask the guy, he’ll put it in the packet. They’ll pay the postage and everything. All I’m trying to do, I got the publisher to print 10,000 copies for me to do this with, because I’m trying to get the message out. You see? I’m 59 years old right now, Jason. My grandchildren are gonna be faced with this. My children are already faced with this. And I decided that if I can’t leave my country in better shape to my children than I received it, then what kind of man am I? So, I’m preparing my own family to make sure they’re in that shape. I’m hopeful through my book I can do this throughout the entire nation. People say, you’re crazy, you’re one man, it can’t be done. I don’t know. With people like you that are helping, and getting the word out, I think we can turn the thing around before it’s too late. I really do.
JASON HARTMAN: Good stuff. Well Craig R. Smith, thank you so much for joining us today, and thank you for talking about the book. Folks, get your free copy there, and appreciate you coming on, and just keep getting the word out.
CRAIG R. SMITH: Thank you Jason. It was great to be with you.
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Transcribed by David
The Jason Hartman Team
Episode: CW 369: Conservative vs Progressive Ideologies in America with Craig R. Smith Author of ‘The Great Withdrawal’
Guest: Craig R. Smith
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