If you thought economics was boring, think again. At the heart of wars, land grabs, politics, history, and almost any sort of human interaction lies economics. Remember – economics is about money, and money, depending upon your perspective, either makes the world go ’round or is the root of all evil.
Either way, Jason Hartman’s interview of master economist, Martin Armstrong, for episode #382 of The Creating Wealth Show makes for scintillating listening. First, some background.
Martin Armstrong is the former chairman of Princeton Economics International Ltd. He is best known for his economic predictions based on the Economic Confidence Model, which he developed. In September 1999, Armstrong faced prosecution by the Securities and Exchange Commission and the Commodity Futures Trading Commission for fraud. During the trial, Armstrong was imprisoned for over seven years for civil contempt of court, one of the longest-running cases of civil contempt in American legal history. In August 2006, Armstrong pleaded guilty to one count of conspiracy to commit fraud, and began a five-year sentence.
Armstrong is the developer of the Economic Confidence Model based on business cycles. He is known for claiming to have predicted the crash of 1987 to the very day. Using his theory that boom-bust cycles occur once every 3,141 days (the number pi multiplied by 1000), Armstrong claimed in 1999 to have predicted the Nikkei’s collapse in 1989 and Russia’s financial collapse in 1998.
During this interview Jason and Martin delve into a number of topics:
Armstrong reminds us that Russian President Putin is a KGB disciple who would love nothing more than to put the Soviet Union back together. Through this prism, it’s not difficult to see the reasons behind his land grab in the Ukraine. He believes that the strength of a nation depends upon how much territory it owns, so look out Poland, etc! It’s also worthwhile to note that the failure of communism in Russia left a void that has been filled by a good, old-fashioned oligarchy.
Inflation vs. Deflation
As all good economists do, Mr. Armstrong has a strong understanding of, and opinions about, the inflation and deflation in an economy. Of course, Jason loves this topic whenever it arise in conversation. The main point Martin makes is that it is not inflation that destroys an economy, but rather deflation. Listen in as he explains exactly how.
Other notes of interest from the interview:
- Why we’re on a 25-year war cycle and 8.6-year business cycle
- Why the US ended up in the enviable/unenviable status as the Brinks truck to the world
- Is the American dollar now a de facto international currency?
- The US will never enter hyperinflation (400% monthly inflation) – our corrupt bankers won’t let it happen
- It’s almost impossible for Americans to open a bank account or do business overseas – what is Europe afraid of?
- The next economic implosion will be in pension funds
- The real reason behind the recent huge influx of foreigners buying real estate investments in the US
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 thank you so much for joining me today. We’ll be back with today’s guest or segment, in just a moment.
ANNOUNCER: Have you listened to the Creating Wealth series? I mean from the beginning. If not, you can go ahead and get book one—that’s shows 1-20—in digital download. These are advanced strategies for wealth creation. For more information, go to www.jasonhartman.com.
JASON HARTMAN: It’s my pleasure to welcome Martin Armstrong to the show! He heads up a fantastic website with all sorts of fantastic economic data, and his tagline is, Comprehending the True Monetary History of the World, and it’s an essential understanding of the evolution of money for the future. Martin, welcome, how are you?
MARTIN ARMSTRONG: I’m well, thank you very much. Not too bad. The weather is actually starting to warm up a little bit.
JASON HARTMAN: Are you coming to us from—
MARTIN ARMSTRONG: Too much of this global warming.
JASON HARTMAN: Oh, yeah, this year has been a tough year for global warming. Of course, that’s a snarky comment. Are you coming to us from New Jersey, by chance? Or, where are you located?
MARTIN ARMSTRONG: Yes, in New Jersey.
JASON HARTMAN: Good. Good stuff. Well, you know, first of all, before we dive into some economic stuff, that’s always intertwined, of course, Martin. But the big headline now are Russia and the Ukraine, and wow. Mr. Putin as an aggressive guy. What’s your take on the whole situation?
MARTIN ARMSTRONG: Well, you have to understand that Putin came out and he said that he thought that the greatest tragedy of the 20th century was the collapse of the Soviet Union. He’s still very old school, in the sense that he thinks that the strength of a nation is how much territory it has. So, he has actually even said, before all this started, that he wanted to see all the satellites return to Russia by 2020. And this is largely his agenda. And of course he has the economy of Russia is declining, along with the other emerging markets. So, when you get in a situation like that, honestly, a head of state has two choices. I mean, either he’s gonna be booted out by his own people, because the economy’s going against them, or he has to find external enemies, and that’s what he’s doing.
JASON HARTMAN: And so—finding an external enemy? Is that really it? Or is it more just about a land grab?
MARTIN ARMSTRONG: It’s basically—it’s both at the same time. One, the economy’s going against him, so he needs to do that. But two, he actually believes that restoring all of this area to Russia will impress the world. And actually, Adam Smith really said it well in his Wealth of Nations. And the wealth of a nation is not how much gold it has, how much land it has, or anything like that. It’s really the total productivity of the people. And proof of that is Japan. Japan was a tiny little island, no natural resources, and it rose to the second largest economy in the world. So, I mean, if Putin was really economically smart, he would basically let the country, you know, boom, and go. But you know, unfortunately, communism fell, but it was only replaced by oligarchy. So, what you have in Russia, if you’ve been there, yes, there’s plenty of big modern restaurants, etcetera, but they’re all owned by oligarchs. And you can’t start a small business to compete with them; they’ll kill you.
So, you basically just replace the government with a mafia. You don’t still have an entrepreneurial atmosphere. And, that’s what the Ukraine people were largely rising up against. I mean, they had three staff members in there. So, you know, pretty good connections with Ukraine for some time, and they were upset about corruption. That’s what it was. And, because, you know, the former president’s two sons were basically trying to bring Russian-style oligarchy to Ukraine. In Ukraine you do have a lot of small businesses, in Kiev. And walking in like in the old mafia days, saying, you pay us, or you’re out.
JASON HARTMAN: You’ve gotta pay the toll, you know—I remember, Martin, about, oh, six, maybe six, seven years ago, I had a couple of housekeepers. A couple, man and woman, that would come in, and they’d clean my house. And I got to talking with them in depth one day. And they were Polish. And they said that they owned three very successful nightclubs in Poland. And I said, why did you leave? They spoke good English, they impressed me with their intellect, and they said they both had degrees in engineering, and then they owned these nightclubs, and basically the thugs, the mafia thugs, said they’d destroy their business if they didn’t pay the toll. And that’s just the way it’s done. So they were fed up with it; they came to the US.
MARTIN ARMSTRONG: Yes. This is the core of the Russian way of doing things. I mean, honestly, I had a Russian girl that worked for us, and she was going to go back to her mother, to visit for Christmas, and she wanted to go get a fake large diamond ring. I said, what for? I mean, something like ten carats. And she said, if she had that on her hand, then everybody would leave her alone, because they would think she was engaged to some oligarch.
JASON HARTMAN: It’s funny, you would normally think that would be dangerous, to have something that looks valuable on you.
MARTIN ARMSTRONG: Well, with something that big, they would assume somebody important had to give it to her.
JASON HARTMAN: Very interesting.
MARTIN ARMSTRONG: It was an interesting ploy; I had to laugh at that one.
JASON HARTMAN: Yeah. Well, talk to us about the war cycles. You talk about a 25-year cycle, I believe.
MARTIN ARMSTRONG: Yes. War is connected directly into the economy. And there has been a creation of what was called the Wheeler Index, which you can see on our website. But, Wheeler basically took everything back to about 600 BC. All the activities, how many countries involved, how many people proportionately, etcetera, and so, we were able to put that into our computers, and then really develop models off it to say, okay, fine, when does this actually occur? And it occurs at a very regular interval of about 25.03 years. And we were able to split it between civil unrest, domestic disputes, revolutions, where it’s internally within the country, and externally, like in between, you know, international war. And what’s interesting is that this is the first time those two cycles are converging, and they both turned up here in 2014, and so we just had a big conference in Philly, and people flew around the world for this thing. It’s the first time this has occurred in 300 years.
JASON HARTMAN: The first time what has occurred, exactly?
MARTIN ARMSTRONG: This convergence between these two models. So, last time was in the 1700s, where we had the overthrow of monarchy. So, there’s a rising trend globally. Ukraine is just one aspect of it, but all Southern Europe, you’ve got down in Brazil, Thailand, etcetera. What is the common bond to all of these countries starting to rise up, and Turkey as well? And it’s corruption. People are fed up, really just fed up with government. And we’ll see more of it here. Our economic confidence model, we’re predicting again the next session should start basically from about October 15, and then that will go down into 2020. So, we’re going to start seeing more of that here, and all of Europe is pretty hard too.
JASON HARTMAN: I just want to make sure everybody’s following. Seeing more of what here?
MARTIN ARMSTRONG: Civil unrest.
JASON HARTMAN: Civil unrest, okay. So you’re saying, people are fed up with government around the world. And really, government is a proxy for being the environment in which organized crime, whether it be directly government—whether it be done directly by the government—or it’s done by proxy, through the mafia, which the government allows to exist, or in fact, through its policies, encourages, in many ways.
MARTIN ARMSTRONG: Yeah. Banking, etcetera.
JASON HARTMAN: Yeah. The banksters, and Wall Street, and you know, here in the US, we just institutionalize it and make it look so much cleaner. Hardly anybody ever dies. But a few do. We can talk about banker suicides, or strange stories like that. But you know, by and large—
MARTIN ARMSTRONG: We don’t call it corruption. We call it lobbying.
JASON HARTMAN: Right, we call it lobbying. And so, by and large, it’s sort of institutionalized, and sort of white collar here. But around the world it’s a little more thuggish, isn’t it?
MARTIN ARMSTRONG: Yes. Certainly in Russia and behind the Iron Curtain, it’s still very much very thug, mafia type thing, they’ll walk in and break your bones.
JASON HARTMAN: So people are fed up with this, but in the US, we seem to be welcoming more government.
MARTIN ARMSTRONG: That’s debatable. But I think largely what we have, we have many different conflicting trends developing. And in Europe, the taxes just keep rising. I mean, France seems to be insane. But, the thing that people are not paying attention to, is that we also have like a collapse in education. And in Europe, you have over 60% of the youth, and that’s defined as under 25, unemployed. Cannot find a job. Forbes Magazine reported that 65% of American students that go to university, they come out with their degrees, and they cannot find a job in what they went to school for.
JASON HARTMAN: Right. And the first question is, why are we allowing—maybe it shouldn’t be a government policy, because I hate to see more government in anything. But, just sociologically, why are we allowing students to go get these silly liberal arts degrees that are just useless? They can’t use them! I mean, nobody’s hiring—
MARTIN ARMSTRONG: Honestly, I’ve, you know, we advise a lot of major corporations around the world. I have met with CFOs of everywhere, and the vast majority you will find are engineers, not trained in—with no MBAs. Engineering seems to be the best, because they at least teach them how to think out of the box.
JASON HARTMAN: And they create real stuff. I love engineers.
MARTIN ARMSTRONG: Right. In economics, they say, here are the rules, and that’s it, and if you disagree, you flunk. So, most of your social sciences teaches you not to think. Only engineering seems to. So, most of the CFOs that I’ve encountered have engineering degrees, and it’s almost pointless to go spend all this money to go get a very nice degree in economics or finance, and then you have to be retaught!
JASON HARTMAN: You know, that’s so interesting that you say that, Martin. Because I was just watching an interview with Elon Musk, one of my favorite CEOs, and the interviewer asked him, what do you consider yourself? Do you consider yourself a CEO? Do you consider yourself a startup guru? And he says, no, I really consider myself an engineer. That was a telling comment, to me. That was interesting.
MARTIN ARMSTRONG: It is. And engineer’s basically taught to solve a problem. How do you solve a problem? Well, every time it’s a different problem. So, there’s no set rules, per se. You have laws of physics, etcetera, but other than that, you have to figure out a way out of this thing. And the other—our other sciences do not. I mean, even—it’s pretty pathetic, but I mean, if you look at archeology, for example. Heinrich Schliemann, anybody that’s gone on a tour of Europe or whatever—he’s the one that found Troy, Mycenae, most of the ancient cities. Why? Because the academics said that Homer, it was just a fairy tale written for children. Nobody got up and went out to prove that statement. Schliemann said no, I don’t think you’re right, and he took Homer, went to the place Homer said, they said I better go to Troy, walks in, says, anybody heard of Troy? Yeah, it’s over there. You know? And I’ve taken Homer—when you look into Mycenae, it basically says, turn right, and Agamemnon’s buried in a shaft grave down at the bottom. And you go there, and that’s where it was! His mask is now in the Athens Museum. But you know, your academics that were in Harvard, in Yale, in Oxford, they all declared, without ever stepping out, that it was just a book for children.
JASON HARTMAN: Very interesting, very interesting. Well, you know, Martin, our time is somewhat limited here, but I wanted you to talk a little bit more about the economic confidence model, if you would, and kind of drill down on that, and tell us where we are, and what we can expect, and then I want to ask you a little bit more about some things we might expect, before you go.
MARTIN ARMSTRONG: Largely, everybody has conceded from every—even Paul Volcker wrote a book on it—Rediscovering the Business Cycle, he said. And he concluded it was about eight years. We’ve basically defined it. It’s 8.6 years, to be precise—
JASON HARTMAN: Which is the business cycle, is 8.6 years?
MARTIN ARMSTRONG: The business cycle in general. Now, the way it functions is that people largely just—it is really confidence that makes something boom or bust. Like interest rates have been down virtually zero in Japan, and honestly, the economy doesn’t turn until somebody sees higher interest rates and expects inflation. As long as the average person thinks it’s gonna be cheaper tomorrow, they hold off. As soon as they think it’s gonna cost them more, now they get up and they start going out.
JASON HARTMAN: And this is one of the reasons, by the way, that I say that deflation is so dangerous to an economy. As much as I like to rail against fiscal policy, and monetary policy especially, inflation really, as long as it’s somewhat moderate, is kind of a good business plan for governments.
MARTIN ARMSTRONG: Well, you do need inflation to keep pace with population growth. That’s mandatory. Okay, because if you had $10 and 10 people, in theory everybody could have $1. But if you now have 20 people and still only $10, that’s deflation.
JASON HARTMAN: We only have 50 cents each.
MARTIN ARMSTRONG: Right. So, you have to have—you can’t have it both ways. You can’t have your home improving in value, you’re gonna get a raise every year, etcetera, and at the same time, money’s gonna be flat, and always have the same value. It’s impossible. Because if assets rise, then the value of purchasing power of money has to decline. They’re on the opposite side of a seesaw. So, it’s always a boom and a bust back and forth. But each cycle that we go through, it moves from real estate one time, then stocks the next time, then bonds the next time, then commodities the next time, then it’ll go right back again and start all over again. Real estate—
JASON HARTMAN: That seems to be by design, that it runs that way, you know? It’s like, get the people off one—I mean, Greenspan—it just seemed like exactly the way he designed it. Get them off one thing, get them on another. You know? This thing’s failing, so let’s just switch gears here.
MARTIN ARMSTRONG: Well, the other thing with monetary policy that people, I think, are not appreciating, is that the dollar is the reserve currency. And, I know a lot of guys that say oh, hyperinflation, etcetera. They’re only looking at the United States. And most of your Third World countries issue bonds in dollars. Why? Because they can’t sell it in their own currency. And you have basically Europe is a basket case. China’s really out—has surpassed Europe even in trade now. And—but where do you put your—where is money? Russians still want dollars. They don’t want rubles.
JASON HARTMAN: Can you blame them?
MARTIN ARMSTRONG: No! So, there’s a demand for dollars that is actually beyond our borders. So, yes, the Fed could increase money supply, and everybody goes oh, there’s gotta be inflation. No. If you look at what China did, they said thank you very much. They had a bond portfolio of US assets that were long term, they sold all the long term, and it brought it down to under five. So now, they’re below five years, and they said thank you very much. That’s why the Fed—QE1 stood up and it said, okay, we’re gonna help the real estate market by buying in 30-year bonds. That will, in theory, create more money, but it will create a shortage of long term, so therefore, it’ll—the private sector will start buying the real estate. And they didn’t. Because they assume that they’re buying the 30-year bonds from an American. It was China selling it to them. So the money went straight out the back door. The global economy is very porous. So, you know, you can’t necessarily run this on theories that were from long time ago. Things have changed. And you can have inflation with no change in money supply. If there’s a shortage of goods, a storm like Katrina, something. It’s the same thing that you’ll see with anything; if they start getting very bullish on anything, and decide to start buying, it doesn’t require the Fed to increase the money supply. So, it’s a lot more complicated than people suspect. There’s more going on. And it’s global, and we have to look at this as, the dollar money supply is actually international. And actually if you—when they’re coming out with the new $100 bills, you flew international, they would have little ads coming on—the old $100 bills are still good. You don’t have to worry.
JASON HARTMAN: Right, right. Yeah. Very interesting. Well, but that’s nothing new. America has been for a long, long time the so-called Brinks truck of the world. And the dollar has been certainly the reserve currency for a long time. And you know, people debate whether that’s legit.
MARTIN ARMSTRONG: Well, the main—the biggest problem is not how long it has been. The problem is what’s happening to all the other players.
JASON HARTMAN: Yeah, right, right. And that’s why I say it’s relative. It’s a race to the bottom with these fiat currencies.
MARTIN ARMSTRONG: Right. So, basically, they’re collapsing first. The US will eventually have its problems. But it was the same thing in the Great Depression. In 1931 you had all of Europe basically default, except for France. Britain went into a moratorium. I’m talking a permanent default on their bonds. Most of South America defaulted, and so did China. So, the US was the last one largely standing, and the dollar went up dramatically in value, and US politicians didn’t understand what was going on, so that started protectionism, and then the dollar, Roosevelt, when he finally realized, okay fine, the dollar’s too overpriced, because everybody else is down, that’s when he basically devalued the dollar, and confiscated gold. So, that brought the dollar down. But, we have that same problem going on globally right now. So, it’s largely an issue of—you have Europe, got rid of all these individual currencies, then they went to the Euro, but then they didn’t have a national debt; they left every country with their own, and that was crazy. And that’s why that’s been falling apart. So, by default, the dollar is becoming almost the only world currency. Because you largely have problems—I mean, you can’t use the won. You can’t use rubles. Europe never created a single currency that would last, because you have to have a single national debt in order to absorb money.
And that’s what the whole problem is with Europe. Canada, Australia, they’re just too-tiny markets. So, unfortunately, the only place to go is the dollar. And we have a large national debt, true. But that means also that capital can be absorbed. You can’t call up Britain and say, gee, I want to buy $2 trillion worth of bonds. You know? They just don’t have it. So, the dollar ends up becoming—being pushed up as it was in the Great Depression, and as that happens, that creates more deflation. So, it’s actually deflation that destroys the economy, not inflation. The idea of hyperinflation, etcetera—if you look at that, that really only goes to revolutionary-type governments, like Germany it was right after they got rid of Hitler who was a Bolshevik, basically, revolution. United States, we had it right after, you know, that was the continental currency. French, etcetera. So, that largely comes after war. And it’s—hyperinflation is associated largely, it means the government prints because they cannot sell bonds. Nobody will trust it. So, we’re not at that stage.
JASON HARTMAN: Well, people say we’re getting close to it. I mean, at some point, don’t we have a boycott on our bonds? Because—and the reason, just to make sure people understand this, at least from my perspective, but chime in, is that if you buy a US bond, and the dollar is inflated—its value is inflated away, then you get paid back on that bond in cheaper dollars. So, it’s a bad deal for the investor in the bond. Or a lender of any sort, which really is all a bond is, is a loan. So, is there any real fear of people not buying our bonds? Or is that just a long way off?
MARTIN ARMSTRONG: Not yet. I mean, what you’re saying is basically applicable to everything. And it’s been that way since World War II. But hyperinflation is more, is defined at 400% per month. So, we’re not—we’re not anywhere close to that.
JASON HARTMAN: Wow. Because—you know, I’ve been searching, and there’s just no academic definition for hyperinflation. But, 400% a month—mind you, that’s still a lot lower than Zimbabwe was. But, yeah, that’s amazing.
MARTIN ARMSTRONG: Yeah, you had Hungary, you had Germany. But they’re all Third World type countries. You don’t have the core economy, which is the United States, go into hyperinflation. Because what would happen is that number one, the corrupt bankers would prevent it. But, our problem is deflation. And why I say that, is that what’s happening, is they keep raising taxes, and they’re raising enforcement. So, for example, the 2011 law that they put in, Americans have been thrown out of banks everywhere. And that forces them to also bring their capital back home. So, you can’t invest overseas! Unless you’re a multinational, you can’t even start a business over there.
JASON HARTMAN: Oh, no, I agree. I mean, if you’re an American, and you try to do business overseas, which means you’ve gotta form an entity, probably, and open a bank account, it’s like you have a scarlet letter! Nobody wants to deal with you!
MARTIN ARMSTRONG: They won’t let you. They will not let you open a bank account.
JASON HARTMAN: Yeah. So that really has created not only a way for the US to tax more, and to make sure that there’s not a lot of tax evasion, but also to repatriate dollars!
MARTIN ARMSTRONG: Well, I think that the bureaucrats aren’t quite that smart. You know, they’re just looking for taxes, and they assume anybody doing anything overseas is illegal. And they don’t realize, what they’re doing is they’re destroying the world economy. The velocity of money has been collapsing since ’07, and it has not turned back up. So, that’s part of the deflationary cycle. And, so what we have, is really serious problems here. You have Europe going into deflation, and you have the head of the IMF come out and say that Europe’s problem is low inflation, and they have to actually increase money supply, but that’s not gonna change it. You can increase the money supply. It’s the question is, is confidence!
If people don’t believe that they’re gonna be able to do something with it in the future, it doesn’t matter! We ran correlation studies, for example, with interest rates and the stock market. Said okay fine, do higher interest rates prevent the stock market or make it peak? The answer is no. 1899, coal mining rates peaked at nearly 200%. The biggest stock market rally was 1929, and they peaked at 6%. What it is, is that—it’s the differential accounts. If you think the stock market’s going to double next year, and I say, well, I want 20% interest, you’ll pay it. But if you think the stock market’s going to go up 5% and I say, I want 5%, you’re gonna say no. So, there has to be something left on the table that you think you’re gonna make in order to borrow. And that’s the key. It’s when the expectations reach whatever level the interest rates are, then the market will crash. So, that’s why the stock markets never peak with the same level of interest rates twice in a row. It’s always different.
JASON HARTMAN: So, is it fair to say that you’re somewhat bullish on the dollar?
MARTIN ARMSTRONG: Well, yes. But what’s happening, and you have to understand, is what actually makes the economy go down? And that’s deflation. And what is deflation? Deflation is the rise in the purchasing power of the currency. So, as the capital from this new taxation hunt that they’ve been going on, Americans having to pull back their money, and pushing the dollar up, will actually create what a lot of people keep saying, oh, there’s the collapse, the collapse. But the collapse doesn’t come from inflation. It comes from deflation. That’s how all the great empires collapsed, Rome included. And if you look, for example—like, the difference between gold and other assets is quite significant. And in a hyperinflation, everything goes up. Alright? Real estate, art, whatever. And but the society, the entity still left, it’s still there.
So, Germany collapsed, but okay, fine, the country was still intact. The difference is when the country is not intact. For example, like the Russian Revolution, etcetera. That’s when gold rises when the others don’t, and the difference is, it’s a moveable asset. And this is what happened to Rome. They kept raising taxes and taxes and taxes, to the point that people would just walk away from the houses. You can’t take it with you. Where you can at least take gold or something like that with you. That’s the distinction that people have to understand. So, gold is the hedge against government, but it’s not the hedge per se against inflation. Everything becomes the hedge against inflation, including your wages.
JASON HARTMAN: And I want to say something—you know what the best hedge against inflation is? It’s not gold. It’s debt. Long term fixed rate debt, attached to a commodity. And the one I like is real estate, in terms of income property, that produce income. Because that debt is debased by inflation! So, you pay the debt back in cheaper dollars, but the debt is also tied to commodities! And when you look at the commodities that are the ingredients of an apartment building or a single family home that you rent to somebody else, number one you’ve outsourced the debt to somebody else, so you don’t even pay your debt; the tenant does. But number two, inflation pays the debt off for you. So, the tenant and inflation are both paying the debt. And number three, the commodity—the ingredients—the lumber, the petroleum products, the copper wire, the glass, the steel, the concrete, you know, all of those things, as well as the energy it takes to build them all, are hedged against inflation pretty well.
MARTIN ARMSTRONG: Yes. And this is why the big institutions can’t buy gold. Gold is more for the retail market. Mainly because it doesn’t pay interest.
JASON HARTMAN: Right. It has no income. And so, let me just contrast that.
MARTIN ARMSTRONG: Right. They need income.
JASON HARTMAN: Exactly. And that’s a very good point, Martin. I love that you mention that. Because, when you look at the real estate asset class, and when I say that, I mean income property only. Not one’s own home, that they pay their own debt for. In a deflationary environment, it also works well, because in a deflationary environment, you know, investors are running anywhere they can to get yield, and you just can’t get yield! Of course, gold doesn’t produce income. Silver doesn’t produce income. But, in an era where interest rates are 0 to 1%, which is what we have now, where are you gonna get yield? You gotta get it from somewhere. And cash flowing real estate is about the only real place.
MARTIN ARMSTRONG: This is also why the stock market’s rising. Because the pension funds were based upon models where they anticipated they needed a percent, where long term bonds used to be. And they’re mostly going into insolvent. We have—I think after 16, you’re gonna see the next crisis. Won’t be real estate; it’ll be pension funds.
JASON HARTMAN: Or student loan debt.
MARTIN ARMSTRONG: Most of our unfunded—well, most of them are basically insolvent. But that’s why long term debt has collapsed in price. Because there’s too much money out there in pension funds trying to lock in something long term, so they bid interest rates to the point that they can’t even function anymore. So now, they need to go out, and that’s why you start seeing the stock market rising. And real estate. Exactly the type of property you’re talking about. I’m not talking about the homes in Detroit. But, income-producing, you have foreigners coming in and buying the top properties in New York, Florida, California, but that’s largely because they’re trying to get capital off the grid outside of Europe.
JASON HARTMAN: Right. They’re looking for the Brinks truck called America.
MARTIN ARMSTRONG: Yeah. And you have the Chinese doing the same thing.
JASON HARTMAN: And Russians, and South Americans.
MARTIN ARMSTRONG: And they’ve been buying up property—Australia, all the farm property, things of this nature. So, they’re hedging against their currencies, and this is part of the whole issue here, that emerging markets look like they’re going to continue to go lower into about 2020, and the more geopolitical problems we have emerging with Korea, we have China and Japan rattling sabers back and forth at each other, and then you have Putin on this quest to reestablish the Soviet Union. The only other place for capital to go is the United States. And that’s what happened with World War I, and it happened again in World War II, and it looks like it’s happening again. And people should keep in mind that the United States was actually bankrupt in 1896. That’s when JP Morgan became famous, and he organized the loan for $100 million in gold. So, from 1896 to 1914, World War I, we became the number one economy, and then at the end of World War II, we ended up with 76% of the entire world gold reserves. So we were the breadbasket and the arms dealers.
JASON HARTMAN: The breadbasket and the arms dealers of the world. Love it.
MARTIN ARMSTRONG: And it looks like it’s coming back again. One advantage of the United States is that we really cannot be invaded by land. Okay? They’ve gotta get a lot of people on boats, you know? So, that has always tended to be the difference. Whereas Europe, you know—if Russia wanted to, you know, run tanks down to Paris, they could do it in probably less than a month.
JASON HARTMAN: We’ve got the luck of geography. But we’ve also got the largest military on earth by a long shot. And you know, as much as you can argue that it’s built on a house of cards, we do still have the largest economy. But you know, other economies are built on a house of cards too. It’s not like we’re the only one.
MARTIN ARMSTRONG: Well, this is largely—it’s like, you know, the question is, who’s the prettier of the two ugly twins. That’s about it. And we’re—we have the largest economy, we still do have the lower tax rates, which has been improving it. But, that’s been our primary advantage. And we’ve been less socialistic over the years, as far as determining who can open up businesses—I mean, anybody’s free to open up a business. Now it’s, can you afford it with all of the regulations. But nobody’s going to come in like Russia and say no you can’t do it.
JASON HARTMAN: Right. And even though the regulatory burden is higher, technology has made it a lot less expensive, and a lot more accessible for more people. So, it’s like, you trade one for the other.
MARTIN ARMSTRONG: Yes. Well, our own business—I mean, you know, we tend to be counted as the most expensive as the world, largely because, yes, when we began, our reports were going out by Telex. So, it was 50 bucks in Western Union fees to send a Telex from here off to Europe. So, it was very expensive back then. So, only the top institutions could even subscribe to it. And then faxes came, so it goes from 50 bucks down to $3, and now basically it’s out by email. So, now we have, you know, clients all over the world that the cost of communications has gone from 250 grand a year just to access us. Forget what you’re paying us. To zero!
JASON HARTMAN: Well, very good points. So, the website is ArmstrongEconomics.com, and this has been a fascinating conversation. Just anything you want to say in closing, before you leave us?
MARTIN ARMSTRONG: No, I think that pretty much is it. I mean, we just have to realized that it’s a global economy, we are all connected, and one change in something over in China does impact us, and it impacts Europe. So, it’s not purely domestically driven.
JASON HARTMAN: Very good points. Well, Martin Armstrong, thank you so much for joining us today!
MARTIN ARMSTRONG: Well thank you for inviting me.
ANNOUNCER: This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com, 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 Platinum Properties Investor Network, Inc. exclusively.
Transcribed by David
The Jason Hartman Team
Episode: CW 382: Monetary Futures & History with Master Economist Martin Armstrong Former Chairman of Princeton Economics International
Guest: Martin Armstrong
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