Introduction: 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 multimillionaire 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 is your host Jason Hartman with the complete solution for real estate investors.
Jason Hartman: Welcome to the Creating Wealth Show. This episode number 283 and this is you host, Jason Hartman and I’ve got Steve here with me on the line. He is one of our investment counselors, Steve, how are you?
Steve: Fantastic, how are you Jason?
Jason Hartman: I am doing great. So, you’re in Utah today and I’m in Arizona and I just took a call from one of our listeners and clients, Neil, from Minnesota which we’re not going to play on this episode but I just recorded it before this and I was talking to Neil about how geography is really nowadays less meaningless than it’s ever been in human history. And you know Steve what’s interesting about that is when we all think, well, there are still those people out there much less sophisticated than our listeners but these people out there who say “I want to invest right near where I live in my own neighborhood so I can keep an eye on my houses” but if look at geography and you look at the tools we all have nowadays between Solo, Trulia, Rentometer, Rentrange, Google Maps, Google Satellite, Google Earth, you know I’m just half way there are so many more I can’t even mention them all and then our network what our company provides to people. Geography is less meaningful than it’s ever been in history. That whole concept of investing near where you live because the first problem Steve is you may not live in the right place to invest, right? I mean do you agree with that?
Steve: Yeah absolutely. Geography used to be a big issue but because of technology and the way the world is, it doesn’t matter so much anymore. I’ve owned properties a couple of miles away from my primary residence that were complete nightmares whereas I’ve had a property seventeen hundred miles away that I heard from the property manager maybe once or twice a year. I mean it wasn’t the geography that makes or breaks the deal. It’s the research and what you do on the front end and making sure that it’s a good deal and that you’ve got the right team in place. That’s far more important than the geography.
Jason Hartman: No question about it and it’s the number, it’s the economics of that particular housing market that drive it and one of the things I was saying to Neil is that when you look back in history like if you look back before the internet so, say we’ve got the early 90’s and before, well, between the 50’s and the early 90’s geography became less meaningful than it was before the 50’s and what I mean by that is if you wanted to go across the country in 1930 most likely you were going to drive. Now, you could fly back then I mean that was post Wright brothers but it was before major commercial aviation right? And from the 50’s to now, you can get across the country in about four and half hours, okay on a jet. And before that time, before the automobile you were going to take a horse and buggy, it might take you months to get across the country and that months was compressed to weeks since geography got less and less meaningful and less and less of an obstacle and then now with the internet, I do business all over the planet. I go on Craig’s List and I find people to do certain jobs my company needs done where or one of my company needs done and I find them in minutes, I mean it’s really startling. You can use E-Lance, Odesk, Guru.com, and Craig’s List. You can hire people all over the planet. Geography is just compressed it’s so much less meaningful than it’s ever been. It still means something but it means way less than ever before in human history.
Steve: Yeah, for sure and were seeing technology to a degree start to overtake transportation too. Yeah, you can get on that jet but you and I were actually talking earlier today about how expensive airfare is now, right?
Jason Hartman: Yeah.
Steve: And with all these new technologies coming out, people are starting to replace it, more and more with communicating that way and I find that interesting as well.
Jason Hartman: Well, but you know what though I have to kind of differ with you on how expensive airfare is, now see when Reagan deregulated the airlines, airfare is just plummeted and I mean competition soared and we got no longer were the airlines these big fat cats and the whole romance in flying went out the window after that but it made it that the Greyhound bus in the sky, where everybody can afford to fly and that’s all good and bad right?
Stave: Right. Right yeah, well they can, I mean, there’s no doubt though that it’s more expensive now than it was three or four years ago to fly.
Jason Hartman: Oh, yeah, yeah. No question about that.
Steve: We don’t know why that is, maybe it’s because commodities are going up in price.
Jason Hartman: Well, I think it’s –
Steve: The variety of factors and even though it’s the airlines have been deregulated, the ability to run a business in the United States has only gotten more complicated not just drives up cost for the consumer and I think that’s what we’re feeling too.
Jason Hartman: Yeah. No question about it but a lot of that is political and I hate to say it it’s Obama because Obama is restricting the growth of oil and oil is used in jet fuel. So that’s made the price at the pump go up and aircraft they have a pump too and so what interesting about it is I remember when I was a little kid, I was always very price conscious as a kid. People used to always mention that to me and my mom so, why does this kid talk about money and prices of things. I was very aware when I was a kid and I remember in the 70’s I would go back to visit my grandparents as a little child and I remember sometimes I flew alone. I remember the first time I was really scared to do that the flight that they didn’t call them flight attendant stewardess will escort you around and make sure you got everywhere okay and I remember to fly across the country was $500 back then. And so say I take 1978 just for example and you look at the price, you look at inflation and its impact, $500 in 1978 is $1700.12 in 2011. Now 2012 hasn’t completed yet so and this is just according to the official inflation rates. So, airfare is really — I mean you can still fly across the country for less than 500 bucks in some cases a lot less than $500. So, yes you’re right it’s a lot more than it was three years ago but overall due to deregulation then and what Reagan did, it’s a lot cheaper. So, we got to really understand in a long view geography is just way less of an obstacle than ever.
Steve: Right and then as you talked about in a few of your podcast that you’ve done before the bites and the information that’s free. We’re talking over the internet right now and we do almost all of our business that way. And it’s just very — it’s a cheap and easy way to do business allows us to be a lot more productive and comparatively spend less on airfare whereas before, yeah, you had to fly all over the place.
Jason Hartman: Now granted. I remember the commercial for Continental Airlines when I was a little kid where you got three feet before your two legs. Now, I don’t think anyone is expecting three feet in coach class anymore where in economy class and then I also remember that commercial that said and I think it was also Continental it was kind of a funny commercial it said “sorry Bob no pub” in other words, on the plane I know this may sound like a crazy concept to some of our listeners but you used to actually have a pub like a bar on the plane where you could go and hang out. Imagine that where you could sit at a barstool and order a drink and talk with people just like being in a restaurant not today.
Steve: Yeah, yeah. We’ll agree on this for sure the quality of air travel is down.
Jason Hartman: Yeah, but the safety is up. Well anyway we could put that in a million ways.
Stave: Yeah.
Jason Hartman: Overall, the point being geography is far less impactful than it ever has been in human history and I think we agree on that for sure.
Steve: Agree.
Jason Hartman: And we were talking about some of the things that we are going to talk about and then we got off on this tangent so, you wanted to talk about one of the big funds right?
Steve: Yeah, I’m always interested in this because I’ve seen the impact investors. I mean we all know that we can buy for great RV ratios, buying hold strategy is the best by far however, a lot of people in many markets are they’re finding quickly deals that you could get a year ago you can no longer get much of that is because the numbers become so attractive the news is out, the investors were out of the wood work and some of these investors are large institution in France that are buying up a lot of single family properties and we’ve talked in the past about how — we didn’t think it was going to be much of a long term deal because single family property investing is so fragmented and a fund or a pension funder something like that one day are going to invest money, they have to invest a lot placing a couple of million dollars is a waste of time to them. They have to move 50 or a 100 at a time to do this and they’ve started and trying to get into the single family housing and they’ve definitely made an impact on the investor level. However, we have seen the very first one of them, the large hedge fund Och-Ziff starting to make their exit already for many of the same reasons that we’ve talked about. We’ve talked in the past about California and how it so up and down and the pricing is so volatile that’s one of the reasons Och-Ziff is exiting because they want to liquidate, they want to take some profit out of this thing. But also as far as the buying hold side goes, they haven’t been making the profits that they expected to make and that’s not me saying at all that single family investing is inefficient or not profitable. That’s me saying that a hedge fund just can’t manage a long term. There are just too many houses to do and so we are starting to see the very first little bits of that manifest itself that it’s too fragmented for these large 100 million or 1 billion dollar funds to manage.
Jason Hartman: Yeah, well you know Steve I want to ask everybody now to bow to Jason Hartman because I was right again. What did I say, did I say this was coming embrace the fragmentation folks and that you’re going to see more of this in the future but I just thought of another thing as you’re talking actually. It’s not just about embracing the fragmentation and let just explain that to our listeners in case they don’t remember me talking about it or if they haven’t listened to the shows where I’ve talked about that before but real estate is a very fragmented industry. Where you got a lot of little players, little mom and pop secures some real estate agent in Charlotte, North Carolina and there’s another one in Dallas, Texas and they do things completely different. They’ve got different forms, different documents, different contracts, hold different water of dealing with things and the same with property managers and the same with every neighborhood is totally different, every house is totally different and so all of that fragmentation in some ways its annoying to us as investors right? Sometimes I think where’s I’m managing my portfolio why can’t this guy be as good as that other guy I’m dealing with. That lady over there, she’s a fantastic property manager and this one is sort of mediocre or even worse maybe they are completely lame right? And they are all different and this is what the institutional investors will never ever be able to deal with and good old hypocrite Warren Buffett said it himself a few months ago when he was interviewed on TV most everybody saw that, we’ve talked about it. He said “I would buy a few hundred thousand or a few million” I can’t remember the number he said “single family homes if could figure out how to manage them.” They can’t figure out how to manage them. That’s why there are going to be in lower yielding high-rise office complexes and they’re going to be in shopping malls and much larger investment sizes. They are not going agonized or make a lot of effort over something that is going to produce for them in overall total return on investment with taxes with a appreciation, with cash flow, with everything and overall investment that’s going to produce I don’t know ten to twenty or thirty thousand dollars a year and do this three hundred thousand times. It’s just too annoying for them. They can’t do it. It’s just too fragmented, so that’s why I say embrace the fragmentation. That’s why the opportunity is here for all of us. Everybody listening how this opportunity because you can deal with a little fragmentation, you’re set for it. You can use your human judgment. The returns are large enough to matter to you, they are not large enough to matter to some big fund but Steve here is the thing I was thinking as you were speaking and it’s this. It really goes back to what I talked about a long time ago after interviewing Catherine Austin Fitts on the show. When I was talking to her I was talking about the real economy which is the main street economy. This is the commodity, they are not the commodity but the economy that deals in real things like commodities, housing is a commodity. It’s solid, it’s made of Adams, okay and the things in the real world that you and I buy and interact with every day and we exchange currency for that. Now, currency is fake. Okay currency is pretty much built of bits and bytes. It’s really data that’s all really currency is when it’s controlled by a central bank like the Federal Reserved but the real economy is far less sexy to this big institutional investors like these funds. And as you where talking it, it just occur to me because in the smoking mirrors economy, in the Wall Street economy, in the data economy, the bits and bytes economy which what they really dealing with their financial innovation and their financial instruments and all these crazy derivatives and all these totally sexy stuff that has this huge multipliers and they are all really fake. It’s all a game of smoking mirrors right? But they can make a lot more money that kind of stuff rather than dealing in the real economy. They can make a lot more money, screwing around and finding a way to engineer a pool of capital and short stocks and trade derivatives and do all of these screwy hocus-pocus things. The real economy is just not sexy enough for them. That just occurred to me as you were talking.
Steve: That’s a good point. Yeah, making an honest living isn’t going to cut it right?
Jason Hartman: Yeah exactly.
Steve: Doing something real that requires adding value, the value of things to the market place and there they are just shuffling money back and forth in creative ways that reminds me of this quantitative easing for and I can’t remember if we had talked about this before but where Chairman Bernanke is going to allow I believe a 40 or 50 billion a month in purchasing of mortgage back securities. Well, there is not $40 or $50 billion a month worth of real estate changing hands so, how do you do that? Well, you make up a bunch of crap.
Jason Hartman: Yeah.
Steve: Okay.
Jason Hartman: You created —
Steve: And that’s what changing hands and they’re going to buy it and it’s useless.
Jason Hartman: Yeah.
Steve: We’re going back to square one again here.
Jason Hartman: You know we haven’t talked about it lately I was really into this whole thing about a hundred, hundred and fifty episodes ago but really just getting your head around, the concept of how money is lent into existence and it’s really hard to understand that. I mean, just to understand how when a bank loans money it increases the money supply and has a multiplier of fact and I remember when went with the National REI Group, the Real Estate Investment Group. I went to Washington DC a couple of years ago and it was kind of cool kind of a field trip because it was basically to be obvious for a day and it was right after the financial crisis. I mean it was really kind of scary what was going on and I remember we’d go in to these different offices of our representatives and talked to their aids and once in a while you’ll catch one of them in real life and maybe get a few words with him. But mostly you’re talking to some underpaid aid who thinks politics is sexy and we’d go in and we lobbying them and we’d said “hey you could help real estate investors, restart the economy by doing this and that and there were several bills that we were kind of lobbying for and it was very interesting but then I remember with one of them I think it was an Arland Inspector’s Office actually. We were talking with one of Arland, I’m pretty sure it was Arland Inspector. Arland Inspector’s aids and they said “well the reason we and congress wanted to give the money to the banks instead of giving it directly to the people in a tax credit or tax rebate, remember when George Bush did that?” Where everybody got I don’t know like $2300 back or some I can’t remember so forgive me but it was like a rebate that everybody got to stimulate the economy. And the reason congress didn’t like that just giving money to the people is because it didn’t have the multiplier effect. When you give it to the banksters, the crooks that were on the banking cartels right?
Steve: Yeah.
Jason Hartman: It has a multiplier effect which basically they just did admitted it creates inflation. Okay that’s exactly what happens with that multiplier effect you give money to the banks and I shouldn’t even money I should say currency because it’s not money it’s just data. Currency is data, money is real. Money has things but you give currency to the banks, the banks lend money and when they lend money to someone it actually increases the money supply by a multiplier. So, that’s why it’s one of the many reasons that the inflation track, the inflation footing will always be until collapse eventually occurs in any country. It will always be the path because it’s the easiest, most probable way out and you get to debase the debt owed to other country. So, it screws over China and Japan because they are two biggest lenders but it’s great for the US. As long as we’re holding the cards and we’re probably going to hold on to them for a few more decades at least I mean everybody is squawking about how we’re going to lose control of that. I don’t think that’s coming anytime soon. And what I mean by that is the world’s reserve currency. I think we’re going to hold on to it for quite a while and I do as I’ve stated before because we’ve got the military, we’ve got the might to force that upon the rest of the world, not fair just the way it is.
Steve: Just the way it is and there is no other way out of it. We’re going to keep getting the hamburger today and paying for it on Tuesday. They don’t really have choice to take it. It’s going to happen whether we like or not and it’s not like you say it’s not printing money so to speak. Good friend Peter Schiff points out that it’s just a credit. I mean the Federal Reserve they just give him a credit on their statement, press it into the bank wakes up “oh look there’s more money in here now.”
Jason Hartman: Yeah, we can lend them more.
Steve: It’s out of thin air.
Jason Hartman: Right exactly and what the banks have been doing the last couple of years is they haven’t really been lending it. They have been investing it because now they can go and speculate in investment markets and they figured they can invest it better speculating and also to crazy financial smoking mirrors vehicles than they can loaning it to people, loaning it to main street. I remember when Charles Payne. Charles Payne is great. He used to be on KFI in Los Angeles and he is on CNBC and Fox a lot I think. I think he is on both and Charles Payne is just awesome and he would talk about inside all this studies that how the government gave the banks all this money and they said “okay look here’s all these money go and do loan modifications, help people out, keep them in their homes, avoid for closures, reduce the for closures” and at one point along the way, they have that absorb Countrywide and unbelievable that what’s his name, Anthony Mozilo, I believe didn’t go to jail, he just bought his way out of that problem for what would be like may be 10 bucks okay. Okay so he paid a few million dollars big deal it’s just unbelievable. These people are like the finest meaningless to them. They don’t even live in the real world and there was a point of which Charles I remember he cited a study and he said “the average cost of a loan modification to the tax payer” in other words what the government spend to modify a loan was like eight hundred thousand dollars to modify a loan on someone’s house. That the house could only be worth a hundred and eighty thousand dollars yet the cost in the money getting all deluded and sunk and wasted and stolen in this crooked banks was basically like eight hundred thousand dollars to modify a loan. I mean just –
Steve: Right.
Jason Hartman: — just a total absurd it.
Steve: Right, not to mention the cost that it was to the housing market. The uncertainties that just lower the housing market now a bank when there are going to for close and I’m not saying “Oh poor banks,” I’m not doing that at all here. But when considering for closing now by law in many cases they have to offer loan modifications to certain amount for people who are in that situation for a reason many of them even with the modified loan lots of those ended up going upside down and not working out once again and that shadow inventory that hang over the market for so long now is a great opportunity for investors. But is to the overall housing market recovering all it did was delay the inevitable and just string it out for longer.
Jason Hartman: Yeah and some of it still there no doubt and by the way I wanted to mention I’m sure that that number that I talked about with Charles Payne and I don’t know the exact number but it was ridiculous that’s my point. I’m sure that number got quite a bit better as things progressed. I mean it did I have to think it did but it’s just absurd you could have just given — the government could have just bailed out the people instead of bailing out the crooked banks right? They could have just given everybody a check for a bunch of money and people would have gone out and spend that money they would have formed to had capital formation reduced their debt but God forbid the government doesn’t want to see people reduce their debt because that’s a part of the whole scheme. That’s the whole inflationary scheme. Real economies are built on capital formation not on debt. We live in this like fake economy. It’s almost hilarious, you couldn’t fiction that’s good and what we were teaching on this show and to our investors is were teaching them a way to deal with a fake economy and actually out smart it by using the same techniques that the central banker are using, that the government is using and gaining the system if you will. It’s completely legal, of course. But you just got to have the right strategy. I mean most people are getting just destroyed and it’s going to get a lot worse in my opinion that’s why I will never say this is a recovery because I think for many people the pain they have experienced over the past few years is minor compared to the pain that’s coming. My goal is just to reach out as many people as possible and get them to see they ways they can get around it but anything more in the hedge fund thought?
Steve: No, no I think we’re definitely getting on tangents today. We have a couple of times already but agreed with all you said and that’s all I have to say on the fun thing. I don’t think that they are going to be around for the long term affecting investors. You don’t have to worry about bidding at the auction, having some fund to swoop in and pay the market price before they didn’t put any repairs into it that’s another bubble that it’s getting pumped out in the Wall Street, that’s funding this private equity groups that are showing up at the auction but they’ll find sexier faker products to go to sometime in the short to medium term here.
Jason Hartman: Yeah, faker I don’t even know if that’s a proper grammar there I doubt it is but a faker products that’s what they’ll do. They’ll get more fake stuff. Why deal in the real economy it’s just too difficult, it’s too much of a burden when you can deal in the smoking mirrors fake economy that they are so good at and the other thing I wanted to say this is one of the reason Steve that investing your money with an institution is just a bad a idea because institutions, they don’t care just remember something it’s not their money. This is the reason that they will go for this low yielding investments. They just want to place money because the more money they place the more they get. It’s like running some stupid department a big inefficient corporation or in the worst most inefficient corporation in the world history known as government. If you don’t spend all your money, if you don’t deploy all your money, you don’t get more. You got to get rid of it all. You got to deploy it all and then you can get more and they don’t care it’s not their money. One of the barrels of government why government doesn’t work because and I think this code is just an original from me but here it goes “when it’s everybody’s money, it’s nobody’s money.” Nobody really cares when it’s collective. That why collectivism doesn’t work because everybody starts to get lazy mentally. They get lazy physically. A worker in the Soviet Union and a former Soviet Union, you know how hard you think they work really? Do they get up and go to work with the ambitions that they are going to take over the world today? Some Soviet worker in the 60’s or 70’s or even 80’s I mean no, of course not. There was nothing in it for them. They wouldn’t improve their life one bit –
Steve: Not at all.
Jason Hartman: — by being more successful.
Steve: Not at all and there’s that old adage of the Soviet worker were they you’d say “the government pretends to pay us so we pretend to work.” Right?
Jason Hartman: Very good.
Steve: Nobody is doing anything.
Jason Hartman: Very good. Very good. Well hey we’re going a little long. I know we’ve got a couple of things more to talk about let just make those for another show okay and let’s get to our guest today here and we’re gone pretty long here. So when I get to guest and then Steve I will be back with you to record another show, another interim for a show here very shortly okay?
Steve: That sounds great.
Jason Hartman: And one of the things I do want to say people is be sure to register for our Meet the Master’s Event coming up in January. That’s going to a fantastic event. Again, we’re trying to make some changes, change it up, keep interesting for our regular attendees and we only do it once a year now so this will be the only time that we have planned in 2013, January 18th through the 20th Hyatt Regents Irvine, register at www.JasonHartman.com in the events section and that price will be going up pretty soon. So get the early bird pricing. Alright, we will be back with our guest in just a moment.
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Jason Hartman: It’s my pleasure to welcome Dr. Woody Brock to the show. He is the president of strategic economic decisions and the author of American Gridlock why the right and left are both wrong and some common sense economic solutions to the economic crisis. He is a public speaker, travels extensively and it’s great to have him on the show this morning. Woody good morning how are you?
Woody Brock: Thank you very much for having me on.
Jason Hartman: My pleasure, you’re coming to us today from Boston I guess right?
Woody Brock: Well I’m in Boston, MA right in the historical fishing tent North of that where they film the perfect storm.
Jason Hartman: Well we are facing quite a bit of head wind in terms of the economy nowadays. And the big debate is especially when you segment classes, the upper class, the elite super rich, the middle class, the poor so forth. There is this constant debate, are we getting richer or poorer? What’s going on out there?
Woody Brock: Well as you can imagine you’re asking a good question and there is no easy answer. Here’s what you can say, you must think of a river versus the tributaries. Think of the river, the main body is being the country as a whole. You measure how well off it is excused me you measure how much it’s getting richer, you measure wealth growth, what is called family net worth for all families. Forget rich and poor that statistics shows today the net worth for American families, all assets as well as liabilities is $54.2 trillion. Now, if you’re getting richer as a national, that gross might stay 3% or 4% a year correct? Well the wealth of the nation grows enormously from 1980 to 2000. It’s important to have this background just take the stock market. I guess was the SNT was maybe 890 if I recall in 1982 when my dad died. It had been a total 20 years and stocks with OPEC inflation. In fact if I recall the stock markets have been up in the late 90 in 66 or 67 and was still there after more than 200% inflation when he died in at the end of’81. Everybody was gloomy no one was getting rich.
Jason Hartman: And things were moving backwards in real dollars easily.
Woody Brock: And the real dollars Oh no, no, no my family loss 65% of the real buying power so, only people in a lot of debt survived. Unfortunately, that’s reverse. So the point is, George Soros told me in’82 or’83 when I was just getting down in my little business that he was in my option _____ [0:31:20] market I think he said we go to five thousand about the millennium which was 18 years away. Well of course having gone nowhere it would never go from 890 to 5 thousand. I mean George what are you smoking.
Jason Hartman: Right but it went more than –
Woody Brock: As you know on the millennium on January the 1st was 11,800. The point is for a variety of reasons, interest rates had fallen, your bond wealth therefore, going up because the more mature, the more interest rates bounce up. Housing was good. So the country got real rich. Unfortunately, the growth rate of wealth follows a long term law known as the capital output ratio. You don’t have to get into the details but basically the growth rate of wealth is the growth rate of GDP that is the turn like forget the X from the _____ [0:32:05]. We then entered into a very tricky period. We’re good in the 90’s somewhat but you will note that the stock market today after inflation is where it was in the late 90’s correct? So you have made any money and that was went up of course and then it crashed for this sort of recession of the dot com clash of’01 and’02 and then of course the final, the housing boom and then the housing boom crashing the middle class. We are over leverage in housing. So net worth of the nation hasn’t been doing that well, it goes up and down pretty good. Well technically, it’s actually what it should be now because net worth should be 3.4 x GDP which it is as the capital output ratio. So in the funny way we’re all worth what we ought to be in a theoretical sense which is interesting. Now, when you look in an individual groups statistics you made it right of which a very, very rich maybe getting rich because of this whole new group of financial people who can leverage hugely and when they get it right have an income of 100 million or billion a year Greenwich, Connecticut average nobody have of course found their wages outgrowing in a negative rate. They can’t afford healthcare if going up much faster than their wages. And you look in the net worth average middle class it has not been doing well when you look at poor people it’s even worse so the gap between rich and poor which is a separate issue from the overall wealth of the nation is indeed distressing.
Jason Hartman: No question, yeah, the gap is getting larger in the middle classes definitely under attack. I sort of struggle though with a poor side of the equation because when I look history and I watch old movies and I had Bill Whittle on the show a while back and you know he did that segment that you sound like your obviously familiar with it seems like the poor have a lot of stuff they definitely didn’t have before. So it’s sort of hard argue that the poor are getting poorer or at least maybe in a small segment of that but when you compare to a few decades ago it seems like there are better off now.
Woody Brock: You have to be very careful about this. This is the point that you probably never heard of me before but theoretically correct. Most people measure whether they are getting more equal or not what we called the distribution of income and wealth. Fair there is no question but poor have been basically have been really screwed and the very rich have done brilliantly. The poor all are not doing well in terms of income. But from a moral standpoint that even Adam Smith understood this. What really matter is the distribution of consumption. There your point is correct. Poor people in a very odd way wear the same baseball cap, the same Reeboks, go to the same concerts of the Rockefeller, that was absolutely untrue ’70,’80,’90, 100 year ago. The distribution of consumption is actually not as bad as people think. The person who loves Mony painting of the water lilies what would be 40 million at an auction can get basically perfectly production of it and hanging up where additional copy and pay maybe $150 and most people can’t tell the difference. That can never be true before and they couldn’t have that beautiful thing in their wall. So in funny ways, the distribution consumption isn’t as bad at all as if the distribution of income. But there again it’s mainly between the very rich who are really rich these days and the poor who are going down.
Jason Hartman: Yeah, I mean no one would possibly argue that the elite rich are not getting much, much, much richer it’s a little confusing in the other segments. What about inflation? I mean, the government has been creating money out of thin air like it is my mother used to say when I was a kid she used to say “Jason, you spend money like it’s going out of style.” And I think money is going out of style given the prospect of inflation but what are your thoughts?
Woody Brock: Inflation is an extremely difficult issue and the reason is people don’t understand it at all. I say that with respect to the work of James Tobin who would receive the Fifth Nobel Prize in Financial Theory and was eminent in this field and other. Here is the problem, have you noticed that we have been turning money for four years and there is no inflation?
Jason Hartman: Well, there is slightly depends on what?
Woody Brock: Have you asked why?
Jason Hartman: Because they keep figuring out how to keep the cane down on the road and –
Woody Brock: No. They did print the money that’s what you’re saying.
Jason Hartman: Right, I agree.
Woody Brock: They did monetarism but there is no inflation. Let me give you a good example. Twenty year of printing money in Japan what’s the inflation been?
Jason Hartman: There has been massive of deflation in Japan.
Woody Brock: But the point I’m making is, of creating a trap for you. Inflation is a counter intuitive. Let me give you the facts about what you asked, okay. First, do not think of house prices or gold prices or commodity prices or having anything to the inflation. The inflation is set by treasury manages is the inflation rate of cherry, tomatoes, and haircuts. It’s called main street inflation. CPI, consumer price inflation, you will agree that even if copper has gone up 400% because of Chinese demand who cares. They don’t buy copper, to think you and I buy the inflation rate before. You and I buy doesn’t going up at a very low rate for quite a while even in the last four years we’ve been putting all this money. So any normal person would say what else going on with all those money turning, where is inflation. The problem with this logic is that there never was any money turning. Let me make this point crystal clear and I have received a lot of help from Ben _____ [0:37:38] he’s very good on this he holds Harvard’s chair in money and banking. When the Federal Reserve Bank prints money that is to say purely 1 and 2 and 3 correct? It goes in and buy security, buys in government debt correct?
Jason Hartman: Yes.
Woody Brock: It has quantitatively eased to, I don’t know 2.8, 2.9 trillion in the past four years because of this places. In other words, it bulked up 1.4 trillion of mortgage bank security and then government securities another 1 trillion or whatever. Oh my God the Feds buying in the debt is printing money. Of course, when the Fed buys in the debt it goes into the open market buys bonds and things for you and me and prints cash to pay for it correct? Wrong. Germany did that and had a million percent inflation. The Zimbabwe did that they printed money to buy into the debt and you had 10 million dollar bills. Have you noticed how we only have 100 bills, we don’t have any of that?
Jason Hartman: Right.
Woody Brock: Here is the reason why. This is what people do not understand and incidentally why should –
Jason Hartman: I can’t wait to hear what you’re getting out here.
Woody Brock: You’re going to hear the whole thing. Number one, when the Fed buys in assets and monetizes the debt if you wish to call it that is an increase I guess it’s the 1.8 trillion in this balance sheets assets. Buying in those things is inflated the assets held by the Fed hugely. When you increase the assets as you know you have to increase the liabilities. Do you know what the two liabilities of the Fed are? One is cash outstanding currency that’s what got printed in Zimbabwe and Germany in the 20’s. The second thing is bank reserves. In my country we do not print money. Here is what we do, when the Federal Reserve of Washington tells the Federal Reserve Bank of New York which is a separate organization, go buy in a trillion dollars of government debt. The primary dealers within the Fed deals and they have to have soft of clearance to do this. We’ll go out secretly into the market and for the Fed buy in those trillion dollars of securities okay. How do you think the Fed pays City Core and UBS to do this? It does not write them a check. It credits their reserve account that by law they must hold with the Fed by that amount. So bank reserves have gone up hugely with the Fed that’s the liability that matches the increase in assets not cash. Now, Woody wait a minute aren’t those bank reserves something _____ [0:40:15] dollar new reserve that can make 10 dollars of loan the time they can _____ yes in principle as long as it has enough capital.
Jason Hartman: Yeah but I mean that’s a way fractional reserve lending works right.
Woody Brock: That’s right. So hold on, Woody they are much saying is the banks are flashed with the reserves it they got 2 trillion more reserve they can make 20 trillion of new loans. When they make loans to you and me, and the money goes into your bank account and your paying an interest on it you go spend it and you and I create a huge demand for what we did on the price _____ [0:40:45]. Is that clear?
Jason Hartman: Yeah, that’s clear 2 million dollars chasing a limited supply of goods.
Woody Brock: Once the money is in the system, because you have converted the reserves that have been converted then it goes into the system we are flashed with cash we go out and compete to buy coffee filters and they start going up at 80% a year. The problem is both in our country and in Japan, nobody wants to or can barrow. Companies don’t need to they’re flushed with cash in the brocks are deleveraging. Deleveraging means you negatively barrow. You are deleveraging and so are Tom, Dick and Harry. So none of those reserves now called idle reserves have been turned into money. There has been no money printing and no inflation. Now, when it does happen suppose you and I get optimistic and we start to barrow then it all happens we all get money and we go out and bid the prices up. The Fed has a new control model that is three years ago next week it’s called the Reemony rate. The Fed now has the power to tell City Core, no you are not going to go make loans to Tom, Dick and Harry and make money because we are going to pay you 5% the hold the reserves with free money, income and you said _____ [0:41:55] and don’t make loans. The Fed can now through the Reemony rate make it attractive to the banks not to make loans because they get risk free nice stand returns from Fed. So the point about this is that I’m not saying there won’t be inflation but I’m making the point there may be no inflation at all from this mass of creation. The bank reserves as long as the reserves remain idle and they are all idle.
Jason Hartman: They are idle now so the question is –
Woody Brock: Totally and last year and the year before.
Jason Hartman: Yeah wait – because I always said and thought that when the crisis hit as the deleveraging has occurring the reason that dollar was strong was because during deleveraging the system is sucking up dollars to deleverage.
Woody Brock: No, they’ll never think about they can’t tolerate this. It’s the bad way to thinks very bad way to think. It’s about credit not dollars – it’s a very, very tricky —
Jason Hartman: No, no I agree that was my next point is that it’s not just money supply, its credit supply and the credit supply declined. The overall inflationary picture is determined not just by money but by credit and so people can buy stuff on credit what credit – in the old saying about too many dollars chasing limited goods and services.
Woody Brock: Sure. Somebody say that they won’t be any more of those dollars. Even though in both in debt and holds it on its balance sheet so that’s – you’re correct. So it is much more tricky to believe in, why would most people understand this, on an obvious point.
Jason Hartman: Well it doesn’t – yeah fair enough. But despite of credit is the money supply. I mean it’s just another form of it right?
Woody Brock: You have to be careful this not completely true. It’s partly true but it gets into double entry T accounting and let’s move on — before the economy is doing so badly. So that interest you or not?
Jason Hartman: Alright, okay so – yes one question though just before we leave this topic, if the Fed can give the banks nice yields to sit on money and not loan it will –
Woody Brock: They sell only one quarter of 1% it’s very low.
Jason Hartman: Right.
Woody Brock: And they don’t have to give value because you and me don’t want to barrow, get it? We don’t want this so then have to bribe the bank, okay.
Jason Hartman: Let me take a brief pause, we will be bank in just a minute.
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Jason Hartman: Sounds good, we’ll let’s go ahead and head wins. What is making it so difficult to have a real recovery here?
Woody Brock: Okay here is – I mean a lot it is in my book American Gridlock, I called it as a seven head wins. Basically, here is the main point, it’s about jobs not just GDT but jobs. We fired millions of people now in this terrible recession. Do we not have people coming over the border as immigrant, new college, and high school grads every year?
Jason Hartman: Yes large supply of labor.
Woody Brock: Yes, here you go. A fundamental long run average result of that growth and jobs is the following: The growth rate of the economy, the pie GDT must be about 3% in our country. It is got to be X% where X is the from of Y and Z. Y is the increase in the work force and Z is so much more productive in each worker. Let me repeat, if workers are all in the pizza parlor, the growth of the economy to keep the job market in equilibrium or in balance has to be the sum of how many more people are baking pizza’s this year and how much more pizza gets it per person. So if you add those together in my country our so called trend growth is about 2.93% that is to say Yu must grow with 2.93% to absorb this year’s new supply of labor from immigrants and college graduates. Now, when you have a big recession that we had whooper far from the biggest since 30’s something else happen. You fire 15 million people or however many of us. So not only you have to put the work every year as a new people joining the work force you have to rehire so to do that clearly you have to growth a lot faster than 3% am I clear so far?
Jason Hartman: Sure.
Woody Brock: So if you take the 18 or so business cycles over the last century what do you think is the growth rate of GDP in the first two years of recovery after recession, give me a guess.
Jason Hartman: Oh gosh, 3%, 2%?
Woody Brock: No because you’d fired workers in the recession and now you had to rehire them and give jobs to all the new infants and cover productivity so I trap you on purpose.
Jason Hartman: Okay, was it lower?
Woody Brock: Three percent is what you need when you don’t have a recovery problem. We grew at 6.2% on average coming out of a recovery. So you not only absorb the new interns to the work force you also rehire those workers that have been fired by him before.
Jason Hartman: Well rehire the recovery sure okay.
Woody Brock: Now, what do think is then the growth rate of this recovery in the past three years?
Jason Hartman: It’s just been anemic, I mean –
Woody Brock: They’re 1.8 or 1.9
Jason Hartman: Yeah. It’s terrible.
Woody Brock: You now get my point?
Jason Hartman: Yeah.
Woody Brock: The real story here is that inflation – I’m sorry the unemployment rate which have nothing to do with the government’s 8.5% that’s one rate but the real rate is almost 6 number and is about 15.8 if I recall I don’t know the exact number. The point is it includes the people who have given up working because they can’t find a job. It’s scandalously high and what I’ve shown you is why it should be high. The growth rate has been terrible compared to what’s needed and bring that 15% down to 6%. Now when you say why here’s the economy itself so bad moving away from joblessness. The answer is number one, state local governments always absorb the best out of 550,000 people during recessions and recovery. But they over hired and over spent so badly they are all going broke so this time around rather than state local government absorbing workers they have basically fire some 700 thousand so you go from not hiring 550 thousand but firing 750 that’s bad. The construction for housing never came back because housing never back agrees?
Jason Hartman: I agree. There are slight small signs of it.
Woody Brock: But I mean in terms of the growth rate of the economy it’s pathetic. Third did not Tom, Dick, Susan, Harry _____ [0:49:09] borrow for 35 years.
Jason Hartman: Oh yeah. I think –
Woody Brock: We cover over the declining living standard by borrowing like there was no tomorrow as the state federal government. So the result is we are now retrenching the Woody Brock realize damn it, I never saved enough for retirement, damn it, the yield I’m getting on my money is a third of what my mother used to get. You’re lucky to get one 1.5% after taxes today and I’m terrified all the broke during retirement none of us would saved enough money to retire as they are coming clearer that they generations. Therefore, Tom, Dick and Harry are not going to go and reunite the economy by barrowing and binging are they?
Jason Hartman: Not likely. No.
Woody Brock: They are being careful. I mean were okay compared to Europe. But basically, were very concern of. Next business investment, my client like John Deere and 3M, they’re fine. They’re investing but then they invest in America. Their investment, their capital spending is in the new world from which over half their profits come. So, they’re fine with big companies. They have cash, they are growing but they don’t need to invest in America because America is sort of dead in the water. So, if you take housing state government Woody and Tom, Dick and Harry contracting, adding housing and you realize you knew all along you’ll going to have a lousy recovery as I wrote five years ago and we have. It’s not that it is a bad recovery its, we should have a bad economy given the background making it worse. Obama barrowing a trillion dollars a year how the money been spend as I argue in my book on the Marshall plan where if we don’t fix bridges and roads but electrical grids, tracking infrastructure all kinds of things were we have neglected our infrastructure for five decades. When you barrow from the kids a trillion dollars and spend it on productive investment then it might be interstate highway it creates a very big impulse for hiring. If you do what _____ [0:51:08] does we barrow the money and just give it to state and local democratic workers to staying in their jobs. It’s good that the people are being fired. But note that no new jobs just created but when you give Becto and other companies a trillion dollars a year to do infrastructure work they keep 10% of the money then they go higher 473 subcontractors each of them hires more subcontractors and consultants and you have a huge explosion on the accelerator multiplier investment theory. So we just barrowed from the kids hugely, we have not spent any money productively. That’s bad.
Jason Hartman: I couldn’t agree more.
Woody Brock: And that leads to the risk that the bond market will go on strike against us in the next four years, which I think it will which is of course what happened now to Spain and to Italy and to Greece and et cetera.
Jason Hartman: And to Greece yeah.
Woody Brock: And will not have interest rate don’t go up a little.
Jason Hartman: They go up a lot.
Woody Brock: Like the way hell up because the worlds as America we don’t believe in you anymore.
Jason Hartman: Well that was actually the question I was going to ask you when ou talked before about the banks not needing to lend and that’s why it wouldn’t create inflation where what I was wondering is can the Fed pay banks at much higher rates if we have a bond strike which, I want to ask you quickly about bond yields but if we have that type of event can they cause the banks to not lend when rates are say in the 10-12% rage of maybe back to the Carter era range much higher than that. Can the Fed cause that to happen, can they afford to make that happen in that environment?
Woody Brock: The Fed can afford it. The real question however goes beyond that in the kind of scenario you’re talking about you have to ask once again whether Tom, Dick and Harry would want to be barrowing, you see what I’m saying?
Jason Hartman: Fair enough but there are always barrowers to some extent yeah right.
So it’s a tricky mix of things. It is a tricky mix but see the thing that happened during Carter or during the end of Carter maybe is the better frame you just look at housing. Housing depreciated so of course it took 18% to get mortgage but the house price was a lot lower too. So, we know with some barrowing not as much as —
Woody Brock: That is part of national net worth as I said in 1981 was so terrible but very high interest rates that the value of your assets was way down and you’re right. But that was a period of inflation.
Jason Hartman: Well sure.
Woody Brock: Due to very different reasons not money putting or anything like that. It was due to a wage price spiral or powerful unions have the power to extract the very high wage fees increases that ended up killing their industries because they were being hit by 300% higher gas prices. Gas went from 3 dollars a gallon in 1972 to 12 dollars a gallon to 30 dollars by 1981.
Jason Hartman: You mean in real dollars – you’re saying real dollars?
Woody Brock: From 3 to 30 people were outranged. So they were able because unions have power to get big wage increase which created the very inflation they had worried about that is known as the wage price spiral inflation and Paul Volcker ended it by pushing interest rate to the sky at 20% having a major recession and then Ronald Reagan told all the aircraft controllers go to hell everyone of you is fired. Then China came along and the end of unions except for this public sector unions which continue to ruin cities.
Jason Hartman: Well the public sector unions have a cartels so they – federal government too and sure of course it is.
Woody Brock: It’s a real catastrophe.
Jason Hartman: Well what about the bond yields. Tell us about the scenario there if you would.
Woody Brock: Well the point then is that was the period when people like my parents never dreamed that the plus funds that they inherited, let say the bonds and the bonds would go from $1 dollar so to speak $0.20. They were like that. If you have a 3% Pennsylvania terms like bond and interest rate go to 18% the bonds worth nothing correct? This time we start with extremely low bond yields so simply normal recovery stories or to take today’s 2% bond yields and pushing back to a normal 4 or 5% wouldn’t you think? They are very low right now basically because we’re a safe haven the way we think this is just as Germany has bond yields much lower than anyone else in Europe that’s is if you live in Spain or anywhere else in Europe, you want to hold German bonds because they are safe. The world still thinks US is safe. You and me will not agree but relatively the world sees us as a Safe haven.
Jason Hartman: Woody that’s what I keep saying. You know the US has always had that sort of brain stuck good fortune if you will and you know I keep saying the US is a disaster but compared to what?
Woody Brock: Yes that’s the point. There is no such thing as a currency. There is only a relative currency. There is no dollars, its dollar pound, its dollar this, its dollar that. So you’re right its always relative but the US right now is benefiting from the fact that people want, she to keep their money here. There is trillions of dollars on the sideline. Private savings are huge if you’ll include corporate profits and not just household. And so the point is what could cause that to change. Now if you have a huge inflation for money funding the bond yields would go way up. I don’t expect to see that kind of things for reason I’ve already told you. I believe the US bond yields could be very low for another two or three years. I think by the next election no I think this election is over and almost doesn’t matter that’s disgrace but by the time of 2016, I see big developments and I think the global bond markets by the next four years will begin to say as it Italy. We don’t trust you anymore. You talked about it but you’ve done nothing but kicked the can down on the alley. We are going on strike. We basically are not going to touch you’re debt except at an 8% rate. Now going from a 2.5% bond to 8 –
Jason Hartman: Its like 400% increase yeah.
Woody Brock: That is a catastrophe.
Jason Hartman: It sure it is.
Woody Brock: So people say, oh it can never happen here. Well it can never happen in Italy and the bad news is when this does happen the economic notion the assert prices only moved in synch with the news in proportion to the news. This is false as it has been show in Stanford. Actually in the case like this take Italy the spread between the Italian bond yields and German bond yields was always 30, 40, 50 basis points. You could always demand on yield from Italy and Germany but with the euro they’re over saying. Once the euro prices started and the news came out about Italy fiddling with the books and all or whatever they did whereas it would have been normal to say that the spread would go from 45 basis points over German bonds to 80 or 70 it went up 300 so prices of bonds move disproportionately to the news making the crisis even more severe. So I am worried in the future that were all going to get used to this cozy 2% yield. And then they won’t go to 3% they could go to 6% so, I’m just stupid to know when. I don’t know when these things happen but if certainly not going to at 2% forever.
Jason Hartman: I would agree with that. One thing just enclosing real quickly Woody, who mentioned that this selection is over, it’s a disgrace. You’ve got to just tell us what you mean by that.
Woody Brock: Well I said that at the book _______ [0:58:34] basically that the – when you have the republicans on one day offending woman with crazy statement about abortion just to please and extreme prank, when you have people fighting over social security and MediCare that is a good way to handle this, they are not handling it right. You got to alienate and a lot of people. The democrats on the other hand who accuse the republicans of being obstruction as which they are themselves obstructing us because every idiot knows the major financial catastrophe of the country are entitlements and the democrats won’t touch it. I would argue they are the great obstruction because that’s the issue that affects us when the matters. That’s the issue the world is judged we’ve got to reform MediCare and social security my book has chapter on each. So, that’s what I’m getting at. I think its election between _____ I think no matter who wins you got to have gridlock and I think it’s going to come on stack in the next election which could be like year 1848 in Europe when the ill-regime fell completely and created a new Europe. Time will tell. Normally saying its too many people that will become too used to sleep in the back seat of sold cars.
Jason Hartman: Fair enough. Well Woody Brock, give now your website if you wouldn’t. Tell people where they can get the book.
Woody Brock: Well I don’t even know which website, the book just Amazon. You look for H. Woody Brock and American Gridlock on Amazon. So again American Gridlock H. Woody Brock or www.americangridlock.com.
Jason Hartman: Right, in this strategic economic decision website is sedinc.com.
Woody Brock: My website privately for stuff and consulting and all of that is www.sedinc.com. Anyway, thank you for being so patient I hope I made a little bit of sense.
Jason Hartman: It sure did. Thank you so much Dr. Brock. I appreciate it. (Top image: Flickr | mikecogh)
The Jason Hartman Team
Transcribed by: Renee
