2316 FBF: The Financial Health of America’s Social Classes with Dr. H. Woody Brock Author of ‘American Gridlock’

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Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some 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's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Grading wealth show. This is episode number 283 and this is your host, Jason Hartman. And I've got Steve here with me on the line. He's one of our investment counselors. Steve, how are you?

Fantastic. How are you, Jason?

I am doing great. So you're in Utah today and I am 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, you know, when we all think, well, gee, there are still those people out there much less sophisticated than our listeners. But those 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 you look at geography and you look at the tools we all have nowadays, between Zillow, Trulia, Rentometer, Rent Range, Google Maps, Google Satellite, Google Earth, 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?

Yeah, absolutely. Geography used used to be a big issue, but because of technology and 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 properties 1700 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.

No question about it. And it's the numbers, it's the economics of that particular housing market that drive it. And, you know, 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 90s and before. Well, between the 50s and the early 90s, geography became less meaningful than it was before the 50s. 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 for major commercial aviation, Right? And from the 50s to now, you can get across the country in about four and a 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. And so 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 Craigslist, and I find people to do certain jobs my company needs done or one of my companies needs done, and I find them in minutes. I mean, it's really startling. You can use Elance, oDesk, Guru.com, craigslist, 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.

Yeah, yeah, for sure. And we're 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. 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.

Well, but you know what, though, I have to kind of differ with you on the. How expensive airfare. Now, see, when Reagan deregulated the airlines, airfares just plummeted. And, I mean, competition soared, and, you know, it got. No longer were the airlines these big fat cats, and the whole romance of flying went out the window after that, but it made it the Greyhound bus in the sky, you know, where everybody can afford to fly. And, you know, that's all good and bad.

Right, 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.

Yeah, yeah. No question.

We don't know why that is. Maybe it's because commodities are going up in price. Well, a variety of factors. And even though the airlines have been deregulated, the ability to run a business in the United States has only gotten more complicated, and that just drives up costs for the consumer. And I think that's what we're feeling, too.

Yeah, no question about it. But, you know, 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's 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. It's like, 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 70s, 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. They didn't call them flight attendant. The stewardess would escort you around and make sure you got everywhere okay. And I remember to fly across the country, it 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 $1,700.12 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 and what Reagan did, I mean, it's. It's a lot cheaper. So we got to really understand in the Long view. Geography is just way less. Less of an obstacle than ever.

Yeah. Right. And as you talk about in a few of your podcasts that you've done before, the bytes and the information that's free. I mean, we're, we're talking over, over the Internet right now, and we do almost all of our business that way. And, you know, it's just very. It's a cheap and easy way to. Allows us to be a lot more productive and, and comparatively spend less on airfare, whereas before, yeah. You had to fly all over the place.

Welcome to this week's edition of Flashback Friday. Your opportunity to get some good review by listening to episodes from the past that Jason has hand picked to help you today in the present and propel you into the future. Enjoy.

Yeah. 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's expecting three feet in class anymore or an economy class. And then I also remember the commercial that said, and I think it was also Continental. It was, it was kind of a funny commercial. It said, sorry, bub, no pub. In other words, on the plane. I know this may sound as 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 bar stool and order a drink and talk with people. You know, just like being in a restaurant today.

Yeah. Well, agree on this for sure. The quality of air travel is down.

Yeah. Yeah. But the safety is up. Well, anyway, we could split that hair a million ways.

Yeah.

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. And we were talking about some of the things we were going to talk about, and then we got off on this tangent. So you wanted to talk about one of the big funds, right?

Yeah.

I'm always interested in this because I've seen it. I've seen it impact investors. I mean, we all know that we can buy for great RV ratios. Buy and hold strategy is the best by far. However, a lot of people in many markets, they're finding quickly that deals that you could get a year ago, you can no longer get. Much of that is because the numbers become so attractive that the news is out. The investors are out of the woodwork. And some of these investors are large institutions and funds 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 you know, a fund or a pension fund or something like that, when they are going to invest money, they have to invest a lot. Placing a couple million dollars is a waste of time to them. They have to move 50 or 100 at a time to do this. And they've started trying to get into the single family housing and they've definitely made an impact on the. However, we have seen the very first one of them, the large hedge fund Auk Zif starting to make their exit already for many of the same reasons that we've talked about. You know, we've talked in the past about California and how it's so up and down and the pricing is so volatile. That's one of the reasons OXIF is exiting, because they want to, they want to liquidate, they want to take some profit out of this thing. But also as far as the buy and 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 it long term. There's just too many houses to do. And so we're starting to see the very first little bits of that manifest itself, that it's too fragmented for these large hundred million or $1 billion funds to manage.

Yeah, 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 gonna see more of this in the future. But I just thought of another thing as you were talking. Actually it's not just about embracing the fragmentation. And let's just explain that to our listeners, you know, in case they don't remember me talking about it or if they haven't listened to the shows where talked about that before. But real estate is a very fragmented industry where you got a lot of little players, little mom and pops. Here's 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, whole different way 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 it's annoying to Us as investors, right? Sometimes I think as I'm managing my own portfolio, you know, why can't this guy be as good as that other guy I'm dealing with or that lady over there. She's a fantastic property manager. And this one is sort of mediocre or even worse, maybe they're completely lame, right? And they're all different. And this is what the institutional investors will never, ever be able to deal with. And, you know, 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 I could figure out how to manage them. They can't figure out how to manage them. That's why they're 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're not going to agonize or make a lot of effort over something that's going to produce for them an overall total return on investment with taxes, with, with appreciation, with cash flow, with everything. An overall investment that's going to produce, I don't know, 10 to 20 or $30,000 a year and do this 300,000 times. It's just too annoying for them. They can't do it. It's just too fragmented. So that's why. That's why I say embrace the fragmentation. That's why the opportunity is here for all of us. Everybody listening has this opportunity. Because you know what? You can deal with a little fragmentation. You're set up for it. You can use your human judgment. The returns are large enough to matter to you. They're not large enough to matter to some big fund. But Steve, here's 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 Kathryn Austin Fitz 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, or not the commodity, but the economy that deals in real things like commodities. Housing is a commodity. It's solid. It's made of atoms, okay? And 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 Reserve. But the real economy is far less sexy to these big institutional investors like these funds. And as you were talking, it just occurred to me, because in the smoke and mirrors economy, in the Wall street economy, in the data economy, the bits and bytes economy, which is what they really deal in with their financial innovations and their financial instruments and all these crazy derivatives and all this totally sexy stuff that has these huge multipliers and they're all really fake. It's all a game of, it's all a game of smoke and mirrors. Right. But they can make a lot more money in 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 hoaxes, hocus pocus things. The real economy is just, it's just not sexy enough for them. That just occurred to me as you were talking.

That's a good point. Yeah. Making an honest living isn't going to cut it, right?

Yeah, exactly.

You know, doing something real that requires adding value, the value of things to the marketplace. And they're just shuffling money back and forth in creative ways. It 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 40 or 50 billion a month in purchasing of mortgage backed securities. Well, there's 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, okay? That's what's changing hands. And they're going to buy it and it's useless. I mean, we're going back to square one again here.

You know, we haven't talked about it lately. You know, I was really into this whole thing about a hundred, 150 episodes ago, but really just getting your head around the concept of how money is lent into existence and it's really, 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 effect. And I remember when I went with the National Rea Group, the real estate investment group, I went to Washington D.C. a couple of years ago and you know, it was kind of a cool, kind of a field trip because it was basically to be lobbyist for a day. And it was right after the financial crisis and I mean it was really kind of scary what was going on. And I remember we'd go into these. These different offices of our representatives and talk to their aides. And once in a while, you'll catch one of them in real life and maybe get a few words. But mostly you're talking to some underpaid aide who thinks politics is sexy. And we'd go in and we'd lobby them and we'd say, 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 in Arlen Specter's office, actually, we were talking with one of Arlen. I'm pretty sure it was Arlen Spector, Arlen Specter's aides. And they said, well, the reason we in Congress wanted to give the money to the banks instead of giving it directly to the people in a tax credit or a tax rebate. Remember when George Bush did that, everybody got, I don't know, like, $2,300 back or something. I can't remember. So forgive me, but there 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' have the multiplier effect when you give it to the banksters, the crooks that run the banking cartels. Right. It has a multiplier effect, which basically they just 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 say money, I should say currency, because it's not money. It's just data. Currency is data. Money is real. Money is 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 the. That's why this in. That's. Well, 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 palatable way out. And you get to debase the debt owed to other countries. So. So it screws over China and Japan because they're our 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 onto them for a few more decades at least. I mean, everybody's 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 onto 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.

Just the way it is. And there's no other way out of it. You know, we're going to keep getting the hamburger today and paying for it on Tuesday. They don't really have a choice, you know, to take it. It's going to happen whether we like it or not. And it's not like you say, it's not printing money, so to speak. You know, your good friend Peter Schiff points out that it's just a credit. I mean, the Federal Reserve, they just give them a credit on their statement. President of the bank wakes up, oh, look, there's more money in here now.

Yeah, we can lend more thin air. Yeah, right, exactly. And what the banks have been doing the last couple of years is they haven't really been lending it, they've been investing it because now they can go and speculate in investment markets. And they figured they can invest it better speculating in all sorts of crazy financial smoke and mirrors vehicles than they can loaning it to people, loaning it to Main Street. I remember when Charles Payne, Charles Payne's great. He used to be on KFI in Los Angeles and he's on CNBC and Fox a lot. I think, I think he's on both. And Charles Payne's just awesome. And he would talk about, he'd cite all these studies that how the government gave the banks all this money and they said, okay, look, here's all this money. Go and do loan modifications, help people out, keep them in their homes, avoid foreclosures, reduce the foreclosures. And at one point along the way, B of A that absorbed Countrywide. And unbelievable that what's his name, Anthony Mozzillo, I believe, didn't go to jail. He just bought his way out of that problem for what would be like me giving you 10 bucks. Okay, okay, so he paid a few million dollars, Big deal. It's just unbelievable. These people like the fine is meaningless to them. They don't even live in the real world. And there was a point at which Charles, I remember he cited a study and he said the average cost of a loan modification to the taxpayer, in other words, what the government spent to modify a loan was like $800,000. To modify a loan on someone's house that the house could only be worth $180,000. Yet the cost in the money getting all diluted and sunk and wasted and stolen in these crooked banks was basically like $800,000 to modify a loan. I mean, just total absurdity.

Not to mention the cost that it was to the housing market, the uncertainty that just over the housing market. Now, a bank, when they're going to foreclose, and I'm not saying, oh, poor banks, I'm not doing that at all here. But when they're considering foreclosing now, by law, in many cases, they have to offer loan modifications to a certain amount of people who are in that situation for a reason. Many of them, even with a modified loan, lots of those ended up going upside down and not working out once again. And that's that shadow inventory that hung over the market for so long. Now, it was a great opportunity for investors.

Investors.

But as to the overall housing market recovering, all it did was delay the inevitable and just string it out for longer.

Yeah, yeah. And some of it's 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, I hope it did. I'd have to think it did. But it's just absurd. I'm sure it's. 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 the people would have gone out and spent that money. They would have formed, had capital formation, reduce 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 write fiction this good. And what we're teaching on this show and to our investors is we're teaching them a way to deal with the fake economy and to actually outsmart it by using the same techniques that the central bankers are using, that the government is using and gaming the system, if you will. It's completely legal, of course, but you just gotta have the right strategy. I mean, most people are getting just destroyed and it's gonna 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've experienced over the past few years is minor compared to the pain that's coming. My goal is just to reach out to as many people as possible and get them to see the ways they can get around it. But anything more on the hedge fund thought?

No, no, I think, you know, we're definitely getting on tangents today. We have a couple times already, but agreed with all you said and that's all I have to say on the fund thing. I don't think that they're going to be around for the long term affecting investors. You know, you don't have to worry about bidding at the auction and having some fund swoop in and pay the market price before they've even put any repairs into it. That's a you another bubble that is getting pumped out into Wall street that's funding these 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.

Faker. I don't even know if that's a proper grammar there. I doubt it is. But a faker product, 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, you can deal in the smoke and mirrors fake economy that they, that they're so good at. And the other thing I wanted to say is that this is one of the reasons, Steve, that investing your money with an institution is just a bad idea. Because institutions, they, they don't care. Just remember something, it's not their money. This is the reason that they'll go for these low yielding investments. They just want to place money because the more money they place, the more they get. It's like running some stup department in a big inefficient corporation or in the worst, most inefficient corporation in 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. You know, one of the perils of government, why government doesn't work is, and I think this quote is just an original from me, but it's just here it goes. When it's everybody's money, it's nobody's money. Nobody really cares when it's the collective. That's why collectivism doesn't work because everybody starts to get lazy mentally, they get lazy physically. You know, a worker in the Soviet Union, in the former Soviet Union, you know, how hard do you think they work really? Do they get up and go to work with ambitions that they're going to take over the world today? Some Soviet worker in the 60s or 70s or even 80s, I mean. No, of course not. There was nothing in it for them. They wouldn't improve their life one bit by being more successful.

Not at all.

And there's that old adage of the Soviet worker where they'd say, you know, the government pretends to pay us, so we pretend to work. Right. Nobody's doing anything.

Very good, very good. Well, hey, we're going a little long. I know we've got a couple things more to talk about. Let's just make those for another show. Okay. And let's get to our guest today here. And we've gone pretty long here, so I want to get to our guest and then Steve, I will be back with you to record another show, another intro for a show here very shortly.

Okay, that sounds great.

And one of the things I do want to say to people, be sure to register for our Meet the Masters event coming up in January. That's going to be a fantastic event. Again, we're trying to make some changes, change it up, keep it 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. Regency Irvine. Register@JasonHartman.com in the events section. And that price will be going up pretty soon, so get the early bird pricing. All right. We will be back with our guest in just a moment.

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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 why the Right and Left are both Wrong and Some Common Sense Economic sol Solutions to the Economic Crisis. He's a public speaker, travels extensively and it's great to have him on the show this morning. Woody, good morning. How are you?

Thank you very much for having me on.

My pleasure. You're coming to us today from Boston, I guess, right?

Well, I'm in Gloucester Mast, right in the historic fishing town north of there where they filmed the terrific storm.

Well, we are facing quite a bit of headwind in terms of the economy nowadays. And the big debate is, especially when you segment class, the upper class, the elite, super rich, the middle class, the poor, so forth, there's this constant debate, are we getting richer or poorer? What's going on out there?

Well, as you can imagine, you're asking a good question and there's 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, as being the country as a whole. You measure how well off it is. Excuse me? You measure how much it's getting richer. You measure wealth growth by looking at what is called family net worth for all families. Forget rich and poor. That statistic shows today the net worth of American families, all assets minus liabilities, is $54.2 trillion. Now, if you're getting richer as a nation, that number grows, might say 3 or 4% a year, correct? Well, the number wealth of the nation grew enormously from 1980 to 2000. It's important to have this background. Just take the stock market, I guess it was the S and p was maybe 890, if I recall, in 1982 when my dad died. It had been a terrible 20 years in stocks with OPEC inflation. In fact, if I recall, the stock markets had been at 890 in 66 or 67 and were still there after more than 200 inflation. When he died at the end of 81, everybody was gloomy. No one was getting rich and things.

Were moving backwards in real dollars, easily in real dollars.

It was like, oh, no, no. My family lost 65% of their real buying power. So only people in a lot of debt survived. Unfortunately, that's now the reverse. So the point is, George Soros told me in 82 or 83, when I was just getting going in my little business, that he was an optimist who fought the market. I think he said it was go to 5,000 by the millennium, which was 18 years away. Well, of course, having gone nowhere, it would never go from 890 to 5,000. I mean, George, what are you smoking?

Right.

But it went more, well, you know, on the millennium, on January 1st, the market was 11,800. The point is, for A variety of reasons. Interest rates had fallen. Your bond wealth had therefore gone up. Because the more rich you are, the more interest rates are low, bonds are valued higher. 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 turnpike. Forget the exits and the off ramps and the iron ramps. We then entered into a very tricky period. It was good in the 90s somewhat. But you will note that the stock market today, after inflation, inflation is where it was in the late 90s. Correct. So you haven't made any money. And net worth went up, of course. And then it crashed with the sort of recession of the dot com crash of 01 and 02. And then of course it was fine with the housing boom. And then the housing boom collapsed, crushing the middle class who were over leveraged in housing. So net worth of the nation hasn't been doing that well. It goes up and down pretty good tech, technically. It's actually what it should be now because net worth should be 3.4 times GDP, which it is. That's the capital output ratio. So in a funny way, we're all worth what we ought to be in a theoretical sense, which is interesting. Now when you look at individual groups, the statistics you read or write, the very, very rich have really been 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 a billion a year. Greenwich, Connecticut average nobodies have of course found their wages are growing at a negative rate. They can't afford health care, it's going up much faster than in their wages. And you look at the net worth of average middle class Americans, 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 the dressing, no question.

Yeah, the gap is getting larger and the middle class is definitely under attack. I sort of struggle though with the poor side of the equation because when I, when I look at history and I watch old movies and I had Bill Waddle on the show a while back and you know, he did that segment that you're, that you sound like you're 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 to argue that the poor are getting poor poor, or at least maybe in a small segment of that. But when you compare it to a few decades ago, it seems like they're better off.

No, you have to be very careful about this. This is a point that you've probably never heard made before, but it is theoretically correct. Most people measure whether we're getting more unequal or not by what we call the distribution of income and wealth. There, there's no question. The poor have basically been really screwed and the very rich have done brilliantly. The poor are not doing well in terms of income. But from a moral standpoint, and even Adam Smith understood this, what really matters is the distribution of consumption. There your point is correct. Poor people today, in a very odd way, wear the same baseball caps, the same Reeboks, go to the same concerts as the Rockefeller Great Grand Tour. That was absolutely untrue 70, 80, 90, 100 years ago. The distribution of consumption is actually not as bad as people think. A person who loves a Monet painting of the water lilies that would be 40 million at an auction, can get basically a perfect reproduction of it and hang it up or a digital copy and pay maybe $150. And most people can't tell the difference. That could never be true before, and they couldn't have had that beautiful in their wall. So in funny ways, the distribution of 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.

Yeah, yeah. I mean, no one would possibly argue that the elite rich are not getting much, much, much richer. It's just a little more confusing in the other segments. What about inflation? I mean. 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?

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 others. Here is the problem. Have you noticed that we've been printing money for four years and there's no inflation?

Well, there is inflation. It depends on what.

Have you asked why?

Because they keep figuring out how to kick the can down the road.

No, no, no. They did print the Money, that's what you're saying, right? I agree they did monitor easing, but there's been no inflation. Let me give you a very sample. 20 years, years of printing money in Japan. What's the inflation been?

There's been massive deflation in Japan.

The point I'm making is I'm creating a trap for you. Inflation is a counterintuitive subject. Let me give you the facts about what you ask, okay? First, do not think of house prices or gold prices or commodity prices as having anything to do with inflation. The inflation that the Fed by charter manages is the inflation rate of change. 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? We don't buy copper the things you and I buy. The inflation rate of what you and I buy has been going up at a very low rate for quite a while. Even in the last four years when we've been printing all this money. So any normal person would say, well, what the hell's going on with all this money printing? Where's the inflation? The problem with this logic is that there never was any money printing. Let me make this point crystal clear. And on this I've received a lot of help from Ben Friedman at Harvard who'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 QE 1 and 2 and 3. Correct. It goes in and buys securities. Up. It buys into a. Correct. Yes, it has quantitatively eased to, I don't know, 2.8, 2.9 trillion in the past four years because of this crisis. In other words, it bought up $1.4 trillion of mortgage backed securities and then government securities, another 1 trillion or whatever. Oh my God. The Fed's buying in the debt. It's printing money. Of course, when the Fed buys in the debt, it goes into the open market, buys bonds and things from you and me in Prince Cash to pay for it. Correct? Wrong. Weimar Germany did debt and had a million percent inflation. Zimbabwe did that. They printed money to buy in the debt. And you had $10 million bills. Have you noticed how we only have $100 bills? We don't have any of that.

Right?

Here is the reason why. This is what people do not understand. And incidentally, why should.

I can't wait to hear what you're getting at here.

You're going to hear the full thing. Number one, when the Fed buys in assets and Monetizes the debt, if you wish to call it that. That is an increase, I guess it's about $1.8 trillion in its balance sheet assets. Buying in those things has 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?

One is cash outstanding currency. That's what got printed in Zimbabwe and Germany in the 20s. 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 buying in a trillion dollars of government debt, the private primary dealers with whom the Fed deals and they have to have sort of clearance to do this, will 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 Citicor 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 that When Citicor gets a dollar new reserves, it can make $10 of loan to Tom, Dick and Harry? Yes, in principle, as long as it has enough capital.

Yeah, but I mean, that's the way fractional reserve lending works.

That's right. So hold on, Woody. Then what you're saying is the banks are flush with reserves. If they got 2 trillion trillion more reserves, they could make 20 trillion of new loans. When they make loans to you and me and the money goes into your bank account and you're paying an interest rate on it, you go spend it and you and I create a huge demand for widgets and the price of widgets explodes. Is that clear?

Yes, that's clear. Too many dollars in the system because.

You have converted, the reserves have been converted. Then it goes into the system. We are flush 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 borrow. Companies don't need to. They're flush with cash. And the Brocks are deleveraging. Deleveraging means you negatively borrow, you are deleveraging and so are Tom, Dick and Harry. So none of those reserves, now called idle reserves, have been turned into. There has been no money printing and no inflation. Now, when it does happen. Suppose you and I get optimistic and we start to borrow and then it all happens, we all get money and we go out and bid the prices up. The Fed has a new control knob. As of three years ago next week, it's called the Ramoni rate. The Fed now has the power to tell Citicor, no, you are not going to go make loans to Tom, Dick and Harry and make money because we are going to pay 5% to hold the reserves. Risk free money, fabulous income. And you sit and have five martini lunches and don't make loans. So the Fed can now, through the remunerate, make it attractive to the banks not to make loans because they get risk free nice fat returns from the Fed. So the point about this is that I'm not saying there won't be inflation, but I'm making the point there need be no inflation at all. All from this massive creation of bank reserves. As long as the reserves remain idle. And they are all idle.

They're idle now. So the question is. Totally.

And last year and the year before.

Yeah, wait. Because I always said and thought that when the crisis hit, as the deleveraging was occurring, the reason the dollar was strong is because during deleveraging you're sucking dollars in. The system is sucking up dollars.

No, don't ever think about picking up dollars. It's a bad way to think. Very bad way to think. It's about credit, not dollars.

No, no, no, I agree. That was my next point, is that it's not just money supply, it's credit supply. And the credit supply declined. The overall inflationary picture is determined not just by money, but by credit. And so if people can buy stuff on credit, that credit the old saying about too many dollars chasing limited goods.

And the Fed can simply say there won't be any more of those dollars even though it bought in debt and holds it on its balance sheet. So that's. You're correct. So it's a much more tricky story than. Why would most people understand this? Well, it's not an obvious point.

Yeah, fair enough. But the supply of credit is the money supply. I mean, it's just another form of it, right?

You have to be careful. This is not completely true. It's partly true, but this gets into double entry T accounting and let's move on. Let's talk about why the economy is doing so badly.

All right, okay. So does that interest you or not? 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.

Now it's only 1/4 of 1%. It's very low. And they don't have to give high yields because you and me don't want to borrow. Get it? We don't want to. So they don't have to bribe the bank.

Okay, let me take a brief pause. We'll be back in just a minute.

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Okay, sounds good. Well, let's go. Go ahead and move on then. Headwinds. What is making it so difficult to have a real recovery here?

Okay, here is a lot of that is in my book American Gridlock. I call it the seven headwinds. Basically here is the main point. It's about jobs. Not just gdp, but jobs. We fired millions of people, did we not, in this terrible recession? Do we not have people coming up over the border of immigrants and new college and high school grads every year?

Yes. Large supply of labor.

Yes. So here you go. The fundamental long run average result about growth and jobs is the following. The growth rate of the economy, the pie GDP must be about 3%. In our country it has got to be X percent where X is the sum of Y and Z, why is the increase in the work force and Z is how much more productive is 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 pizzas this year and how much more pizza gets baked per person. So if you add those two together in my country or our so called trend growth is about 2.93%. That is to say, you must grow at 2.9 or 3% to absorb this year's new supply of labor from immigrants and college graduates. Now when you have a big recession and we had a whopper far the biggest since the 30s, something else happens. You fire 15 million people or however many it was. So not only do you have to put the work every. Every year, the new people joining the workforce, you have to rehire. So to do that, clearly you have to grow a lot faster than 3%. Am I clear so far?

Sure.

So if you take the 18 or so business cycles of the last century, what do you think was the growth rate of GDP in the first two years of recovery after a recession? Give me a guess.

Oh, gosh, 3%, 2%?

No, because you'd fired workers in the reception and now you had to rehire them and give jobs to all the new entrants and cover productivity. So I trapped you on purpose.

Okay. Was it lower?

3% is what you need when you don't have a recovery problem. We grew at 6.2% on average, coming out of recovery. So you not only absorb the new entrants to the workforce, you also rehired those workers that had been fired by Henry Ford.

Rory. Out of a recovery. Sure. Okay.

Now, what do you think has been the growth rate of this recovery in the past three years?

It's just been anemic.

I mean, 1.8 or 1.9.

Yeah, it's terrible.

Do you now get my point?

Yeah.

The real story here is that inflation, which has nothing. I'm sorry, the unemployment rate, which has nothing to do with the government's 8.5%. That's one rate. But the real rate is known as the U6 number, and it's about 15.8. If I record. I don't know the exact number. The point is, it includes the people who've 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 to bring that 16% down to 6. Now, when you say, why is the economy itself so bad moving away from joblessness, the answer is number one. State and local governments always absorbed about 550,000 people during recessions and recoveries. But they overhired and overspent so badly, they're all going broke. So this time around, rather than state and local governments absorbing workers, they have basically fired some 700,000. So you go from not hiring 550,000 to firing 700. That's bad. B, construction for housing never came back because housing never came back. Agreed.

Agreed. There are slight small signs of it.

In terms of the growth rate of the economy. It's pathetic. Third did not. Tom, Dick, Susan, Jill and Harry all like me binge and borrow for 35 years.

Oh yeah.

Oh, you bet we did. We covered over the declining living standards by borrowing like there was no tomorrow, as did state federal governments. So the result is we are now retrenching. The Woody Brocks realized. Damn it, I never saved enough for retirement. Damn it. The yield I get on my money is a third of what my mother used to get. You're lucky to get 1.5% after taxes today. And I'm terrified I'll be broke during retirement. None of us have saved enough money to retire. As it's becoming clearer, the baby boom generation, generations, therefore Tom, Dick and Harry are not going to go and reignite the economy by borrowing and binging, are they? They're contracting, they're being careful. I mean we're okay compared to Europe, but basically we're very conservative. Next, business investment. My clients like John Deere and 3M, they're fine, they're investing, but they're not investing in America. They're investments. Their capital spending is in the new world from which over half their profits come. So they're fine. Those big companies, they have cash, they're 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 and Dick and Harry, contracting, add in housing, you realize you knew all along you were going to have a really lousy recovery. As I wrote five years ago and we had have. It's not that it is a bad recovery, it's that we should have a bad economy. Given that background, making it worse, Obama into borrowing a trillion dollars a year. Had the money been spent, as I argue in my book, on a Marshall Plan whereby we don't fix bridges and roads but electrical grids, fracking infrastructure, all kinds of things where we've neglected our infrastructure for five decades. When you borrow from the kids a trillion dollars and spend it on productive investment spending like the interstate highway, it creates a very big impulse for hiring. If you do what Nancy Pelosi does, we borrow the money and just give it to state and local Democratic workers to stay in their jobs. It's good that the people aren't being fired. But note that no new jobs get created. But when you give Becto and other companies companies a trillion dollars a year to do infrastructure work, they keep 10% of the money. Then they go hire 473 subcontractors, each of whom hires more subcontractors and consultants and you have a huge explosion known as the accelerator multiplier investment theory. So we have borrowed from the kids hugely. We have not spent any money productively. That's bad.

I couldn't agree more.

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 of course is what's happened now to Spain and to Italy and to Greece, etc. And when that happens, interest rates don't go up a little.

They go up a lot.

They go way down. Because the world says, america, we don't believe in you anymore.

Well, that was actually the question I was going to ask you when you talked before about the banks not needing to lend and that's why it wouldn't create inflation. What I was wondering is, can the Fed pay banks at much higher rates if we have a bond strike, which, you know, 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% range, or 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 happen in that environment?

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 borrowing.

Fair enough. But there are always borrowers 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, if you just look at housing, housing depreciated. So of course it took 18% to get a mortgage, but the house price was a lot lower too. So there was some borrowing. Not as much as that was part.

Of my national net worth, as I said in 1981 was so terrible. The very high interest rates meant that the value of your assets was way down. And you're right, but that was a period of huge inflation.

Yeah. Oh, sure.

It was due to very different reasons. Not money printing or anything like that. It was due to a wage price price spiral where powerful unions had the power to extract those very high wage increases that ended up killing their industries because they were being hit by 300% higher gas prices. Gas went from $3 a gallon in 1972 to $12 a gallon to $30 by 1981.

You mean in real dollars. You're saying in real three to 30.

People were outraged, so they were able, because unions have power to get big wage increases which created the very inflation they had worried about. That is known as if the wage price spiral inflation. And Paul Volcker ended it by pushing interest rates to the sky at 20%, having a major recession. And then Ronald Reagan told all the air traffic controllers, go to hell, every one of you is fired. Then China came along and it was the end of unions, except for these bloody public sector unions which continue to ruin cities.

Yeah, well the public sector unions have a cartel. So it's a catastrophe for our future. Sure, of course it is, yeah, catastrophe. Well, what about the bond yields though? Tell us about the scenario there.

Well, the point then is that was the period when people like my parents never dreamed that the plus funds they inherited, let's say with bonds on them, that the bonds would go from 1 to, so to speak, down to 20 cents, they were wiped out. If you have a 3% Pennsylvania Turnpike bond and interest rates go to 18%, the bond's worth nothing. Correct. This time around it's different. We start with extremely low bond yields. So simply normal recovery stories ought to take today's 2% bond yields and push them back to a normal 4 or 5%, wouldn't you think? They're very low rising now basically because we're a safe haven. The way to think of this is just as Germany has bond yields much lower than anyone else in Europe. The reason is if you live in Spain or anywhere else in Europe, you want to hone German bonds because they're safe. The world still thinks the US is safe. You and I may not agree, but relatively the world sees us as a safe haven, Woody.

That's what I keep saying. The US has always had that sort of brink struck, good fortune if you will. And I keep saying the U.S. is a disaster. But compared to what?

That's the point. There is no such thing as a currency. There is only a relative currency. There is no dollar, it's dollar, pound, it's dollar this, it's dollar that. So you're right, it's always relative. But the US right now is benefiting from the fact that people want to keep their money here. There's trillions of dollars on the sideline. Private savings are huge if you include corporate profits, not just household. And so the point is, what could cause that to change now? If you had a huge inflation for money printing, the bond yields would go way up. I don't expect to see that kind of a thing for reasons 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, and I think this election is over, almost doesn't matter. It's such a 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 they did about Italy, we don't trust you anymore. You talked about it, but you've done nothing but kick the can down the alley. We are going on strike. We basically are not going to touch your debt except at an 8% rate now going from a 2 and half a half percent bond to 8. As you know, debt is a catastrophe.

It sure is.

So people say, oh, it could never happen here. Well, it could never happen in Italy. And the bad news is that when this does happen, the old textbook economic notion that asset prices only move in sync with the news in proportion to the news, this is false. This has been shown at Status Stanford. Actually, in a case like this, take Italy. The spread between Italian bond yields and German bond Yields was always 30, 40, 50 basis points. People always demanded more yield to invest in Italy than Germany. But with the euro, they're all the same. Once the euro crisis started and the news came out about Italy fiddling with the books and all of this 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 we're all going to get used to this cozy 2% yield and then they won't go to 3, but they could go to 6. So I'm too stupid to know when, I don't know when these things happen, but, but it's certainly not going to stay at 2% forever.

I would agree with that. One thing just in closing real quickly, Woody, you mentioned that this election is over. It's a disgrace. You've got to just tell us what you mean by that.

Well, it's about the book. I mean, it's basically that the, you know, when you have the Republicans, you know, on one day offending women with crazy statements about abortion just to please some extreme right wing party. Blank. When you have people frightened over Social Security and Medicare, there's good ways to handle it. They're not handling it right. You're going to alienate an awful lot of people. The Democrats, on the other hand, who accuse the Republicans of being obstructionists, which they are themselves are obstructionists because every idiot knows the major financial catastrophe of the country are entitlements and the Democrats won't touch it. I would argue they're the great obstructionists because that's the issue that affects us and that matters. That's the issue the world is judging. We've got to reform Medicare and Social Security. My book has chapters on each. So that's what I'm getting at. I think it's an election between ideologues. I think no matter who wins, you're going to have gridlock. And I think it's going to come unstuck in the next election, which could be like. Like the year 1848 in Europe when the old regime fell completely and basically you created a new Europe. Time will tell. Another way of saying that is too many people will become too used to sleeping in the ever smaller backseats of small cars.

Fair enough. Well, Woody Brock, give out your website if you would and tell people where they can get the book.

Well, I don't even know which website the book is. Just Amazon. You look for H. Woody Brock and some American Gridlock on Amazon. So again, American Gridlock on the hydro. Or there's www.americangridlock.com One word. American gridlock.

And the Strategic economic decisions website is Sedinc.

Yes, my website privately for stuff and for our consulting and all of that is sedinc.com www.sedinc.sstrategic. e. Edward D. Decisions Sed Inc. Sedic.

Anyway, well, thank you for being so patient. I hope that made a little bit of sense.

It sure did. Thank you so much, Dr. Brock. Appreciate it.

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