AIPIS 252 - Using Inflation for Wealth Distribution

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Hey, it's Jason Hartman. I want to say welcome. I am very excited to talk to you today about some investing strategies, investing strategies that you can really depend on. Now. What can we depend on as investors? Well, we can depend on the fact that we will have cycles, things will change and we can also depend on things will go wrong. You've heard that Murphy's Law always shows up, right? It always shows up and it always happens. And you know that the powers that be that run the government and the central banks around the world have, have a certain motivation, they have a certain type of interest. And what I believe we have to do as investors is we need to stop fighting those interests. We need to align our interests. We need to do the same thing they're doing. We need to take a page out of their book. We need to follow their game plan so that our interests are aligned with the most powerful forces the human race has ever known. What are those most powerful forces the human race has ever known? Well, after God, they are governments and central banks. Governments and central banks. The most powerful forces the human race has ever known. Now, you know, it's really interesting nowadays with all the talk about cryptocurrencies, Bitcoin, Ethereum, Litecoin, all the rest, right? We've all heard it. We've looked at the radical, radical ups and downs in that marketplace. We've seen those currencies soar to amazing heights and we've seen them fall like lead, right? We've seen people lose tons of money in the cryptocurrency world. And it's interesting. Money. I mean, what is money, right? Money is different than currency. It's an important distinction to understand. And I know this is like going down the rabbit hole a little bit, but before we jump in to what we can depend on and how to align our interests as investors, let's kind of just examine this, just for a quick moment. Money, at least I believe. And many, throughout history, many academics have said this money is something with intrinsic value. It is something that is not Dependent on another outside force. It has value to people automatically. That's real money. And this is why you hear the gold bugs. You'd hear them talk like this, gold is real money, right? They'll say, for the last 5,000 years, gold has been considered money. Right? Fair enough. Okay. I don't believe that necessarily exactly the way they do. I'm not a gold bug. I believe that gold is extremely flawed as a form of money. But it's a decent measuring stick, at least until recently, it's a decent measuring stick. So it's important to watch gold and to understand gold and to know about it, because it is a measuring stick. It is a measuring stick. And no matter where you go around the world, people will value gold, Right. They'll also value silver. But what will they really value? Well, the utility of precious metals as money. That's one utility. Right. And that might be, some would argue that's the ultimate utility. But also it has intrinsic value. Some precious metals do. Now, gold isn't used very much as an industrial metal anymore at all. Silver sure is. Platinum and palladium, sure. Are catalytic converters, et cetera, et cetera. Right.

So.

So they have intrinsic value, not symbolic value. Gold has more symbolic value than intrinsic value nowadays, Right. Jewelry, you know, there's some uses, certainly, but they're not that extensive. But what really has use, what really has totally intrinsic value that people around the world need? Well, you've heard the three things, right? What do people need? They need food, clothing and shelter. Yes, shelter. Well, I like shelter as an asset class. In fact, I believe it is the most historically proven asset class in the entire world. I say own and control that shelter and let other people rent it from you. Let other people rent it from you. Very, very powerful force. You know, in Pat Donahoe's new book, he talks about this. He talks about the power of alignment, of interest, of breaking away from the Wall street game. He's got a chapter in here that talks about the myths and truths of insurance, saving, borrowing, investing and building wealth. Borrowing, interestingly, can be a very powerful tool for wealth creation. So we'll go into that and we'll talk about it as we align our interests with the most powerful forces the human race has ever known. Now, let's look at the three basic economic maladies. What are they? I mean, there's all kinds of things that happen in the economy, right? We hear about this, that the other thing, there are cycles, there are recessions, there are boom times and bust times. We all know that, right? But if you boil it down to just three basic concepts, three basic maladies that occur in the economy throughout history, they are simply inflation, deflation. And in the 70s, back under the Jimmy Carter era, right? If you study your history a little bit, or if you were alive and lived through it, you know about the misery index, right? You know about stagnation, okay? Inflation, deflation, stagnation, the three basic economic maladies. I know there are lots of other things here and there, but I just want to boil it down to those three. And as investors, as we plan, and if you are a business owner and if your business is really just an investment, right, just like your real estate portfolio or your stocks or bonds or mutual funds, right, all of these different investments, how do these play in the three basic economic maladies? Now, why do I call them maladies? Well, because none of them are really good, right? They're all bad things. But I would argue that one of those three things, and maybe two at the same time, or possibly even three at the same time are happening at any given time in the economy. I don't think there's really any time where you don't have at least one of these three basic economic maladies occurring. Okay, so let's talk about aligning our interest and benefiting or at least surviving through these three basic economic maladies. Inflation, deflation, stagnation. Over the last five plus decades, we have had a government that has engaged in this to one degree or another. Entitlement society and people in power, politicians that are running for office or in office already as incumbents, they love to have the opportunity to dole out goodies to voters because they can effectively buy the votes. And we know that this incentive will never go away. Politicians will always want to buy votes. They will always want to make the electorate happy by giving them goodies. We've seen this throughout history in many regimes around the world. I mean, even, you know, after Hugo Chavez, the dictator in Venezuela, after he passed away, they talked about how he would dole out the goodies to people. This is something that is just never going to change. It will always be a motivation. So why not align our interest and profit from that, right? Why not be an investor that is smart enough to maybe, I mean, look, feel free to complain about the way things are because they're really messed up. I agree. I couldn't agree more. But, but let's align our interest always. As Deep Throat said, he said, follow the money, right? Always follow the money. You know, you can always tell what really matters by where the Money goes. You can always tell what really matters by where the money goes. So the government is in a financial mess. Now, this module is from my Creating wealth seminar. It's a one day program that I do and I've been doing this for many years. Thousands of people have seen it. And if you're a regular listener to my podcast, you've heard me talk about these topics to varying degrees. But we're talking about it a little bit differently today. So first, we must understand the motivations of governments and central banks. If we don't understand this and why they do the things they do and what they're going to do, if we don't have a prediction for what they're going to do, we, we will be handicapped as investors. Remember, there are three basic economic inflation, deflation and stagnation. And I want to show you what I think the government will do. And this is based on history. I've got lots of evidence for this and I think you'll agree with me as to how the government will get out of its mess, get out of its debt, out of its deficits, out of its financial problem. You know, I've had Lawrence Kutlikoff on my podcast a couple of times. He's a very well known economist, very famous. He has done a study on the unfunded mandates, right? All of these entitlements that the government has promised to the United States population over the next 15 to 20 years. And he believes that this number is somewhere in terms of cost to fund those mandates, right? Somewhere around $220 trillion. That's trillion with a T90, not million or billion. It's trillion. That's a lot of money, folks. I mean, consider that the GDP of the US is somewhere just under $20 trillion a year. The GDP of the entire planet is about $60 trillion a year. These are very rough numbers, by the way, don't quote me, but hey, a trillion here, a trillion there, what's the difference? So comparatively, when you look at a $220 trillion time bomb, it is very significant and it's a very significant factor in how we need to decide how to invest. So the government is in a mess. I've identified six ways that I believe they can try to mitigate that mess to one degree or another. So let's dive in. The first way is the government, hey, look, the government has made all these promises. The government could just default and, and say, sorry, we overspent, we overindulged. It's like the person at the party who drinks Too much. And then the next day they wake up with a very bad hangover, right? And the government could say the same thing. They could say, look, we overindulged, we spent too much. We can't afford to fund Social Security, we can't pay for roads and schools. We can't pay for all the things we've promised, all the different entitlement programs, all the welfare, the disability, the government employees that make up about 20% of the economy. Just, sorry, you know, we're going to default. So I don't think that's going to happen to any major degree. Now, we saw this happen in Europe, right? Especially Greece with their austerity measures, right? As that country has totally overspent, so have many other countries in Europe that are on the verge of collapse. I mean, look at Spain and Portugal and Italy. These countries are a mess, just like Greece, to a lesser degree than Greece. They have had to default on some of their promises. And when they did, what happened? There were riots in the streets when they had austerity measures. So this is politically unpopular and the government will try and avoid a default at all cost. Okay, so, and then the government has foreign debt also. It could default on foreign debt. So that's another type of default. What's the other thing they could do? Well, number two, they could increase taxes. The government could say, look, we're running short of money, we need to increase taxes. Now, I don't know what your political beliefs are. I don't know if you're left will or right wing or libertarian or in the center or what you believe, but I can tell you that it is an absolute fact that is unassailable. You can't argue with this fact that when taxes are increased, it suppresses economic activity with the exception of government economic activity. But I say government economic activity is bogus. It's not real economic activity. So this was certainly proven during the Reagan era. And you know, criticize Reagan all you want, he certainly made a lot of mistakes. There's no question about that. However, without the advantages Bill Clinton had a decade later of having the Internet and the fax machine, I mean, you know, remember the humble fax machine? That was a revolution. The fact that you could do business around the world by sending someone a document on a fax machine, it increased the velocity of money. And the Internet did that to the 10th power, right? So Bill Clinton, even though he wasn't as good philosophically on the economy, he benefited from some incredible advances. He was just lucky to be in office at the time when these things happened. But Reagan wasn't. So he had the largest peacetime expansion of the economy without war. You know, and a war is a bad investment for sure, but initially it's like drinking a cup of coffee with caffeine, right? It initially pumps up the economy, but ultimately is a terrible investment and a terrible cost to the economy. So the problem with raising taxes is, number one, you suppress economic activity, but there aren't enough taxes to raise. Even if you taxed everybody in the country at 100% of their income, which of course they would all say, well why would I work if you're going to tax me at 100% or 90% or like they do in Canada, what, 59% or some ridiculous thing like that. It reduces people's incentive to work. But even if, even if everybody just worked really hard and gave all their money to Uncle Sam, there wouldn't be enough. The problem is far too big to solve with tax increases. So what's the next thing they could do? Well, the government could have a yard sale, you know, a big garage sale, the U.S. yard sale. And it could sell off assets. This already happens to one degree or another. Certainly the US sells military equipment to other countries. Years ago there was talk of selling the ports to Dubai. Remember that? Big deal. And it was all over the news. It ultimately didn't happen. And this was before the Arab Spring. But Muammar Gaddafi, he was our enemy for decades, right? The terrible enemy that we had in the Middle east, one of many. We had decided shortly before the Arab Spring, I can't remember the exact time, to sell military equipment to Gaddafi. Right. No one would have ever thought that would have happened. But when the pressure gets bad enough, it will cause bad decisions, right? So a yard sale, that's another way to raise money. Number four, the American military or something called economic hitmen, okay, EHM's economic hitmen could be used to steal money from other countries. And look, I love the military, I love our troops and I appreciate what they do. The fact is though, governments use militaries to steal, okay? That's been done throughout history. I mean look at Napoleon. He would analyze how rich the find was. And if his military could roll in there and take the art and the gold from the enemy, there was a motivation for war. And as long as there. Sadly, as long as there is a motivation for war, there will never be peace as long as war is profitable. What we need to do to have peace is make war very unprofitable and then we will have peace. And economic hitmen. I've had John Perkins on my show, he's been a guest on my podcast over the years and he talks about how economic hitmen are used, otherwise known as negotiators. Right. They're not necessarily hitmen. I guess it's a matter of degree, right? To go into other countries and negotiate deals that are favorable in this example, to the US and unfavorable to the other country and apply a lot of pressure in a lot of different ways. Those first four things were all negative, they're all bad things. This is a positive one. Technological innovation. The United States is a very innovative country. There are many other very innovative countries too. But I'm talking about these things from a US perspective, number one, because it happens to be where I live, but it also happens to be the largest economy in the world with the most powerful military the human race has ever known and the most powerful, unfortunately, central bank the world has ever known, the Federal Reserve. Talking from a US perspective, of course, I know I've been to 81 countries. I know there are many other perspectives and I love hearing them and I love to travel and talk to people in other countries. But if any country has a big technological innovation, in this example, if it was an America centric innovation that would profit the US and it would bring money to the country because of the innovation, certainly, you know, biotechnology, nanotechnology, energy, all of these great things that are happening, it's truly an amazing time to be alive. As I always say, these are areas of great artificial intelligence, self driving cars, robotic surgery. All these incredible things that we are going to take advantage of, and we're already taking advantage of are going to be truly amazing. So we'll see how that all pans out. That could be a very positive thing. The last thing which I say is a positive thing if you follow my strategy, and that is inflate, the likelihood is the government will inflate their way out of the problem and so will other governments around the world. They will inflate their way out of a problem. So inflation is a great tool for investors who are in the know, investors who get it right. I teach a strategy I call inflation induced Debt destruction. Inflation Induced debt destruction. And this is a wonderful strategy. I pioneered this strategy along with a couple of other people, not in my field directly, but a charter financial analyst that I've had on my show many times, Dan Ammerman. He's a pioneer of this idea. He doesn't call it that. That's. I gave it my trademark of Inflation induced debt destruction. But this strategy is something you want to take advantage of as an investor. Now let's just move on and look at how this kind of works, okay? To understand inflation, we need to distinguish between real and nominal. So I think everybody knows what I mean by real. What is the real value of something versus nominal? The word nominal means in name only. What is the name of it? So if I take out a $20 bill, right? What is this called? It's called a $20 bill. And what was this called 50 years ago? It was also called a $20 bill. But the value of this $20 bill is significantly less than it was 50 years ago. So in other words, nominally it's $20 in name only, but in real value, it's worth dramatically less than $20. After inflation has taken its toll, it's a much smaller real value. And we need to understand the difference between price and value, right? What do we get? What value do we receive versus what price do we pay? Now, inflation is this insidious hidden tax. It is a hidden tax. It's a foreign form of taxation. We get taxed in at least two ways by our government. We pay income taxes, we pay sales taxes. We pay all those types of taxes. But then after that, we pay another tax called the inflation tax. As inflation destroys the value of our savings, our stocks, our bonds, and thankfully, the value of my favorite four letter word, debt, debt. It destroys the value of debt because we get to pay the debt back in cheaper dollars as the value of our money is inflated away over time. There was a cartoon character when I was a kid that taught me a lot about inflation and monetary policy. And you might remember the cartoon. It was with Popeye. Popeye the sailor man, right? And one of Popeye's friends was a guy named Wimpy. And Wimpy used to say what? Remember what he said? Do you remember Wimpy from the Popeye cartoon? He used to say, I'll gladly pay you Tuesday for a hamburger today. See Wimpy? Wimpy understood the time value of money because he wanted to get the hamburger today. And maybe it was a cheeseburger. I think it was a cheeseburger. I'll gladly pay you Tuesday for a cheeseburger today. And he wanted to get the hamburger or cheeseburger today and pay later because he could pay back in cheaper dollars through inflation, right? So there's a funny illustration to remember it by. Inflation induced debt destruction. That's the technique I'm talking about. Now, inflation is the most powerful method of wealth redistribution. You might remember in the 2008 presidential election, there was a famous guy. I interviewed him on my podcast. He became famous, had had 15 minutes of fame. His name was Joe the Plumber. Remember Joe the Plumber? I actually interviewed him on my Creating wealth podcast. And Joe the Plumber confronted candidate Obama and said, you're going to redistribute my wealth. Right. And the media made a big deal out of this and accused Obama of being a socialist and a communist, which probably isn't too terribly far from the truth based on his policies. That was the point, right? Most people think that the most powerful method of wealth redistribution is taxation, but it's really inflation. Because taxation is much more noticeable than inflation. Inflation is more subtle, it's more covert, and it's much more powerful. Inflation redistributes wealth from lenders to borrowers, from lenders to borrowers. Lenders become poor, poorer in an inflationary environment and borrowers oddly become wealthier. And it also redistributes wealth from old people to young people. Why does it do that? Why from old to young? Well, hopefully and generally old people have assets. They have stocks, bonds and savings. And young people have the opposite. They have debt. They have debt. And when you look at the third item down on your screen, inflation destroys the value of savings, stocks, bonds, and thankfully the value of debt. Right. So that's how it transfers wealth from old to young and also from lenders to borrowers. J. Paul Getty said something powerful about debt. And J. Paul Getty was the world's first billionaire. He was the richest man in the world for quite a long time. And he said, if you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem. And what he's alluding to there, I think, is the power of debt and the power of leverage. Now, one of the reasons I like income property the best of any asset class, I believe it's the most historically proven asset class in the entire, entire world. It is the most tax favored asset in America and taxes are the single largest expense any of us have in our lives. And it is the most debt favorable asset or the most debt favored asset in the country because you can get a lot of very high quality, low cost debt against income, property. And over time, as we have inflation, and you saw that inflation is the business plan of every government on the planet and every central bank on the planet, do you think you're going to change that? No, none of us are going to change that. So we need to align our interests with that and invest and take advantage of inflation induced debt destruction.

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