In this Flashback Friday episode of the Creating Wealth podcast from November 2012, Jason Hartman discussed the results of the election, what former president Barack Obama’s second term means for investors, and how to find benefits in the way that the system is running. With his guest, Steve, he reviewed a critical piece of fan-mail, as well as cultural division in the United States.
Karl Denninger, author of Leverage and the Market Ticker blog joined the podcast to discuss global economic issues. He explained his reasoning for beginning his blog and for writing his book, to warn investors about the upcoming ruptures in the stock market. He spoke about illegal practices in the technological boom and how geometric systems are unsustainable in the long run.
The pair discussed solutions for putting the system together on a sustainable basis, as well as the issues of deflation from productivity, deflation of money, and Denninger’s experience in before the technological boom as the former CEO of MCSNet in Chicago.
Expansion of the Welfare System
Hartman begins the episode one day after the election with his guest Steve, and mentions that former-president Obama has been the biggest expander of the welfare system. He notes that it’s amazing how many people are on disability versus years ago when there was a significantly smaller number of people receiving benefits from the system.
Steve notes that there is a good deal of legitimately disabled people in our society, but agrees that there are likely just as many entitled people receiving disability benefits that they don’t truly qualify for. He explains that it is unlikely, though, that there are going to be cuts to these programs, because government parties do not want to risk it and lose popularity with the electorate.
Hartman explains that in today’s world, a candidate can’t win an election by telling people to be responsible and strive to involve the government in their lives as little as possible. Over time, he says, politics has leaned to the left in reference to people wanting their government to do things for them, to benefit them in some way.
Hartman mentions that he owns a foundation at www.jasonhartmanfoundation.org, that he places sums of his own money into. He doesn’t take donations to run the foundation and uses the money to further the financial literacy of young adults via a free podcast geared toward younger people and the world of finances.
He references a Facebook comment that he made about the election, stating that he’s surprised that people are surprised by the way the election ended. He explains that he has liberal, conservative, and non-affiliated friends, and that at about 9:20pm the previous night, friends from all walks of life were messaging him about the news of the election with many complaining because Obama appeared to be winning.
In his Facebook post, he asked people if they were truly surprised by a victory won through vote-buying and promising things to people. Though the election has gone this way, he states that it is still a very profitable society with inflation going up. Investors will become richer and there will be an increase of low-income people, meaning a good deal of renters in the pool.
Obama’s Past Shrouded in Mystery
Steve reads a piece of Hartman’s fan-mail, criticizing his views regarding Obama’s past being shrouded in mystery, stating that it isn’t. The piece also states that though the writer does not agree with Obama’s policies, they do seem to be good for business. There are a lot of people on public assistance, and many of those who rent his properties are receiving some sort of housing benefit.
Steve also mentions that listeners can complain about the vote, but it will not do anything to fix the problem. With entitlements growing, he states that it’s best to find opportunities in the system. Get some rental properties and allow tenants who are receiving assistance to rent them. It will be a benefit to you.
Hartman states that the Obama administration was pulling for uniting the country, but it seems that as a country, we are more divided than we’ve been. Rich people are getting richer and the middle class is disappearing. Many are complaining about low-income people receiving government assistance, but that is not likely to change. Hartman agrees that the rich are getting richer and that many of the middle class are moving into the lower class, becoming poor.
He explains that even if listeners do not like the system or the results of the election, the best option is to deal with it. Follow Hartman’s plan and keep working. Dominate your assets in things like rental properties because they do not go down in value, as they are not indexed to currency.
In reference to the fan-mail regarding Obama’s past, Hartman explains that the former president has yet to release his college transcripts, which every president has done in the past along with the release of tax returns. Donald Trump offered to contribute $5 million to Obama’s favorite charity if he’d release his college records and it hasn’t happened. There are several mysteries involving Obama’s past, and Hartman believes that he may puppet for someone.
With this, he explains that he is going to step away from discussing the topic of the election in future episodes, because it has ended.
In Favor of Smaller Government
Hartman mentions that he is very much in favor of smaller government involvement in society, and that they should not be able to dictate morality. Government should be smaller, he says, allowing more freedom to the people. He references a picket sign he’d seen in the past stating that, “Larger government equals smaller citizens.”
In society, both government and citizens cannot be big. Either the government is in power or the people are. The US was initially the first country that was founded on the idea of the individual being first, but voting in big government has become a vote for less freedom.
In a way, Hartman says, we have become like children in the sense that we are needy. We want the government to do things for us, and the candidate that hands things out wins elections.
Steve asks listeners to point out a time in history where the government has not continued to grow at will, and states that this is why we have to actively try to limit its power, because it will continue to grow if it continues unchecked.
The government continues to try telling people what to do, and in that, there is a moral hazard. For those who want to use the government to force viewpoints on people, what happens when someone they disagree with is in power?
Hartman states that next time around, it could be you who gets the bad deal. He references racism and how it cannot be allowed to exist freely in society, because the next time around, it might be your own group facing these issues.
He states that we live in a sea of laws and customs, and we are constantly being told what we can do with our investments, how quickly we can evict tenants, what mortgages are available. Politics tries to control all sorts of things and in this, it is very much related to real estate.
Karl Denninger’s History
Hartman welcomes Karl Denninger to the podcast. Denninger is the author of Leverage and his Market Ticker blog, tuning in out of Niceville, Florida.
He explains his history by stating that he is a former online entrepreneur, and worked as the CEO of MCSNet in Chicago during the 1990s.
He contributes his writing of Leverage to the fraudulent activity he observed in the technological sector during the technological boom, citing the same basic design of these companies. Their aim was to sell so many billions worth of their product, while the companies sold securities to their investors. They collected money and spent it on bonuses, and would say that the money was gone when they were caught in the act.
Denninger recalls the stock situation in the early 2000s, noting that in the early part of 2007, there was dislocation in the stock market that initiated in Asia. It was the first rupture in the stock market during the four previous years. He states that he looked for the why that people were not noticing and found disturbing things in the system.
He explains that Washington Mutual was paying out dividends for money that they didn’t have. They were taking negative amortization of interests, counting it as income, and then paying it out in dividends. Denninger states that this practice cannot go on for very long, as it happened during the technological bubble as well, and these situations led to the same end.
Chronicling the Recovery of Systems Full-Time
Denninger states that he saw people going bankrupt due to these practices and felt that he couldn’t let it continue the way it was. Since then, he has been chronicling the recovery of the system full-time. He explains that his book, Leverage, condensed a good deal of his work, which he wrote in a manner that he aimed toward people who do not have financial backgrounds.
He notes that as a country, we have not had any organic economic growth in the past thirty years. It has been a functional reality of our economy since 1984. We are borrowing more and more money to add leverage that is truly debt to the system. Denninger explains that this is not growth, it is debasing the capital in the system. Due to this, the government has run a large deficit. Denninger points out that they are adding credit into the system but not capital. In this, it becomes a geometric series, not sustainable in the long run.
He offers an example of the claims of maintaining Medicare, even though medical spending has grown from 1982 until 2011 at a compound 9.3%. That cannot be maintained forever. Denninger explains that bankers have Rule 72, which approximates the doubling time of a growth rate. In this situation, every seven years, the amount of money spend is doubled. Medical spending was at $52 billion in 1980, and last year it was $850 billion. This means that fifteen years from now, we will spend more than $3 trillion in the medical field.
Denninger explains that if you’re 50 years old today, your life expectancy is another thirty years. When the government tells you that your Medicare is not going to be tampered with during that time, they’re lying.
The Insidious Tax of Inflation
Denninger references the last four years, stating that the government has spent 10% in deficit. To make sense of this, he creates an abstract of our economy, stating that if there is 10,000 units of GDP being produced, and $10,000 units of credit or currency, there is a 1:1 balance. If the government comes along and states that they’re going to put another 1,000 of borrowed units of credit into the system to help people, they’re really bringing the cost of things up by 10%. Now rather than the 1:1 balance, it now takes 1.1 units to buy anything. Essentially, it’s a tax.
Hartman refers to inflation as an insidious tax, where the government can take your money without you ever having to consent to it.
Denninger states that we live in a world where we do not have hard-backed money anymore. If we look at the Fed Z1, it shows the economy and credit, and who holds that credit. That’s the monetary base. Currency base is the credit in the system, he says. We have to look at the Z1 to sum everything up. He explains that it’s important to look at that chart’s growth, and the growth of income without looking at the financial credit in finance firms. That money never reaches the economy, but mortgages, consumer credit, and student loans do.
From 1953 to 1980, Denninger points out that there was legitimate income growth. In general, there was between 4% and 10% on the annual growth average, making a vibrant economy. There was a recession between 1984-1985 and incomes decreased. No one made progress in terms of debt.
After the technological crash, the government convinced people to borrow more and more against their assets. There was a -20% growth just before the crash and Denninger states that it has never gone positive since the third quarter of 2000. As of the last Z1 update, we’re at about -3%, which is why the middle class is being destroyed.
Hartman notes that this could also point to the entitlement obligations in the government. There is a crisis regarding student loans, now at the $1 trillion mark. Though Americans have not had a raise in decades, it appears that they’re living better than before, including the poor being more well off than they’ve been. We all have smartphones, and we outsource our labor. It’s helped hide a lot of the inflation and increased unemployment in the country. Had we been more isolated, as we were decades ago, it would be easy to see that we aren’t well off.
Denninger states that the problem is obvious. It’s directly out in the open but nobody wants to face it.
Destruction of Purchasing Power
Denninger mentions that problems come from the labor parody issue. The government has covered up what we have done in other countries. He states that if we have a free-floating currency regime with both China and Mexico, both nations trade and balance floats. If we run a trade deficit between one of these countries and the US, the capital goes to the receiving country to pay for goods. Their currency becomes stronger than ours. Their prices go up and it chokes off the balance immediately. It’s this way due to the flow of capital, but why did it happen?
He goes on to explain that the federal government issued credit to the economy to make up the hole in capital. It debased the capital to keep up the illusion that there are cheaper products available at Walmart, but nothing has been done short of destroying purchasing power.
Hartman mentions that when he hears statistics about the destruction of purchasing power, he looks into it. He hears statements referencing how since WWII, the average home has doubled in size and this makes it seem like people are living better. Though the sizes of homes have increased, we are living in more densely-packed environments than people did in WWII. Now, everyone’s car, computer, and phone are better than ever before, but he states that hedonics tell us that we are not entitled to progress. The CPI gets the progress we worked for.
Denninger asks listeners to take into consideration that the natural state of all economies is deflation. We have productivity because we are intelligent, and we come up with ways to do less in order to get more. We are efficient, and we develop. At one time, we hunted with sticks, then invented guns. We learned to farm and made plows, then steam machines, and then engines.
Hartman agrees that the natural state of society is deflation, but points out that because things become better with progress, progress is deflationary. Every paper currency is eventually devalued to paper and ink.
Denninger explains that the banksters didn’t invent the con. It’s the same scam that has gone back many years into the past. The government gets the idea to do a small amount of inflation, and they don’t realize that if they maintain the prices, they’re still robbing the economy. We the people are productive, not the government. With the help of bankers, the government sells people the idea that the slow increase in prices was the way things were supposed to be. It’s a lie and it’s illegal, says Denninger. The Fed is supposed to regulate currency and credit to produce the most stable employment and prices, with moderate interest.
The issue with that law, he says, is that there is no “or else” included. It’s our responsibility as citizens to tell our politicians that the natural state of our society is productivity. It belongs to us, not them. They cannot steal from us by lying and they should not be spending what they can’t tax. What they won’t pay for, they can’t spend.
He mentions that people often want to discuss Medicare and Medicaid but that these issues can’t be fixed without fixing the underlying medical system. He explains that in at least 30 states, there are con laws which state that in order to open a medical center, you need a license to show that there is need for a center in your desired area. People who own the MRI sit on the licensing board.
He compares the monopoly in the medical system to technology. He states that he owns a flat screen TV and four flat screen monitors for his computer. For the monitors, he paid $250 apiece, when five years ago, they would have been $2,000 apiece. The medical system doesn’t work that way. The cost of an MRI will never drop down to $2 because the medical system hides the cost by cost-shifting methods. They mark up procedures to cover the care of people who have no money. This way, other people are forced to pay outrageous medical fees when they need care.
Deciding Between Two Outcomes
Denninger explains that we have to decide between two outcomes, and the choice has to be made actively. Failure to make a choice is still a choice made. We can decide to force the financial industry to stop writing hot checks and impose a $1 capital, or we can stand by and do nothing.
He notes that there is something wrong with creating credit in the system and creating asset bubbles with nothing behind them. The financial industry should start requiring capital behind every loan they write. This would stop a lot of the issues in a day, but the economy would contract dramatically. It would create a recession but not a depression.
He states that though many believe that this would put a good deal of people out of work, Denninger asserts that people who should have gone bankrupt would. There would be new opportunities opening up for others, stating that if every bank in a town were to bust tomorrow, a new bank would emerge the following day.
Denninger’s Advice
Denninger’s advice regarding how to invest in a world like this is that duration risk is death. Avoid it. Don’t count on the government to be able to gear up. Look at the potential opportunities that will emerge if you have capital available when the opportunities are present. Look for base hits, durations measured in days, weeks, or months. Consider assets that can be liquidated when things go downhill. Expect that when the game ends, dislocation is going to bring opportunities you’ve never seen before. If you’ve got capital, think about the appropriate valuation and offer half of the asking price. You won’t get rich quickly, but you can slowly gain wealth.
Hartman states that his clients buy at 30-year low fixed-rates and the duration risks are with the lender, not the borrower. He only invests a small portion of the property’s value and since the laws changed about how properties work, every downturn benefits people in debt. They’ve been able to attain short sales and loan modifications. Hartman notes that this might not be right, but it is what it is.
Denninger warns against making assumptions, noting that listeners should be very careful regarding what they get into. If everything in your business goes downhill, you’ve got to be sure you can walk away.
In closing the podcast, Karl Denninger offers more information to listeners at his website, www.market-ticker.org, as well as following him on Twitter at the handle @tickerguy. He also has Ticker Forum for even more information to those who are interested.
