2305: The US Economic Ponzi Scheme: Avoiding Collapse and the Path to Stability with Les Rubin

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So far, the event's been fantastic. Lots of great speakers, so many good contacts. Just the amount of different people you see here and meet here is probably the biggest benefit. And the speakers are unbelievable. And it's jam packed with content. Basically, can't miss a speaker. If you're on the fence at all about this, if you're even considering it, just jump on, do it. You won't regret it. You're going to be able to close those time windows that you think take forever. Just do it. It'll be a great experience for you as an investor and you're going to be able to learn just through osmosis, through all these great people you're around.

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 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.

Greetings, empowered investors. Welcome to episode 2305. Now I want to just recap on a couple of things.

You know, many of you joined us.

For our masterclass today. Thank you for joining us. I got excellent feedback on this masterclass, so thank you for that too. And it's just amazing to me how people think that there are some cases, some cases where you should pay off your mortgage and there's really almost never a case for that. You pay tax on positive cash flow. Remember that you don't get the mortgage interest deduction. So this could be on your own home, could be on an investment property. It's a little different either way, but either way you should not pay off your mortgage. I did a video about, I don't know, seven years ago. It's one of the old ones on the YouTube channel. And it was where I was on a ship in the, what was it, the Baltic Sea, I think. So anyway, I was on a cruise ship and I stood out there in the windy environment and I Talked about, should you ever pay cash for a property or should you ever pay a property off? And really, the only time I could ever come up with that that makes sense. And it doesn't even really make sense, right? But here's the time when, you know, you might do it. If you have so much cash that you just need to park your cash and you need a place to park it, right? And it is a personal residence and it is in a state with really good homestead protection, like Florida or Texas, that would be like the only time that you'd want to pay cash. And I did this myself. I kind of hate to admit this, but I bought a property and I just didn't want to deal with financing. I was very busy and so I just plunked down cash, you know, and I thought, I'll just refi it later. And then the COVID era rates came.

Along and I thought I would refi it then.

And I just kept thinking I was going to sell the property and I just never got around to it, you know, indecision, right? So I just sold that property a little over a year ago, and it was free and clear when I sold it. So, look, I don't always do what I say you should do. I'll freely admit that, you know, it depends on your circumstances and your financial ability and your situation. You know, that's one that I did do that with. But I think you should really always finance your properties. Remember, the best insurance is a high loan balance. If you have a natural disaster, if the property burns down, you don't want to have to go to battle with your insurance company. You want your lender to go to battle for you on your behalf. And that will be a much better situation because they're going to protect their collateral. And your insurance company is likely to weasel on you, but they're not likely to weasel on a big lender like Chase with lots of money and lots of lawyers. So, you know, there are so many reasons, but you want the inflation induced debt distraction. So if you pay cash or if you have a low mortgage and you don't use high leverage, you're not going to get the inflation induced debt destruction. So that's an important thing to remember. Besides, you know, there's the tax situation, there's the inflation induced debt destruction. There are all of these reasons that you really, really want to keep your properties leveraged. And as the equity grows over the years, you want to strip your equity and do my refi to die plan. Because that's what really, really Makes sense. So I just wanted to remind you of that. Now today we went over and I know a lot of you love this because I love it too. The perpetual motion machine that nobody was able to invent. The perpetual motion machine. It's kind of a fascinating story, right over the last hundred years, maybe much, probably much longer than that. But you know, I remember reading about how all these patents were filed for perpetual motion machines and nobody could ever invent it because it defies the laws of physics. It can't be done, at least not with what we know now and what we knew then. But with income property, you really can have a perpetual motion machine because you know how I've talked about the leveraged buyout and how you want to think like a Wall street tycoon and do LBOs or leveraged buyouts. So what is a leveraged buyout? Let's just review. You know, this became famous in the 80s with all these corporate raiders and you know, bigwigs, you know, T. Boone Pickens, Carl Icahn, Ivan Boesky, all the rest of them. You remember those names. So what they would do is they would find a company that they want to acquire, they try to buy this company and to do the acquisition, they wouldn't use their own money. They would load it up with debt. They would put as much debt, as much leverage on that company as possible, like I want you to do with your real estate. And then they would make the company out of its income, out of its cash flow, pay the debt back. So it was self liquidating debt. And that's exactly the opportunity we have with rental properties. And it's even better because you can get some positive cash flow out of it. So the leveraged buyout is a fantastic strategy. Now probably none of our listeners have ever or will ever do a leveraged buyout because you're not big billionaires on Wall Street. But you can do it on a smaller scale with your rental properties. And it's a fantastic strategy. So just follow my plan. Leverage up your properties, let the tenant pay the debt for you. Like the company paying back the debt out of its own cash flow. Right. The property is self liquidating debt and then you get inflation induced debt destruction too. So it's just such a phenomenal concept. Now to extend all of this beyond the leveraged buyout, their perpetual motion machine that we talked about today on our masterclass, I wish you were there. If you weren't there, I really wish you were there because everybody loved it. The perpetual motion machine says also use the cash flow that you get from the property. And with that cash flow, you save it until you have enough of a chunk to put a down payment on a property. And so the perpetual motion machine not only keeps your properties going in your portfolio going, but it actually buys you more properties. You get more properties for free over time with your perpetual motion machine. And if you're familiar with the book, it's a very famous book. It's called Good to Great by Jim Collins. Super famous book in the business and the corporate world. And this book, he talked about the flywheel. And that became a big thing that a lot of business people repeated the idea of this flywheel. And, you know, if you think of a big, giant flywheel, right, it is heavy, it's hard to move, it's hard to start, it's hard to get it turning. But once you get it turning now, it's not perpetual motion completely, right? But it has a momentum of its own. And that's the same way it is with real estate investing. And this is the saddest story I can tell you, by the way. Over the 21 years that I've been helping investors, 100% investors now, I, you know, when I was in the traditional real estate business before this, I. I helped a lot of investors as well, but not the way I do it now. The saddest thing I see is the investor who has some bump in the road, some bad experience. And listen, you're going to have them. Real estate is. It's not free. You're not going to get rich for free. There's no. There's no free ride, okay? You're going to have problems, you're going to have frustrations, you're going to have losses, right? But the winners are the people that have the emotional stability to put up with those losses and those frustrations and just keep going until their flywheel really gets moving for them. And the saddest story is the people that just quit. I've told you the story before about my first rental property. I was 20 years old.

I bought my first rental property from.

A client of mine. He wanted to sell it.

He wanted me to list it for him.

And I said, hey, his name was Jim. I said, jim, I want to buy it from you. And that was my first rental property. And guess what? My very first tenant, I'm looking like this total baby, right? Trying to collect the rent, and they didn't respect me at all. So they just stopped paying the rent and figured, what am I going to do, right? And so I Had to evict them. I had to evict my first tenant. My first experience at age 20 was a bad experience. You could argue I did end up selling the property and making some money on the property, but I was frustrated. And listen, no one would have ever blamed me if I would have given up at that point. But wow, I just imagine the course of my life and how different it would have been if I didn't keep going, if I didn't buy my next property, my next property and make all.

That money on all these properties over.

The years, big and small, you know, single family homes, I made small fortune on those. I did some big apartment deals, made a fortune on those. It's just the best asset class. You cannot beat income property. The most historically proven asset class in the entire world. The most tax favored asset class in America, taxes being the largest expense any of us have. So whatever you face along the way, do not give up. Okay? The future belongs to the bold. You know, right now, the past, you know, really, the past three years has been a very like boring time in real estate. You know, prices have been going up modestly, activity's been way down. Everybody keeps waiting for the interest rates to decline and they haven't. Now think about it, after the rates went up, you know what, three years ago, give or take, imagine if you would've purchased several properties, then you'd have a higher interest rate, but you would've had appreciation since then. Okay? And you know, I know the rental market's kinda like boring. It's a little bit anemic. Depends on the area. You know, all real estate's very local, of course, but just keep going, persist. As Warren Buffett says, be greedy when everyone is fearful. Be fearful when everyone is greedy. And I don't think people are terribly fearful right now. I think they're just kind of bored. It's just kind of a lackluster type of market we're in. But this is the kind of market to buy in. I'm shopping for a home for myself right now, a personal residence, an expensive one. And I got to tell you, it feels fantastic. I have so many choices and so many options. It's just a wonderful experience to be.

A buyer right now.

Lots of selection compared to a couple of years ago when I was doing this, trying to buy a high end home. Oh, there was no selection. So, yeah, anyway, okay, let's get to our guest. Today. We're going to talk about the greatest Ponzi scheme and it's about the economy and the way you know, the American monetary system runs. We've talked about it before, but this is a different perspective from another guest. If you want to join our pro membership, Empowered Investor Pro, go to EmpoweredInvestor.com and get your membership for a lot less than a cost of a decent gym health club.

This will make you financially healthy.

We meet every month on Zoom, small group meetings, and it's really a great time to learn more and network with fellow investors and so forth like that. So that. And then our next masterclass, remember the second Wednesday of every month, our next one, we will announce that in, you know, probably a week or two. But always the same link every month. For that, it's Jason harmon.com Wednesday because it's always on the second Wednesday of the month. Jasonhartman.com Wednesday all right, let's get to our guest. Happy investing. Keep the faith. And here we go with the Greatest Ponzi Scheme.

It's my pleasure to welcome Les Rubin.

He is the author of a couple.

Of books, but the one I want to focus on today is the Greatest Ponzi Scheme on Earth. No, that's not the book. That's our system and how the US can avoid economic collapse. There are three main elements that we.

Want to talk about as far as.

This Ponzi scheme, and let's go ahead and dive in. Les, welcome.

How are you?

I'm great. How are you? Jason?

Good to have you. Good to have you. So those three main areas that the book focuses on, what are those?

Well, the areas of problem that we have to address is you start with entitlements, which are completely broken. Government officials don't want to touch it because it's politically taboo. But there are ways to reform entitlements without hurting the benef beneficiaries, and we deal with that in the book the Size of Government. You go back to what was originally intended by our founding fathers. It was a limited government, and they had specific duties assigned to the federal government in the Constitution. Everything else According to amendment 10 to the constitution was for the states or the people. Well, that's not what we have today. Our founding fathers would roll over in their graves if they saw the mess we made of our federal government and the enormous debts we're taking on and the ridiculous spending levels that we have with deficits as far as the eye can see. So we have to look at how we can get the size of government down. And then we have a muddled tax code that is ridiculous. Even the tax professionals have to look up everything. It's so I think it's 10,000 pages of gobbledygook.

Oh, it's more than that, but yeah, absolutely, it's enormous.

I can only remember back in the old days when President Carter said we need to put a match to the tax code and start over. Well, I would agree with him.

Yeah. Couldn't agree more. Couldn't agree more. When we talk about entitlements. You know, I've had Lawrence Cutlikoff on the show a couple of times and he's done a lot of deep research into the forward looking obligations of entitlements over the next 10, 15 years. And you know, there's disagreement on this, but it's anywhere from 60 to 220 trillion dollars, most would say. And these are, these are just unfunded. There's no way we can pay for this except to inflate away the obligation. You can't tax enough to cover this problem. Let's just dice into this entitlement issue first.

Well, the unfunded obligations according to the CBO are $78 trillion. That's over a horizon of 75 years. And yes, if we keep on keeping on just, there's no way we can pay that. So we have to dig down deep into, try and see what the problem is. Well, we have a demographic problem today. There are 2.6 people working for every person on retirement. When we started the system, it was 30, 40, 50 people working for everybody. So, so we got too few people pulling the cart. That won't work. And the, the Social Security trust fund and the Medicare trust fund both exhaust in about 10 years. And if we do nothing, the current law says you have to cut benefits to match the income. And that means 24% cuts for Social Security across the board and 11% on Medicare. So what do we do? Is the question.

That doesn't seem like that'll be very politically popular to do those things.

No, we know what the politicians are going to do. They're going to change the law to keep paying out benefits and that just makes our debt problem worse. And that's the focus of the Ponzi scheme book. There are solutions to this and I propose one in our book, which is converting Social Security to private accounts, which I think is by far the best solution. There's a problem doing that because the capital cost of the conversion. So in my program, which I'm getting modeled right now, have a 20 year conversion with a slow, slowly moving from required into the trust fund, into your own account that you would own yourself and so over a transition period, we would get to the point where everybody owned their own asset and they would retire whenever their assets were adequate to fund a income stream for them for the rest of their life. So that's, that's one approach. There's many.

Okay, so, so let's just talk about that one for a moment. So first of all, I can't imagine the politic wanting to give up control of, you know, the Social Security system like that. And of course, you know, what they'll say is, well, you know, we need, we need to protect people and we need to protect people from themselves to some extent. Right? Because if someone mismanages their account, just like if they mismanage their ira, right, then the system, you know, ostensibly has to somehow solve their problem later. Right? If they're living for today with instant gratification and blowing all their money, somehow society is going end up covering that, aren't they?

The first thing I say in my program is you cannot cut current benefits and you can't, but that means some trade offs in the program to get there. Does the government want to give up control? No, they never want to give up control. Power is what it's all about in Washington. So that's what Main street economics is trying to reach out beyond the political class to the voting public, if you will, the concerned citizens of the country. Because if we can get them educated to the problems that we have in the future, that is not pretty. And you'll see that if you take a few minutes to look at our website, then maybe we can alert the citizens to the problem in time to get some pressure on Washington. I think it was Lincoln that said it best. It says with public support you can get anything done. Without it, you can get nothing done. So we have to get the public on board with this.

All right, so entitlements, we talked about retirement or Social Security, but what about all of these, these promises the government has made? I mean, I for one have never seen so many people collecting disability benefits from the government. How did a generation of people become disabled like this? You know, it's just fake. These claims are fake, many of them. How do you cut back on benefits? I mean, look, the left side of the political aisle and the right side, to a lesser degree, they've just bought off the voters with promises of goodies, you know.

Well, there's a very prophetic quote that I found from someone no one has heard of. His name is Alexander Titler and he forecasts what's going. This was 200 years ago, he was a Scotsman, judge and a historian. And he said democracy cannot succeed is once people discover that they can vote themselves largesse from the government. After that, you're doomed to failure in a fiscal morass. And unfortunately, that's exactly what's happening. The politicians are professional politicians. They're not statesmen anymore. They're professional politicians. They have a job and they want to keep it.

This is one reason we need term limits so badly.

Term limits would be great if you could get it through that. That's the challenge. But we need, we need the public to understand the problem if we're ever going to fix it. And that's what I'm trying to do through Main Street Economics. We have a number of videos that we're producing right now that we're going to be starting into public domain sometime in the next 30 days. But, but the public has to understand the problem. It's not just Social Security, it's Medicare, it's Medicaid, those three entitlements. If you will lose the, lose the federal government one trillion plus every year, you have to fix those and you have to lower the size of government if we're going to get imbalanced because a smaller government will lead to better growth in our economy. And the logic for that is pretty clear. The, the less government takes out of the public economy, the more that's left in the public economy to invest and grow and make a better standard of living for all of us.

No question. But the person who's receiving the benefits, the person on Section 8 housing vouchers, for example, they're never going to vote themselves out of their own benefits. It's just never going to happen.

No, I'm not going to reach 100% of our voters. There's no way that'll happen. But if I can get to 10 to 20% of informed voters, I think that's enough to make a difference. The incentives are backwards in Washington. They incentivize people doing the wrong thing. The best example of that is the War on Poverty. Even though they had good intentions, what happened in the War on Poverty? Instead of bringing people out of poverty into independence, we've created a whole society of dependence. We've spent $25 trillion and we haven't lowered the poverty rate at all. So the people in Washington don't get it right. They have their incentives backwards. And incentives are the most powerful force in the world.

Well, and one problem with those incentives is you look at a program like Aid to Families with Dependent Children and you Know, politicians, especially on the left, know that if you bust up families, single people tend to vote leftward leaning. No question about that. Especially single women. Especially single women. Mothers, you know, you, you give them the benefit of the doubt and you say, well, they had good intentions. I don't know that any of these intentions are good. I think these intentions are just a power grab. We just see this continuing and continuing, like you mentioned, with the incentives. So what do we do? I mean, you know, I don't see how this really gets fixed until you have a collapse type of scenario, because no one will ever vote themselves out of their own pocketbook.

No, people, people vote their pocketbooks. There's no question about that. And, and I was being kind by saying they had good intentions.

I agree, you were being too kind.

Yeah, I, I don't, I won't swear to that. But nevertheless, what they've done is they've created a bureaucracy that wants to give away as much as possible, and that's to curry favor with voters that are getting the benefits of that are not going to change and they're not going to vote to do away with that. And, and I don't know that we want to do away with welfare altogether, but we need to make it for the needy and the people that really deserve it, not everyone. And that's what's happened. And, and why we've created a whole society of dependence. And, and you're right, they're not going to, they're not going to vote for some rational change. But if we can alert enough of the public to the problems, they will be alarmed if they see the facts. And we have a pamphlet that's free on our website that's only about 25 pages that I co authored with the former Comptroller General for United States, Dave Walker. And we described that in some detail and some solutions. It's not as detailed as the Ponzi scheme book, but it would be a good overview. And that's available free on our website.

Mainstreeteconomics.Org you wrote a book strictly about economics, right. Rather than specifically the Ponzi scheme we're talking about. Where does this lead? If it takes another 10 years or another forever to get going in the right direction here. Do we just see massive inflation? We've got a debt increasing at the rate of almost $4 trillion per year. Now, where does this lead?

Well, if we stay on the course we're on, and that's the whole theme behind what I'm doing. If we stay on this course, we are going to crash and burn and we are going to disappear as a country as we have known it. There will come a time when the Ponzi scheme fails and the only way we can finance our growing debt and expenditures is to borrow money. Well, when we can no longer borrow money, that means the Ponzi scheme has failed. And that's a collapse of this country economically and a destruction of our whole monetary system. If that happens to us, it's not just our problem, that's a worldwide problem. And that'll be catastrophic if we let that happen.

Borrow in terms of what? Selling treasuries at our treasury auctions?

Well, the way we finance our deficits is to sell treasuries. This year it will take approximately $10 trillion of debt sales to pay off the rolling over debt that matures, which is about 8 trillion, and the deficits, which is about 2 trillion. So we have to sell $10 trillion worth of bonds and the demand for those bonds is weakening as foreign investors are liquidating. Our biggest holders were China and Japan. They were both over a trillion dollars. They're liquidating, they're going down. And so as the Federal Reserve is not buying like it used to, so you have a convergence of increasing supply of debt and a decreasing demand. And we all understand supply and demand curves. That's not a good scenario. At some point we're going to run into we can't sell our debt to anybody but the Fed. And when you sell debt to the Fed, that's printing money and that's inflation.

So how bad will the inflation get?

Well, that depends on the policy. Right now they're having trouble getting inflation under control and they're trying for this so called soft landing where we get inflation under control without a recession. I think they're smoking something. But bottom line is the way you get inflation under control is to decrease aggregate demand. Supply and demand is what it's all about. So in order to do that, you almost have to raise interest rates and create a recession to do that. If they don't follow that prescription, and I don't think they're going to raise interest rates politically that might not fly, but I don't think you're seeing any reductions either. And slowly the high mortgage rates and the high interest rates are starting to slow the economy. There's a lot of underlying data that says that that's happening right now.

I agree with that.

And it just makes the economy anemic and puts us into this sort of stagflation scenario. Anything else you can tell us about the future of the economy based on what's going on. I mean, I hope you're right and I hope we see some change, but it is not looking likely if we.

Don'T get the public aware of the problems and put some pressure on Washington to fix the problem. I don't know where it ends, but it's ugly and I don't know how much time we have. Nobody can predict that. But my swag, no, I'll call it a wag. It's a wild ass. Guess it's 10 years or less before we really have to start dealing with monumental problems and the road to failure if we don't fix the problem problems. I'm writing a pamphlet now that's even shorter and it's called Failure is our Option and we are choosing it by default. We're not dealing with the problems and we will fail if we don't deal with the problems. And that's my fear for for me, you, our kids, our grandkids, and all future generations. It's going to be dramatically worse if we don't fix these problems now.

Yeah, no question about it. Les give out your website. It's mainstreeteconomics.org mainstreeteconomics.org, les Rubin, thanks for joining us.

Well, thanks for having me, Jason.

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