1486: Small Town Currency, Inflation/Deflation Shell Game, Suburban Bidding Wars

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your Financial Independence Day. You really can do it. And now, here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome listeners from 189 countries worldwide. This is episode number 4 14861486. Thank you for joining me today. And you know how I am always I am always asking you to ask one of life's most important questions when it comes to investing, when it comes to economics, when it comes to statistics, when it comes to surfing waves like we were talking about the other day, when. When it comes to pretty much anything. And what is that most important question? The question is compared to what? So in the spirit of Compared to what? I thought I would share with you before we dive into some deeper topics and talk about how a small town in Washington state is printing its own currency. Boy, are we having a secession movement. And no, this is not Chaz, by the way. It is not. It is not the Capitol Hill autonomous zone. No, that will collapse very soon, I am sure. But when it comes to compared to what I thought I would share with you, this letter, this daughter's letter home, it went viral a while back. And you might have heard this before, there are a couple different versions of it. But anyway, it's handwritten. It's just about a college student that sends her parents a letter home filled with various news. So it goes on to say, dear mom and dad, it has been three months since I left for college. I have been remiss in writing and I'm very sorry for my thoughtlessness in not having written before. I will bring you up to date now, but before you read on, please sit down. You are not to read any further unless you are sitting down. Okay. Well, then I am getting along pretty well now. The skull fracture and the concussion I got when I jumped out of the window of my dormitory when it caught fire shortly after my arrival are pretty well healed by now. I only spent two weeks in the hospital and now I can see almost normally and I only get those headaches once a day. Fortunately, the fire in the dormitory and my jump was witnessed by an attendant at the gas station near the dorm. And he was the one who called the fire department and the ambulance. He also visited me in the hospital and since I had nowhere to live because of the burnt out dormitory, he was kind enough to invite me to share his apartment with him. It's really a basement room, but kind of cute. He's a very fine boy. And we have fallen deeply in love and are planning to get married. We haven't set an exact date, but it will be before my pregnancy begins to show. Yes, mom and Dad, I am pregnant. I know how very much you are looking forward to being grandparents. And I know you will welcome the baby and give it the same love and devotion and tender care you gave me when I was a child. The reason for the delay in our marriage is that my boyfriend has some minor infection with which prevents us from passing our premarital blood test. And I carelessly caught it from him. This will soon clear up with the penicillin injections I am now taking daily. I know you will welcome him into the family with open arms. He is kind and although not well educated, he is ambitious. Although he is of a different race and religion from ours. I know you often express tolerance and and will not be bothered by this. I am sure you will love him as I do. His family background is good too. And I am told his father is an important gun bearer in the village from which he comes. Now that I've brought you up to date, I want to tell you that there was no dormitory fire. I do not have a concussion or a skull fracture. I was not in the hospital. I am not pregnant. I am not engaged. I do not have syphilis. However, I am getting a D in sociology and an F in science. And I wanted you to see these grades in proper perspective. Your loving daughter. So there you go, folks. Compared to what? Isn't that the perfect example of. Compared to what? Right. I just had to share that one with you. Okay, so a small town in Washington state is printing its own currency during the pandemic. Pandemic? Yes. Wayne Fournier was sitting in a town meeting when he had the big idea. As the mayor of Tenneo, Washington, population 1884, he'd watch the pandemic rake local businesses. Residents couldn't afford groceries. Long lines snaked outside the local food bank. For more than a month, the downtown area looked almost abandoned. To bring back the economy he needed to act. We were talking about grants for business, micro loans, trying to team up with a bunch of different banks. He tells the Hustle. I guess that's a newspaper or something like that. The big concern was, how do we directly help families and individuals? And then it hit him. Why not start our own currency? Residents below the poverty line can apply to receive money from the $10,000 fund that Tenio has set aside. Once they're approved, they can pick up their stipends printed in wooden notes worth $25 each. Wooden notes? Really? What does that look like? I gotta see it. The city is capping the amount each resident can accrue at 12 wooden notes, or $300 per month. Almost every business in town accepts the wooden notes. And. And twice a month they can submit redemption requests to the city to turn the notes into cash. By the way, I just have to say, isn't it interesting that they say turn the notes into cash, and cash we're all assuming is the US Dollar, but that shouldn't be the assumption. But it is. And isn't it interesting that all of the bitcoin people and all of the other cryptocurrency redeem their cryptocurrency for cash? Yes, the almighty dollar. I know I have attacked the dollar. I have said bad things about the almighty dollar over the years, and they are not untrue, they are not incorrect. But the question is compared to what we just read about the daughter's note home to her parents, compared to what? And that is a great example going on. By creating its own local currency, Tenio keeps the money in the community. As Fournier said, Amazon will not be accepting wooden dollars. Well, you know, that's just funny because you know the old saying, my Aunt Lucille and Aunt Bee, may they rest in peace, used to say to me. These are great aunts, by the way, used to say to me, jason, don't tank any wooden nickels. Right? That's the old saying you heard from older people. Don't take any wooden nickels. And there you go, they've got wooden notes. Think about this closed system of their own currency from an economics perspective, from a government's perspective, from a. The perspective of a franchise, for example, you know, if you look at a local government versus a federal government, the local people will say, well, we shouldn't send our money off to Washington and have them take a very large handling fee out of that money and then return some of it to our community. That's essentially what Washington does. That's the argument between Local and national government, the argument between states rights, etc. And the local people know what they need and they know how to spend the money better than Washington D.C. does. From a personal level, it's also true in that system, you know, do you as a taxpayer know how to better spend your resources, your money than the federal government should? Or should you send it off to Washington, have them take a very large handling fee or mismanagement fee and then send some of it back to you? So that's what this small town is doing. It's created a closed system. Look at it from the perspective of a franchise, right? The franchisee joins a pool where they spend money, they send money to a franchisor and that franchisor, Joe, does something for the collective. They spend money on advertising for the entire franchise system versus just that local store or local restaurant, as it were. And think about this. What happens in this small town if the population increases? Do they need to increase the money supply? What would happen to the gdp, the gross domestic product of the small town? Do they need to start engaging in fractional reserve lending? It's obviously fiat money already. What happens to the velocity of money? As money moves faster or slower through the small town in their little closed currency that they have, does it create inflation or deflation? That's the velocity of money argument. I mean, these are complex economic theories, we all know that. But it's just interesting when you see it on a small scale, it becomes more understandable. And then lastly, what about foreign trade, if you will look at it in the context or it being analogous to the US and China? Well, if the small town wants to trade with the outside world, how does it do that? Should it allow the outside world to bring its goods in and sell them at lower prices? Then the small town merchants in their closed system with their own currency are selling those items for now. What would happen then? Well, the consumers of the small town would get maybe lower prices, but then the money would leave the small town. And when it's spent outside of the system, it's not always spent back in the small town. So when the US trades with China, for example, some of that money is spent back here in the US because China buys our treasury bills, they buy companies, they invest in companies in the US because the US has the more open economy and the biggest economy in the world and the big stock exchanges. But not all of it comes back. Some of it stays in China. So these are all just thought experiments really, just to, just to consider as we look at this insular Closed currency. But when you look at it on a really small scale, it becomes more apparent how that works. By the way, I am looking at one, it's got George Washington on the front. It says 10 Washington, it says $25. And then it says Covid relief. And inside the words Covid relief are inside a bat. Yes, a bat. You know, like the bat that theoretically carried the Wuhan virus. Right? Oh, can't say the Wuhan virus. That's politically incorrect. Oh my gosh. Can't call it the China virus. Okay, sorry. Anyway, but it's almost like they're poking at that with their Covid relief and a bat as the symbol. Right. I think that's pretty, pretty outrageous. So anyway, that is interesting, isn't it? But I'll tell you something folks, here is another article. This is from the Wall Street Journal. Housing market around New York City is booming. And it says house hunters are swarming the villages, rural communities and small towns outside New York City, from the Hudson Valley to southeast Connecticut. When the state imposed shelter in place restrictions in March, the initial hotspots were months long rentals in the Hamptons and leafy suburbs not far from the city, as some urbanites look for temporary ports with more space. Well, that's pretty much as I've been telling you, right? You know, if you've been listening to the show, you knew that was going to happen. Now another article that's interesting, this one's from Barron's and this is, you know, owned by the Wall Street Journal or whatever, that same conglomerate. And it says how the pandemic has changed what home buyers want. Get ready for the mother of all bidding war seasons. And the article talks about how last week the authority commented on something by economist Robert Shiller. Right. You know, Case Shiller, index Nobel laureate, the guy who just completely misses how real estate really works. But he just, when he compares real estate to other investments, he forgets that people use leverage with real estate to amplify their returns by like a 5 to 1 ratio. He forgets that people get tremendous tax benefits. And he makes this completely misleading comparison to the Dow and the S and P. But whatever, whatever, Robert, I guess you're not smart enough to know that even though you are a Nobel prize winning economist. And I guess your main index, the one that everybody quotes, that has three quarters of that index dedicated to cyclical markets that don't make any sense. You just overlook the idea of linear cyclical and hybrid markets. You know. You know, Mr. Shiller, Professor Shiller, you could learn something from listening to this humble podcast right here, you'd be learning a lot. Get out of the ivory tower. Okay, Anyway, enough said, enough said. All right. So Shiller predicted that house prices in the suburbs would rise faster than than those in the city centers in the coming years. As buyers now practiced at working from home, seek more social distancing space, it could be months before house price indexes offer proof. Now that's true, folks. Right there. See, like I've said, you gotta remember that real estate, the stats on real estate are really strong, low. Every single day, every minute in real time, we get stats on the stock market. As soon as the Fed has a meeting, the FOMC meets and they come out with whatever their edicts are. And we know, but real estate, you've got to wait for the deal to be negotiated, wait for the deal to close, wait for the deal to be recorded, wait for all those recording statistics to be tabulated and then circulated in the news media. So you're looking at 60 to 90 days lag time. All kinds of stuff is happening before that in the marketplace yet the stock market, you know instantly. So understand that about real estate. This past week I reached out to Glenn Kelman, CEO of Redfin, for a real time. Ready? So this article is just talking about how the bidding war has moved to the burbs. Move to the burbs, baby. I told you so. I hate to say I told you so. You know Ariana Grande, the singer? Well, guess what? So she bought a mansion. What a surprise. What a surprise. And her 10,000 square foot home on Bird Streets. I don't know, is that a famous street or something? I don't know where that is. Was in a Ponzi scheme, promoter's portfolio. Okay, so it says Ariana Grande's new Bird Streets home. Where is Bird Streets? I don't know that. Anyway, I grew up in la. This is in la, right? I think so. Whatever, whatever. It's for the birds. Okay. Had once been in the portfolio of convicted spec home investor Robert Shapiro. I guess that's not to be confused with the attorney Robert Shapiro, who sadly got the murderer OJ off. But, oh well, the pop star paid $13.7 million for the home in the Hills on an off market deal. Far less than the 25.5 million it listed for just two years ago. Well, what I tell you, Cyclical markets having some trouble. Okay, Ariana Grande got it for about half. She's quite a real estate investor. According to the Los Angeles Times that first reported the sale, the most Recent offering was around 17.5 million for the four bedroom, five bathroom property. Now think about that for a minute, folks. This is a 10,000 square foot house that is only, only, only four bedrooms. Isn't that amazing? Wow. That must be very spacious. Must be nice. Okay. Must be nice. So the ID group designed the home and is among 138 properties ties tied to the Sherman Oaks based investment firm Woodbridge Group of Properties. Shapiro, who was head of the now defunct company, is serving 25 years in federal prison for what authorities called a $1.3 billion Ponzi scheme to defraud investors who didn't follow Jason Hartman's commandment number three, thou shalt maintain control so you don't leave yourself susceptible to the three major problems when you relinquish control. One, you might be investing with a crook. Number two, you might be investing with an idiot. Number three, assuming they're honest and competent, they take a huge management fee off the top for managing the deal. Folks, mark my words. Here's another prediction for you. You want a prediction? Here's one. Here's one for you. Ready? Are you ready? The prediction is that many of these funds, many of these deals like Woodbridge Property Group or Woodbridge Group of Properties, whatever it's called, the 1.3 billion dollar Ponzi scheme, many of these years from now, you will see that many more of them are Ponzi schemes. And you may have invested in some because you didn't follow my commandment number three, thou shalt maintain control. So there will be more of these that come out. A lot of these hot shots with their deals, their syndications, we'll see a lot of them will be Ponzi schemes. Just wait a few years and you'll see. It'll happen. Hey, let's take a quick break. And it's not a commercial break. It's just a break to learn something else because I might be annoying you. Okay, So I want to play for you something from my A L E X A. I can't say it very loud because she'll, She's. She's listening to us. Jeff Bezos is always listening, Alexa. Ah, hey, she didn't hear that. Anyway, I want to play something from the flash briefing. We have an A L E X A skill and it's free. You just go to Amazon and get it. Just type Jason Hartman A L E X A and you can get the skill and put it in your flash briefing every day because then you'll hear all of this great stuff. And here's the most amazing thing about it. It stands the test of time because much of this stuff now we've handpicked and we've removed some of the things is stuff that we published 10 years ago, 12 years ago, 10, 12 years ago, maybe even more, maybe even 13, 14 years ago. And it is still totally true today. And you can see how the predictions have come true today. So let's go to our Flash briefing, which is a free Alexa skill that you can get Here we go.

The Inflation Deflation Shell Game One of the economic forebodings that's beginning to gain some momentum is the notion of the exact definition of inflation or deflation can be subjective in nature, but they are generally understood to be an overarching increase or decrease in prices across a specified period. Now, traditional economic theory holds that when a government increases the amount of money in circulation relative to real output, it creates inflation. Irving Fisher articulated this thought in the following mathematical identity MV pt, where M represents the amount of money or currency in circulation and V equals the velocity of circulation for that money. Now, on the other side of the equation, P is the nominal price level and T represents the level of real output. A simple analysis of this identity reveals that the most important part of the equation is real output or t. The reason for this is that real output frequently grows at a rate between 2% and 3% per year for mature industrialized countries. Another way of viewing this identity is to isolate the price variable so that the price level is equal to the quantity of money times the velocity of circulation, both divided by the level of real output. In other words, P equals MV over t. In practical terms, the level of real output is relatively static over the short term since both the supply of money and the velocity of circulation can be extremely volatile. Thus, the two key variables that affect the market price level are the amount of money in the marketplace and the velocity of circulation. This can create a bit of a feast or famine effect, since periods of economic expansion typically increase the velocity of circulation as people spend and invest more quickly. Similarly, periods of contraction decrease the volume of circulation as people are more wary of spending or investing. The political response to this trend is an attempt by the Federal Reserve to fine tune the price level by increasing or decreasing the amount of money in circulation. After the 2008 financial crisis, there was a tremendous bout of deflation pressure that stemmed from a collapse of transaction velocity. This contraction in velocity was most heavily concentrated in high priced capital assets like homes that depend on credit financing. Since the reduction in credit availability suddenly removed many Potential buyers from the marketplace. This phenomenon is the core argument for deflation in the near future by people who believe that a double dip recession will result in another contraction. And that deflates prices by clamping down on the transaction velocity. In response to this slowdown of currency velocity, the Federal Reserve injected a tremendous amount of new money into the banking system. When this happened, many people became very concerned that the increase in money would create inflation when transaction velocity regressed back to equilibrium. The root of this fear comes from the fractional reserve banking system, where a deposit in one financial institution is used to create loans. Now, the US required reserve ratio for banks is 10%. What that means is that banks must hold 10% of all deposits in reserves. These new loans are subsequently deposited into another financial institution, which results in more loans until the money multiplier rate of expansion has been achieved. When people refer to the money multiplier, what they're talking about is the reloaning of funds out so that the total money creates equals the initial deposit divided by the required reserve ratio. In the United States, a fully multiplied deposit will create 10 times the amount of money that was initially deposited. Now, by now, I'm sure that you've become highly concerned over the potential for fractional reserve banking to take monetary expansion by by the Federal Reserve and turn it into hyper inflation. The way that the Federal Reserve has chosen to contain this risk of inflation is through a shell game of manipulated incentives to hold down prices and prevent monetary expansion from causing widespread inflation. Now, the way the shell game works is by masking money printing through an artificially low fed funds rate those banks can use to borrow money from the Federal Reserve. When banks can borrow an extremely large amount of money for near zero interest, it becomes immediately obvious why the banks are not making loans. The reason that banks are not lending is that they can make more money buying Treasuries with a higher yield than the fed funds rate and capturing the interest spread as an arbitrage profit. The secondary effect of this scheme is that the bank arbitrage of artificially low interest rates by the Federal Reserve hold holds down treasury rates. The reason for this is that banks have an incentive to purchase large quantities of Treasuries with money that they've freshly borrowed at near zero interest rates. Thus, the banks realize enormously large profits, Inflation stays modest and treasury rates stay low. This nifty trick allows the government to use freshly printed money to hold down the cost of borrowing. This is the step where deflation may temporarily emerge. If the Federal Reserve is overly Successful in suppressing private lending with the distorted incentives to banks, it could result in an incremental credit contraction that further slows the velocity of money through the economy. This is especially likely if the economy slips back into recession, as losses in the commercial real estate sector and persistent unemployment create more drag than the fictional government stimulus can overcome. There is a distinct likelihood that the limited duration of asset deflation from reduced currency velocity may unfold. However, just like the Pied Piper of Hamlin, all debts must eventually be paid. In this case, the debt to be paid is our continually increasing national debt. The inflation control shell game of the Federal Reserve is being used to mask the impact of burgeoning government deficits by artificially suppressing interest rates. As the debt continues to grow out of control, the ability of the Federal Reserve to manipulate rates will diminish as foreign governments and domestic investors refuse to accept low interest rates for debt from a government with no semblance of fiscal responsibility. As the government finds itself unable to sell treasuries at low rates and roll over its debt burden, yields will necessarily rise. As these yields rise, the amount of government spending required for debt service will also rise. This will increase government deficits until they reach a point where so much of the government budget is dedicated to debt that a sovereign debt crisis is declared and either spending cuts or currency devaluation is triggered to keep the national budget from collapse. Since spending cuts of the magnitude necessary to get the government back on strong financial footing are unlikely, the most probable option for the government to bail itself out is monetary inflation. By this point, the inflation will necessarily roll through the economy, since treasury arbitrage by banks relies on an artificially low fed funds rate. By this point, the debt will have grown to such a point that it can't be contained with bond arbitrage by banks. At this point, attention will need to be focused on solving the fiscal calamity caused by nearly a century of irresponsible spending. Now, at some point, the eventual result will most likely be currency devaluation by the government that's wrapped in the form of monetary expansion pushing up prices. The monetary expansion will occur as the government prints new money to pay for its entitlement obligations, and the inflation will occur when this flood of money washes out into the economy. In the end, large amounts of inflation are an almost complete certainty. There is a distinct possibility of temporary deflation from distorted market incentives in the near term. But long term actions cannot possibly lead anywhere but inflation unless our government adopts austerity measures that are greater than Three times the restraints recently imposed on Greece. Since governments are naturally irresponsible until forced into responsibility, the reality of inflation in the future is a matter of almost complete certainty. Action item Take advantage of government interest rate manipulation by locking down fixed rate financing on income properties immediately. The shell game being used by the government to control inflation and interest rates can't continue indefinitely. When it breaks, there will be a torrent of inflation that most people have never imagined before. By taking action now, you and your family will be prepared so that the irresponsibility and corruption of government bureaucrats will not destroy your financial well being. Inflation that most people have never imagined before. By taking action now, you and your family will be prepared so that the irresponsibility and corruption of government bureaucrats will not destroy your financial well being.

So how do you like that? A good little primer again on inflation, deflation and the whole shell game. And I tell you so, if you bought, as many of our clients did, if you bought 10 properties through our network when we publish this message, and let's estimate it's 2008, okay? And with those 10 properties, you would have taken out $1 million in mortgages, which is, you know, a reasonable number. Say, say you paid $120,000 for each property and you put 20% down so you had $1 million in mortgages. Well, with the stated inflation rate, which we all know vastly underestimates real inflation, why? Weighting substitution and hedonics. The consumer price index is an epic scam. And by the way, at our upcoming Meet the Masters, I've asked George Gammon to talk about that because he has a fan, a fan frickin tastic presentation on that topic. I mean it is, it is not only good, it is so good, you're going to love it. Okay? And shows you how the CPI is a complete scam, which, you know, it's fascinating stuff. So just at the stated inflation rate, not including all of the other return on investment that you would have gotten from cash flow from refi till you die from tax benefits from leverage, leveraging and multiplying your return on investment, this is simply the inflation induced debt destruction. Very conservatively stated, that means the $1,000,000 in 2008 would now the same item would cost you $1,190,000 today. A cumulative inflation rate, the understated Official stats of 19.1%. 19.1%. Now you take that off the loan balance because the inverse of that is what applies when you're thinking about inflation induced debt destruction. Okay? So you basically got 20% off if you got interest only loans back then and say you didn't pay one penny of principal in all those years, just as an example, because it keeps it consistent, that means you only owe in real dollars about $800,000 now. So inflation induced debt destruction Again, if you're new to the show, check out our Quick Start podcast, Jason Hartman quickstart. Just look that up on any podcast platform and that'll give you some of the more fundamental episodes that explain explain inflation induced debt destruction, refi till you die, how to calculate return on investment properly. And then of course you can go to jasonartman.com, click on the Properties page and you can see these detailed performas that really tell you a lot more about understanding a deal. You can watch the video on the front of our page. And by the way, if you're a regular listener, have you watched that video in the past six months? I guarantee you, you will learn new stuff every single time. Every single time. Unless you are just a total seasoned investor, a complete pro, you should be watching that video every six months. It's free. Just watch it. It's good. It's good. You'll learn new stuff. You'll make new distinctions every time you listen to it. Anyway, that's all for today folks. If you need us, we're here to assist you and guide you in building an awesome real estate portfolio. Reach out to us through Jason hartman.com or by calling in the US 1-800-hartman and until tomorrow, happy investing. Thank you so much for listening. Please be sure to support subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.