On this Flashback Friday episode, Jason Hartman interviews Professor Laurence Kotlikoff, author of The Clash of Generations: Saving Ourselves, Our Kids, Our Economy. They talk about the economy and how astronomical national debt and government spending will affect the future generation. Professor Kotlikoff also explains the $211 trillion fiscal gap and discusses why the 2007 quadrupled money base through money printing hasn’t hit the streets yet in the form of hyperinflation.
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Jason Hartman 0:09
Hey, this is Jason Hartman, thank you so much for joining me. Do you know what day it is? Yes, it is flashback Friday, where you hear the best of the creating wealth show and you hear some good prior episodes, some good review. Remember, we’ve got almost 500 episodes out. And you know what? iTunes doesn’t even hold them all if you’re an iTunes listener, if you are listening on Stitcher, thank you for joining us. So we want to bring you some good review stuff. Now. What’s interesting about flashback Friday, it’s a little scary for me. I got to be very, very candid with you on that. Because you the listener, you get the chance to hold my feet to the fire. Did I make any predictions? Was I right? Was I wrong? I’ve been right about a lot of things, but I’ve been wrong about a few. So you can give me a hard time about that if you wish. But it’s flashback Friday, and we will give you the uncensored Best of the creating wealth show with a prior episode. So let’s dive in. Here we go. Remember, this is not current. It’s Flashback Friday.
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Jason Hartman 2:11
My pleasure to welcome Laurence Kotlikoff to the show. He is a Professor of Economics at Boston University and the author of several books, including the clash of the generations, saving ourselves, our kids, our economy. Larry, welcome. How are you?
Laurence J. Kotlikoff 2:26
Great. Thanks for having me.
Jason Hartman 2:27
My pleasure. Well, we are in quite a peril I have many times referred to it is the $60 trillion time bomb. That’s trillion with a T, of course, but you are calling it a much bigger time bomb than that. And you do propose some solutions, and we’re looking forward to hearing them. First of all, the background, what is the problem? Just outline out for the listeners if you would,
Laurence J. Kotlikoff 2:47
Okay, well, the economy like a business has a balance sheet. And the government has assets, which are taxes that are coming due through time, they have a certain present value. And there’s also liabilities. So there’s the assets, the taxes, the liabilities are the official debt, plus the present value of all the future expenditures that are scheduled to occur for Social Security benefits for Medicare for Medicaid for defense expenditure, all these things also have a present value. And if you look at the combination of the official debt, plus the present value of these spending, liabilities, that’s the unofficial debt, the two things together exceed the assets, which is the present value of the taxes by 200 200, and $11 trillion. So that’s what we economists call our fiscal gap. And these numbers that are underlying this calculation are coming from the Congressional Budget Office. So they’re not numbers that I cooked up, or some economists, they’re coming right out of the government. All you have to do is kind of do some arithmetic with the government’s projections, and you see a colossal fiscal imbalance, a colossal problem much bigger than anything, anyone he has been talking about the $60 trillion figure you’re talking about. It is, I think, based on just looking at 75 years, but there’s no reason to stop the projection 75 years from now, because the kids today are gonna be around 75 years from now, so we have to think about the benefits we’re gonna have to pay to them. In addition, the way the accounting works is the cash flows aren’t really well defined. We use particular words to describe government receipts and payments, some of them we call taxes, and some of them we call borrowing on the receipt side. On the payment side, some of them we call repayment of principal plus interest and some we call transfer payments. And what choice of words we use here doesn’t change the fundamental economics, but it does change the cash flows that are being projected over any finite horizon over 75 years. For example, and so that’s really arbitrary. The only thing that’s really not arbitrary is what we call the Infinite Horizon present value and fiscal gap. And that’s $211 trillion. And that’s enormous. And to get some idea about how big that is, we would have to raise every single federal tax immediately and permanently, by 64%, in order to come up with $211 trillion in present value, or we could cut all non interest spending by the government by 40%. So if you go to your mom’s Social Security benefit, Jason, I don’t know if she’s collecting, but let’s say she is, has to be cut 40%, her Medicare benefits have to be cut 40%, she’s collecting Medicaid, they have to be cut 40%, the defense spending has to be cut 40%. That’s the magnitude of the problem that we’re facing. The country is broke, it’s totally broke. It’s in worse shape than Greece.
Jason Hartman 6:00
Remember, you’re listening to flashback Friday, our new episodes are published every Monday and Wednesday. So Larry, yes, of course, when you look at the balance sheet, it’s we are in much more dire straits than than Greece, for example, and Greece is in a terrible mess. However, you know, we do have the reserve currency, at least for the moment. And while the world still appears to have some faith in us, but you know, we also have so many other advantages in terms of military, we can sort of throw our weight around a bit, and manipulate situations with it and so forth. It can’t really, in all fairness be compared to Greece, in the same way, just from a balance sheet perspective, can it?
Laurence J. Kotlikoff 6:42
Yeah, absolutely. It can’t be compared because we have taken upon ourselves to be the policeman of the entire globe. so
Jason Hartman 6:50
Expensive proposition to say,
Laurence J. Kotlikoff 6:52
Expensive proposition. Greece has to have to deal with that Greece has had some pension reforms, they’ve got a health care system that’s under control. They decide how much to pay for the doctors, they hire the doctors directly, they hire the they build hospitals or not build the hospitals, they decide what drugs the public are going to get. So their control over their expenditures going forward is much better than ours. So we’re actually and the fact that we can print money is not really much of a blessing here. Because what happens if you print? You know, we’ve got a $211 trillion problem. Our basic money supply called the M one money supply is about 2 trillion or so maybe two and a half trillion. If we were to print $20 trillion. What would we end up with Jason, we’d end up with hyperinflation.
Jason Hartman 7:40
Yeah. So I think we’re already going to end up with a degree of hyper hyperinflation, unfortunately, has no academic definition. But whatever you perceive to be hyperinflation, I think it’s going to be pretty severe.
Laurence J. Kotlikoff 7:52
Yeah, absolutely. The government since 2007, has quadrupled the monetary base. In other words, it’s that’s the basic amount of money that it has printed has been quadrupled since 2007.
Jason Hartman 8:06
Since 2000. So let’s examine that. So since it could really be argued, and I guess maybe the reason and I’d love to have you addressed this, that we haven’t seen quadruple inflation since 2007, because we’ve created so much more money is because that money hasn’t hit the streets yet. It’s it’s sort of in the hands of the banks and, and it hasn’t trickled down to Main Street, it’s still on Wall Street is, is that the reason that the inflation hasn’t happened, because the true academic definition of inflation, of course, is just money printing, the result of money printing, is we see as an increase in prices that most people call inflation. But why haven’t we seen the inflation yet?
Laurence J. Kotlikoff 8:48
Well, the Federal Reserve has been paying the banks to hold what are called excess reserves. So they’ve injected this money into the economy, it’s been deposited in the banks, and then the Fed is in effect, bribing the banks not to lend it out. And so on the one hand, we’re trying to stimulate the economy. On the other hand, the Fed is doing everything it can to keep this money from hitting the streets, as you said, because once it does, that could lead to inflation taking off. And then once prices start to rise, people start to treat money as a hot potato. And then the money becomes an effect faster, it just the same money starts circulating more rapidly. lossy increases, and then we can have endogenous inflation, inflation just takes off on its own. So we have the basis in place now for a quadrupling of the price level. And that’s scary enough, let alone trying to print our way out of a $211 trillion problem. It keeps getting bigger, you know, the fiscal gap grew by $6 trillion between last year and this year. Because you know, well, the members of Congress arguing over, you know, $2 trillion, saving that over 10 years, in one year alone, the fiscal gap rose by 6 trillion. Because all the baby boomers are one year closer to getting these very significant benefits. My generation when we’re fully retired, we’re going to be getting $40,000 per person in today’s dollars, three quarters of per capita GDP actually, sorry, it’s going to be about 85% of per capita GDP every year for our full retirements. So that’s going to be an enormous bill about $3 trillion. In total, in today’s dollars every year, the boomers are in retirement, and who’s gonna pay for this? Well, it’s gonna be people in your generation, or not. The whole thing could blow up into the boomers face. So this is the kind of thing we’re talking about in this book, The Clash of generations, Scott Burns and I, in our new book,
Jason Hartman 10:53
Two things, I’d like you to address that you just mentioned. Fascinating things. Number one, you’re saying that the Fed is actually bribing the banks not to lend? I mean, if you listen to Bernanke and and Geithner and Obama, it’s all about let’s get money lent into the hands of small businesses and into the housing market to stimulate it. I mean, that’s just window dressing, isn’t it? And how are they, how are they bribing them not to lend the money, because they’re certainly still pretty tight with lending, I mean, better than they were at the depths of the financial crisis three years ago, but but still very
Laurence J. Kotlikoff 11:29
The way it works is the Federal Reserve is paying interest on these excess reserves, they could make that interest rather than 25 basis points, which doesn’t sound like a lot, but it is a lot in this environment. They could make it zero basis points or negative basis points, they could tax banks for holding excess reserves. They could get the banks to make loans, no question about it. And they’re worried about inflation, they’re worried about see part of what’s going on here is a under the cover method of restoring the bank’s balance sheet. So giving the bank’s free money, if you like, you, let them borrow money at low rates, and then they Well, the banks basically are able to get a return on this 25 basis points, which is more than they can get on the market.
Jason Hartman 12:18
Yeah. Well, so in other words, that banks all they’re doing is buying treasury bills with the money, right, because, you know, there’s that’s a basically a no risk solution for them. And they’re arbitraging, the rate at which they borrow and the rate at which they invest, right?
Laurence J. Kotlikoff 12:30
Well, they’re either borrowing, holding treasury bills, or just they’re holding excess reserves and getting the 25 basis points directly from the Federal Reserve, as interest. Yeah. So
Jason Hartman 12:42
What an unbelievable, frankly, scam that’s going on, isn’t it? It’s really a scam. Right?
Laurence J. Kotlikoff 12:47
Exactly. Yeah. So I mean, the way the way it works, just to be clear, is that the Fed prints the money, it lends it out at very low interest rates to the banks, and then the banks deposit it right back with the Fed and get a higher interest rate. So that’s where the banks can be made, you know, they borrow at a low rate, and they earn a higher rate, at no risk they can be made over time, we’re solving without the public understanding what’s really going on.
Jason Hartman 13:14
One of the things that Bernanke, he said on his first 60 Minutes interview, which, you know, is such a historic thing, because a sitting Federal Reserve Chair has never been interviewed on 60 minutes, or I don’t think has done media interviews like that at all. And one of the things he said Is he said that when he was asked about, well, aren’t you worried about inflation with all of this the stimulus back then we were QE one, or now we’re way way into it? And he said, Well, you know, we have tools that when when inflation starts to rear its head, we will will rein it in with our tools. And, and, and that is, in my opinion, such a complete lie, because you think you can just close Pandora’s box and you know, with a couple strokes of a pen or a mouse, and that’s simply not true. And I think one of the reasons it’s, it’s so untrue, is is what you said earlier, when money becomes progressively more and more value less. It’s as it’s debased by inflation, you get this sort of hot potato syndrome, that was a great metaphor, you just use the hot potato syndrome. And when you look at inflationary examples throughout history, whether it be Weimer Republic, or Zimbabwe, or Hungary, or where Argentina, wherever people treat money, like a hot potato, they get it in their hands, and they can’t wait to spend it because they want to trade it for goods and services before it goes down in value more. So the velocity increases and the rate of inflation it just grows exponentially, doesn’t it? So you set the example, in 2007. The monetary base has increased by X amount, what four times or something right? And so that would say that the rate of inflation will be four x, but really when you throw into that the velocity the hot potato problem gets much worse doesn’t it?
Laurence J. Kotlikoff 15:02
Absolutely. It could go up much more rapidly than four times if prices start to rise, people will naturally try and economize on money, and it will become a hot potato.
Jason Hartman 15:12
Just a reminder, you’re listening to flashback Friday. Our new episodes are published every Monday and every Wednesday. I mean, do even the layman in the economy that really don’t get it the uninformed, they even understand that you should treat money like a hot potato when it’s going down in value, right, spend it. Now, you know, in the Weimer Republic, there are stories of people, as soon as they would get paid, they would rush out to spend their pay, because they knew that if they waited even till later in the afternoon, it would go down in value.
Laurence J. Kotlikoff 15:45
Absolutely. People are paid being paid with wheelbarrows full of money at lunchtime and going spending it immediately in that episode. So when Ben Bernanke says that he’s going to have complete control of these events, every central banker has made these kinds of statements before things got out of control. Now, the thing that he doesn’t have control over is the fiscal policy, and the fiscal policy is going to put enormous pressure on the monetary authorities, just like we’re seeing in Greece right now. Why is why is Greece talking about getting moving away from the Euro? It’s in order to have their own printing press in order to try and use inflation as a way as a hidden way of taxing people and increasing expenditures without somehow this becoming apparent to the public, but it will culminate in inflation, if not hyperinflation in Greece. So going off the Euro is fundamental, not an answer for Greece. It’s just,
Jason Hartman 16:46
It’s just a way to kick the can down the road.
Laurence J. Kotlikoff 16:49
Exactly. It’s more that and Bernanke is not going to be in a situation to somehow avoid the pressure of $211 trillion, where the government can come up with 111 trillion dollars in present time not saying it’s all due today. But increasingly over time, whether it’s Nike or who is who or whoever is in the position of the chairman of the Fed, they’re going to come under enormous pressure to ease monetary policy to print more money. And the way this is going to work is that over time, we’re going to start running large and larger official deficits. So the public will finally see what I see, just by doing the present value, bookkeeping, you’ll see it showing up in the official debt numbers, how bad the situation is, at some point, there will be a run on us bonds in the sense that people will start start dumping US Treasuries, interest rates will spike. And then the Fed will be called upon to lower interest rates, and how do they do that they print money and buy up the bonds. So the pressure to keep interest rates is really the pressure to print money, keep the interest rates from soaring. But if you get into one of these inflationary spirals, the more money you print doesn’t lead to lower interest rates that leads to higher interest rates because the inflation gets embedded in the interest rates. And because people aren’t going to lend money to the government. If they expect their money to get paid back and in water, then dollars, they expect prices to rise.
Jason Hartman 18:13
What do you think the real inflation rate is right now? I mean, the official statistics ever since certainly, I think that the latter part of the Jimmy Carter era have woefully underestimated inflation. If you ask me, it’s nine to 10% presently. Your thoughts?
Laurence J. Kotlikoff 18:31
Well, they keep they’re changing the basket of goods and services, which are being valued. So as things become more expensive, we started switching towards less expensive products, and the CPI is being adjusted, take into account that the change in the in the bundle. So and there’s been some other adjustments in the CPI. I don’t know, we don’t have to look at ice cream cones. That’s my measure of inflation. And they’ve been going up like crazy. And I think on an ice cream cone basis, price level has tripled or quadrupled, actually, but it may be 10 years or 15 years. But I think that the BLS is doing a decent job at this. It’s not a perfect science. And I don’t think it’s that we’re dramatically understating inflation, I think that that the economy is in very bad shape, there’s not a lot of pressure on prices. But again, if the bank start lending at $1.6 trillion, and again, if inflation, if interest rates start moving up, they’re going to have a big incentive to do that. The Fed could try and pay even more interest to bribe them to keep the money from getting into circulation. But that becomes kind of a again, another kind of Ponzi scheme situation. We have to kind of print money to try and stay ahead of the ballgame here. If you print money to keep people from lending out the money and that leads to interest rates to go up. Higher, you’re gonna have to print even more money and it becomes something, something you lose control of. And many, many countries have gotten into this boat 20 countries in the last century ran hyperinflations. And it wasn’t because they had central bankers who didn’t think they could control things. They all have central bankers who thought they were in charge of prices. And they could they could stabilize prices, but they weren’t able to
Jason Hartman 20:23
Just one thing I wanted to say to, you know, listeners who may be a little new to this stuff, you talked about how central bankers like Bernanke at the Federal Reserve, are only in control of one side of the equation. And that’s the monetary policy, not the fiscal policy. So government controls fiscal policy, and that’s taxing and spending, monetary policy creation of fake money or fiat money is controlled by central banks, like the Federal Reserve
Laurence J. Kotlikoff 20:49
Let me just say that’s true, except that when the when the fiscal side doesn’t have enough tax revenue to cover its spending, then they go to the monetary authorities to try and have them print money to, to pay for the things they want to buy, and so forth. So monetary policy is very much an element of fiscal policy.
Jason Hartman 21:08
Sure, sure. They most definitely interconnect for sure, but they’re just not under direct control of each. Talk about the timeframes if you would for a moment, because I thought the timeframes were actually much shorter. on this call you you cheered me up just a tad, maybe, because I really have always kind of called it the $60 trillion time bomb. I’ve heard people say, it’s 100 and 10 trillion, you say it’s 200 and 11 trillion. And of course, that always depends on the time horizon, because the time and the amount of the amount of which we’re underwater, they interplay with each other. And so the 60 trillion part, I was always thinking that that was about 15 to 20 years out, by the time we’re in 2025 2030. We’re underwater, about $60 trillion, with the entitlement expectations. Is that true?
Laurence J. Kotlikoff 22:03
The only number worth thinking about is the 211 trillion. All the other numbers are made up by actuaries or accountants who don’t really understand the economics. None of the numbers actually have any grounding whatsoever in economics. First of all, there’s this labeling problem, which is how you label receipts and payments will affect how you how you project the cash flows to be over the next 20 years, 30 years, 50 years, it’s only this infinite horizon present value calculation that is labor free. So we have a problem in economics, where certain certain measurements are not well defined, just like in physics, time, and distance isn’t well defined. In economics, the deficit, current taxes, current transfer payments, they’re also not well defined, because you know, your Social Security contributions this year, Jason, I could call those a loan from you to the government. And the government could be we could view that as borrowing by the government rather than attacks from you to the government in your future. So security benefits, we could say, hey, part of those benefits are not a transfer payment, they’re really repayment of principal plus interest on this loan that I’m going to you’re making to the government this year. So we’re free to use whatever language we want. These things are not in concrete. But in present value, you see the true story, which is to an 11 trillion, so we’re not broke in 20 years or 30 years. This is a credit card bill that it’s due today. It’s 211 trillion. It’s not in the future that we’re broke, we’re broke today.
Jason Hartman 23:30
So where does the 75 years come into play then?
Laurence J. Kotlikoff 23:33
The 75 years is on accountant or some you know, David Walker, who was a lovely guy was the head of the General Accountability Office for many years. He came up with this calculation, the security actuaries do a 75-year projection, but they also do an infinite horizon projection. Why did that happen? Well, a very good economist named cats mentors was involved under the Bush, the second Bush administration, advising the actuaries. And he got them to put in this infinite horizon calculation. That’s the one that people should focus on. And if you look at that calculation, and table four B, six of the security trustees report for 2012, you’ll see that Social Security’s 31% underfunded, the 75 year projection is about a third of this problem in terms of the calculation. So, again, these truncated calculations make no economic sense. It’s just like saying, gee, the measurement of the distance of this table that I’m sitting in front of today is a certain size, and that’s the Absolute Truth. But Einstein taught us that the size of that take this table can be dramatically larger or smaller, depending on our frame of reference or language, or label, like an effect. And that’s the same thing in economics. So you need to be focused on the Infinite Horizon prismatic calculation, and it’s in table four B six for Social Security. It’s not being done for the entire government sector. Except by people like me, an economist, the IMF actually did the calculation. They came up with a number that’s for the for the reason that’s even bigger than 211 trillion. They did that last summer. So there’s the right way to do economics and the wrong way. And it starts with having actually an economist doing the calculations.
Jason Hartman 25:19
Let me take a brief pause. We’ll be back in just a minute.
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Jason Hartman 26:11
Yeah, another one of your works is entitled Jimmy Stewart is dead, ending the world’s ongoing financial plague with limited purpose banking. Now, I assume you’re referring to the Jimmy Stewart, of It’s a Wonderful Life. Tell us about that. And the limited purpose banking.
Laurence J. Kotlikoff 26:26
Okay. So this is a proposal for how to fix the financial sector, and financial system. And the financial system is a trust me banking system, where the banker say, trust me, give me your money, I’ll be safe with it, I’ll pay it back. And then they go off and gamble. And if they make a killing, they take the upside, if they lose money, they turn to the tax payer to bail them out. So they don’t let people see what it is they’re investing in. So it’s opacity and leverage, they’re borrowing. And then they’re investing in things not telling you what they’re doing with your money. So at the slightest sign that they’re engaged in some kind of fraud, or malfeasance, people want their money back out. So you can have runs very rapidly occur. You saw this in, it’s a wonderful life. Jimmy Stewart, this very honest banker, as experienced as a bank run on. And I think it’s Christmas Eve or whatever. And he barely escapes insolvency for his bank, he tries to commit suicide, he finally gets rescued by an angel, he comes back and makes a great speech and he saves his bank. But you see in that movie, the fragility of the banking system, you see the dependence of all the trust on one person. And if soon as people start to start losing trust in Jimmy Stewart, that’s it. Now, that’s the situation we have here, we have all these people at the top of these banks, who are the only ones who really know what their banks are doing. And in the case of JP Morgan, we see that Jamie Dimon doesn’t even know what he’s his company is up to. And as soon as people lose trust, they start moving away from the banks. And that’s where you have runs in the back. So we have a very unstable financial system. And that’s what we saw in 2008. When all these different, financial companies went broke, went down, we saw a trust, take a holiday. So limited purpose banking, is a very simple reform. It’s been endorsed by five Nobel laureates in economics, actually seven at this point, including to two guys who got it for finance. It’s been endorsed by George Shultz, a former Secretary of State and Treasury, Bill Bradley, Robert rice, former Secretary of Labor, just a long list of very prominent policymakers and economists in addition to the fight. So the Nobel laureates, and here’s what it does, it says, look, let’s take all the financial corporations and make them operate as mutual fund holding companies that issue hundred percent equity, finance mutual funds, and let’s do all the financial intermediation through 100% equity finance mutual funds mutual fund is like a little bank that takes in its money by selling shares. And then it invests in the things that it’s specialized in. So mutual fund because it’s not leveraged because it’s not borrowing cannot go bankrupt. So limited purpose banking, changes all the banks into non leveraged mutual fund companies, and they can never go broke again. And then the other aspect of limited purpose banking is that there’s a single government agency called the Federal Financial authority that discloses and verifies on the web in real time, all the details of the securities that the mutual funds will be buying and selling and holding, so that we have full disclosure. So the two problems that occurred in 2008, and are still plaguing us, our opacity, and another is lack of disclosure or lack of transparency, and leverage, limited purpose banking, turns the lights on and it also eliminates the leverage of the banking system and it moves us from show me back from trust me banking to show me banking.
Jason Hartman 30:04
That’s a great way to put it. The question is, could it ever happen because, like everything in life and this country is just degraded in so many ways, with this problem, there’s so many entrenched interests who have set up these iron triangles that want to keep things the way they are, because they’re all prospering from them. And with with limited purpose banking, I mean, who who would be the the loser. I assume all the traditional bankers that are doing it the way really, I don’t want to say not a traditional because traditionally, it’s only a fairly modern tradition. But I guess the traditional banker is the older banker, but who would lose in that system and who would block this type of reform?
Laurence J. Kotlikoff 30:44
Well, the big banks wouldn’t be happy with this. But we have to realize that limited purpose banking is, is already in large part in place in the US, we have a mutual fund industry, about 25% of our mutual funds actually be 25% of our financial assets. And our financial intermediation is occurring through equity financed mutual funds. There is a small segment of mutual funds, we’re not actually that small, that are money market funds, but they’re leveraged because they’re making a promise to back the investments to the buck. And that’s really like a, you know, a form of leverage. So that would not arise under limited purpose banking. So we have a glass, it’s about 25%, full are ready, you could move to limited purpose banking on a asset by asset basis. So you can start with, for example, mortgages, if you go to a mutual fund system for the for mortgage mortgages, you end up with what they’ve had in, in Denmark and Sweden and Germany for centuries, really, which is the covered bond mortgage system. So there’s a bill in Congress to move our mortgage market to a covered bond system, this would be moving to limited purpose banking, on that asset. So we could do this asset by asset and actually get there pretty quickly. Now, yeah, there will be opposition, very well heeled opposition, but the public has a lot more votes than the bankers. So the real issue is getting the word out to the public. If enough people read, Jimmy Stewart is dead, go to the purple financial plan, which is on my website. It’s a website that I set up for fixing the financial system. And then I’ve got other purple plans to fix other things like health care and social security. And
Jason Hartman 32:33
Why is it called the purple plan?
Laurence J. Kotlikoff 32:34
Purple is to say that this is something that both red republicans and blue democrats can agree to. And red plus blue makes purple. So so we can get behind a reform would actually work. The fact that so many prominent people have endorses the fact that Mervyn King is the governor of the Bank of England, has publicly spoken about limited purpose banking. Instead, it deserves serious consideration. The fact that I’ve been asked to go talk to heads of central banks in Sweden and Holland and in Ireland. Last week, I was asked to speak about limited purpose banking to the Federal Reserve Bank of New York. I’ve spoke about it in China. So the word is getting out there is a way to fix things and keep us safe. If we had limited purpose banking in place in 2008, we would not have had a financial collapse of any kind. If they had limited purpose banking in place right now in Europe, we would not be seeing a sovereign debt problem, we wouldn’t see Greece being forced to possibly leave the Euro, which again, I don’t think so ultimately going to help it we would not have the prospect of a massive run starting this week, this coming week in Greece, which could easily spread to Spain and Italy and all the other Portugal, Portugal, Ireland, Ireland, Belgium, France, yeah. And it could come right across the ocean to the US. Because the system as created is extremely fragile. We’ve got a system that’s built to fail. That’s what the Mervyn King, who’s the governor of the Bank of England, he’s been the the governor of the Bank of England for many years now. He’s a very distinguished economist, a brilliant man. He described the design of the banking system as now exists as the worst possible design. In a speech in 2010, in New York, called the Buttonwood conference, that’s where we were speaking. And in that, in that speech, he said, we need to have radical reforms. There are three or four proposals. There’s like four proposals for radical reforms. He went through three of them, he rejected them in a speech. And then he came to limited purpose banking. He said, this proposal deserves serious consideration. So all you have to do is look at his speech and you see where he’s coming from. On this. Now he’s Bernanke in the UK. So
Jason Hartman 34:46
and I like I like that. I’m looking at the website now. I like your much flatter tax system. I mean, it is the federal tax system is totally broken. There’s just no question about it. It’s got to be simple, flat, transparent.
Laurence J. Kotlikoff 34:59
Yeah. This is the purple tax proposal, which is really a very simple proposal for fixing taxes. I don’t know if you have time, but I can tell you about that.
Jason Hartman 35:06
Sure, I’d love to hear it. But you know, I can instantly think the whole, like you said, people have more votes than bankers. But the problem is bankers have more lobbyists than people. And and, you know, I can see instantly with your first point on the principles of tax reform with a purple plan, you know, the CPA lobby is going to be lobbying against that, and it’s just such a mess. But go ahead and tell us about it if you will.
Laurence J. Kotlikoff 35:30
I think good ideas will out will take over, I think they’ll drive out bad ideas and bad policy, I’m confident maybe I’m overly optimistic. But as all this is described in more detail in the clash of generations, how to fix the economy and how to save our selves personally, because the politicians may not fix things, but it’s very simple. How to fix the tax system, you get rid of the what you’re doing now, which is a mess, you get rid of the federal income tax, the personal federal income tax, you get rid of the corporate income tax, which is really a tax on workers, not a tax on rich people, because the corporations can move to other countries where they pay less taxes.
Jason Hartman 36:10
And they certainly do that they have no loyalty to US shores. And and you look at Apple did that with California or more micro example of it, how they skirted a whole bunch of California Tax by just simply setting up another division in Nevada.
Laurence J. Kotlikoff 36:26
Yeah, absolutely. This happens all the time. It really just leaves the California workers behind. The Boeing is moving out of Seattle for reason for competitive reasons, are Washington State, trying to move to California, I think South Carolina. And there again, it’s another example of corporations being able to move and leaving workers behind. So get rid of the corporate tax, which will produce lots of investment in the country, because one of the lowest corporate tax rate of any developed country, which is zero, get rid of the personal income tax, and then do the following. And also I get rid of the estate and gift tax, which is another Employment Act for lawyers. And all this may sound very regressive. Before I even said what I’m going to do to some of your blue listeners, but let people understand I’m not a Republican or a Democrat or an independent, I think we need to have a highly progressive tax system that treats the fair, the poor, much better than the rich. And here’s how I would do that I would take the payroll tax, and we now have and make it highly progressive as the most regressive tax we now have, I would turn that around and make it highly progressive, I would take I would start taxing consumption, retail purchases at the store or put on a federal retail sales tax. And I would not only tax our purchases of consumption at the store, but also our consumption from sitting in our homes and enjoying our other doorbells, we’re getting consumption services from those doorbells. And they would be subject to the same tax rate, which would effectively be 15%. So we’d have a 15% payroll tax at the top, it would be no ceiling on the payroll tax. So rich people would pay taxes on every single dollar they earn, the poor would only pay seven and a half percent up to 40,000. I mean, people workers would pay, the tax would only be at seven and a half percent, up to 40,000. And then 15%. above that. So we make it highly progressive payroll tax, you have this consumption tax, plus, it comes with a democrat a monthly payment to each household, that’s large enough, so that poor people will get a monthly check. It’s big enough to cover their their payments of the sales tax at the store. So that they they will pay no sales tax on net. Otherwise, the consumption tax on balance for the poor will be zero. And I also maintain, by the way, the earned income tax credit and run through the payroll tax, because that’s one of our major welfare programs. It’s very important to have for tax progressivity to maintain the earned income tax credit. And then I have it in a progressive inheritance tax where the first million dollars of gifts or inheritance that you receive is tax free. And above that you pay 15% on anything above that. So we have a 15 1515 plan that’s highly progressive, the top rate is 15 1515. And nobody has to send in an annual tax return. So people that like the fair tax, because it’s very simple and transparent. And you don’t have to send in a tax return should love the purple tax, because it also has that feature. Those features that you don’t have to do annual tax filing. No, neither businesses nor individuals have to do that
Jason Hartman 39:38
Quite quite a bit simpler for sure. Just kind of wrapping up here. What do you see what does our future look like? Hopefully some of these reforms will occur. That would be very helpful, but a realistic view of our future. You know, maybe out the next 10 years or so. 15 years, what can people expect?
Laurence J. Kotlikoff 39:57
Well, the most realistic view is is pretty Pretty bad because we’ve spent decade after decade really six decades running this massive Ponzi scheme we have all these liabilities are off the books, by careful choice of labels, Congress’s kept most of the 200 trillion $11 trillion fiscal gap off the books, the official debts, about 11 trillion. So we’ve got 200 and $200 trillion that Congress has, isn’t publicly telling us about, that we’re we’ve been ignoring. So less, we do radical surgery of the type that I’m outlining in the purple plans, and they do get the fiscal gap down to zero and even make it negative. If we do all those things in the purple plans, cluding, the health reform, unless we do these things, things will just get worse and worse, and it will be too late to really save the day. And we will end up with hyperinflation and a really tough situation. Because I don’t see either party coming up with the proposals needed to really address what’s what’s necessary,
Jason Hartman 40:57
Can you put a number on what you call hyperinflation?
Laurence J. Kotlikoff 41:00
Well, for the for us, you know, a 10%, inflation would be a real shocker, but hyperinflation is 50 hundred percent a price increases a year, and then it can go up from there. So I think for us, we’re going to see if things continue this way, we’re not immune from standard economic law, which is that if you print more and more money injected in the economy gets out there, it will lead to price increases the correlation over the centuries between the money supply and the price level, not you know, on a monthly basis, or daily basis, or a yearly basis, but over decades, is a very strong correlation, and it will continue up, it will affect us, it could be that I’m wrong. And then I’m overly pessimistic, and that the Chinese will start using the dollar and so on. But we’re likely
Jason Hartman 41:51
That would be funny. Well,
Laurence J. Kotlikoff 41:53
Yeah, more likely, people will start using the one and other currencies that are going to retain value. And there’ll be a movement away from the dollar. You know, the pound used to be the world’s world’s currency. But that was valuable after World War Two, it lost its role as the world reserve currency. So that will happen to the dollar as well, unless unless we change our ways,
Jason Hartman 42:13
give out your website and tell people where they can learn more, if you would.
Laurence J. Kotlikoff 42:16
So it’s www dot the purple plans.org. We’ll give you all access to all the purple plans where you can go and read about the plans and endorse them, if you like. The Clash of generations is the new book with Scott burns that tells you about the magnitude of the problem and how to save your, your own yourself if you can’t, if we can’t save the country. And Jimmy Stewart is dead is this book about how to fix the financial system. It’s not a how to book it’s primarily a book about from an economists perspective about what really happened here how to really understand the financial crisis. It’s only at the end that I talked about limited purpose banking. So I think people will enjoy the even if they’re not into the details of how to fix the financial system, which are all your two short chapters long, because it’s a very simple fix. they’ll enjoy I think the rest of the book.
Jason Hartman 43:06
And I have to ask you one more question, because you mentioned it, what people can do on an individual level, to help solve their own problem assuming the world’s going to hell in a handbasket, as it as it may well do. What can they do? I mean,
Laurence J. Kotlikoff 43:21
One thing we can do is to get to make the most of our current situation in terms of getting the highest living standard safely. And I’ve developed through my company, software program, we have a basic version of it, which was rated number one by money magazine is the best financial planning program on the web. It’s perfectly free. If you go to ies planner calm that’s ESP Li n en er, comm slash basic, this simple version of our software can be run by free just by clicking begin planning at the bottom. And you can find ways to safely raise your living standard, for example, using a Roth versus of IRA, which is better Well, this program can help you figure that out. Should you take Social Security this age versus a different age? Should you convert your IRA to a Roth? Should you take a job in Texas where the pay might be lower, but there’s no state income tax and the housing costs are lower. These are the kind of things that you can decide very quickly with our software. And that’s one answer. The other thing is that the book is full of suggestions, the clash of generations suggestions about how to improve your financial situation. And one thing is, you know, not to get taken by brokers not to spend a huge amount of money with these folks who typically underperform the market.
Jason Hartman 44:45
Very good points. All right. Well, good. Larry Kotlikoff, thank you so much for joining us today. Interesting, scary, but it’s better to be aware than sticking one’s head in the sand, because there are some defensive strategies and really some offensive strategies. These people can take in their own personal lives. So keep up the good work out there and, and keep promoting the purple plan. I would love to see reform in this area. It would just be a wonderful, wonderful thing. Thank you.
Laurence J. Kotlikoff 45:11
Thank you Jason. I really appreciate your having me on.
Announcer 45:19
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