CW 494 – Richard Vague – Private Debt Problems with Author of 'The Next Economic Disaster, Why It's Coming & How to Avoid It'

This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit hartmanmedia.com. Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing fresh, new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors. Welcome to the Creating wealth show. This is your host, Jason Hartman. This is episode number 494. You know, we're getting close to episode 500, aren't we? 500, wow, that's a big deal. It's a big deal, but it's going to be even a bigger deal when we're at episode 1000 and then 1500, then 2000 and then to infinity and beyond, as Buzz Lightyear would say. Well, we've got a good guest for you today who's got an unconventional outlook on inflation or deflation, and that is Richard Vague. He is the author of the Next Economic Disaster, why It's Coming and How to Avoid It. And his thesis is definitely not mainstream, but it's pretty interesting. And I've been thinking a lot about it since I just interviewed him a couple of days ago. That is the idea that inflation, or deflation, as it were, is really determined more by private debt than government debt. And most people would say, you know, even Milton Friedman, the famous late Milton Friedman, the economist who said inflation is everywhere and always a monetary phenomenon. And by that, you know, you could interpret that different ways, I'm sure. And he explained it in his extensive works, which are fascinating by the way. Most people would interpret that to say, well, it depends on the amount of currency the government creates. And as the government creates more currency in order to service its debt because it got itself into trouble by spending too much, just like a drunken sailor reminding me of the Reagan quote. To say that the government spends money like a drunken sailor is an insult to drunken sailors. But yeah, something else. Something else. Anyway, this is an interesting interview, so, you know, see what you think of it. I'd love to hear some feedback on it. And we really love to get your comments. I'm really excited that people are starting to go to the website. They're going to Jason hartman.com or even hartmanmedia.com and they are leaving us a voicemail and asking a question, making a comment, whatever it might be. So we're going to play a couple of those listener comments here on this show. So please do that. Go to Jason hartman.com, ask a question, leave a comment, write a review on itunes, any kind of engagement. We just love it and appreciate it. So thank you for that. As I talked about many times in past episodes, the six ways that the government would get out of its mess, right? The six ways in which the government would relieve the liability it's gotten itself into. And again, inflation being really a terrific business plan for governments. It really is far and away, in my opinion, the best plan for them. And same is true for central banks. But you know, most specifically governments. Governments. I, I mean, it's a great deal for them, especially a government like the United States that has the reserve currency of the world and the power to maintain that reserve currency status, which I believe it will for many, many years to come, regardless of what, you know, Simon Black says, I was reading one of his things today. You might know about the sovereign man. Simon Black, interesting guy for sure. But you know, all of these people talking about everybody leaving America and the dollar collapsing, they've just been so wrong. What can you say? You know, the gold bugs have been so wrong. The bitcoin people have been so wrong. Frankly, I'm just going to pat myself on the back here and brag a little bit. I've been more right than any of these people for many years. Representing the best performing investment asset class in the United States, if not the entire world. And that is income, property. It is amazing. And you know, now that you get to hear these flashback Friday episodes that we're doing, I'm really kind of putting myself on the line here because by the way, I don't even listen to them before. I don't have time to listen to them. I just, I just tell my producer, oh, I just pick one. I go back, I literally do it this way. I go to jasonartman.com and I look through the old episodes and, and I say, let's run episode number, you know, 292 again or whatever. I'm just giving out a number there. Make that the flashback Friday episode this week because the topic looked interesting. Of course, I can't remember exactly what I said on that show, so I might make a fool of myself. An open mouth can gather foots or feet. Foots. Sorry about that. My grammar is actually better, folks. What was the saying? I just saw it. A closed mouth gathers no feet. You know, the foot and mouth. You don't put your foot in the mouth, in your mouth when you say something. So that is a risk to play Flashback Friday. But you know, just listen to it. I mean, I remember doing some calculations during the worst time of the Great Recession and looking around at stock markets around the world that were all in just complete chaos. It was a mess, okay? Looking at gold, which was rising at the time and you know, everybody thought, oh, gold's gonna be the thing, right? And bitcoin didn't even exist yet. And Silver was doing crazy things too. Income property, because it's a multi dimensional asset class, because it's multi dimensional, you get return in multiple, multiple ways. Rather than just the simplicity of buy low, sell high, or you know, with dividend paying stocks. Buy low, sell high, collect some small dividends, right? It's the best. It was the best performing asset class in the world then. And you know, the last few years, it's obviously been phenomenal. So the secret to income property is to stay in the game and have a sustainable investment to stay in the game. Because you never want to be forced to sell a property. You, you might want to choose to sell a property if it makes sense. You know, I've been messing around a little bit with my portfolio lately and buying and selling some stuff and doing 1031 exchanges on some things and hey, that can be a fantastic opportunity. But you want to keep, you don't want to have to reduce your portfolio size. Maybe that's the way I should put it in a time of bad market. And the way you do that is by buying, right? Okay. Buying properties that make sense the day you buy them. That's one of my ten commandments, as you know. Thou shalt not gamble. That's number five. And managing cash flow and then also being being diversified, okay? Thou shalt diversify. Another commandment. So very important things there. Now with this government versus private debt thing, I also want to bring you back to many shows where I have talked about the six ways the government can get out of its mess. Okay? And one way of course, is to default and just not keep promises. Not pay Social Security, not pay Medicare, not pay Obamacare. Okay? That wouldn't work. Too harsh. Politically unpopular. They could raise taxes. There's not enough taxes to raise. Okay? You can't solve the problem, raising taxes. They could have a yard sale, sell the ports to Dubai, maybe sell military equipment to Libya, et cetera, whatever else. Now they're selling our drones to other countries. You know, our drone technology and our drone planes. I don't like that idea very much because they always end up in the wrong hands. It always happens. They could steal, they could use the military power or the economic hitmen to go and take resources from other countries. On the positive side, we could have technological innovation that would be great. You know, technology may well rescue us. It's a pretty amazing time to be alive. As I've said many times before, number six, inflate the most likely they will simply inflate their way out of the problem. But if they don't, that's okay because we have the best yield producing asset class. And in a non inflationary now, what I mean by that is either stagflationary or deflationary environment, we have the best yield producing asset class. And that's income property. And the fact that it's multi dimensional allows you to react to different circumstances differently. And that is one of the beauties of income property. So as long as you don't buy that speculative appreciation oriented asset class, you don't buy that overpriced property in California or South Florida or the overpriced markets in the northeastern United States. As long as you don't do that, you can act, you can adapt to these changes in the marketplace. All right, so think about that as we get to our guest today. Listener comments and a couple announcements. We've got our Memphis Property tour and by the way, we are doing a members call to the members of Jason Hartman University. Our monthly call is tonight. And of course it won't be the day this podcast is released because I'm recording the day before. Join Jason Hartman University. You get way more than your money back for joining that dumb little $120 a year membership, right? It's really cheap. Our members who are on the call tonight get the Memphis Property tour for half price. So that's the, that's the lowest price ever for a property tour we've ever done. Ever. I think you'll really like that. And it's not like we need to have a sale on this, okay? Because it's, it's still early. The tour isn't till the end of next month. We've already got quite good response to it, but we just announced it. We want to give the members a nice benefit. So remember, you get discounts on all of our events if you join. So just go to Jason hartman.com and in the upper right hand portion of the website, you can join Jason Hartman University. You can become a member. It's a measly 120 bucks a year. You'll love it. Also, thank you for the latest reviews. You know, I don't have them handy. I want to read them on the air here. We have been getting some very nice reviews on the podcast on iTunes, SoundCloud and Stitcher Radio. So we very much appreciate that. Thank you for the reviews. If you haven't written one for us, please do. It'll only take you a moment. And now let's take a couple of listener questions.

Hey Jason, it's Jake Kilton again. I'm going to give a quick little background before I ask some questions. I started listening to your podcast three years ago when I was 25, and you really convinced me that real estate was the way to go. Since then, I've purchased four rental properties and they're working out really well. I'm looking to acquire professional real estate status by getting my license, which I'm starting school this weekend. And I saw on your profile that you became an agent at the age of 19. And so I'm wondering, did you work mostly with investors or owner occupants when you first started? And how did you get into working with investors? Because really that's what I would love to do is work mostly with investors because that's mainly where my passion's at. And I'm also wondering what practices, activities, what mindset, what do you think made you such a great agent and brought massive success to you? I would appreciate your response. Thanks.

Okay, so Jake, thank you for the question. And you know what, that one does not directly apply to this show to most people listening. So I'm going to, I'm going to keep the answer a little bit short. Imagine that. Me with a short answer. Can you imagine? So, first of all, yes, I did get my real estate license at age 19. I was in my first year of college. I started part time. I became interested in real estate investing at age 16. And I grew up kind of on the poor side, on the, on the crappy side of town in Los Angeles, California. And I did not want to be poor. I wanted to be successful. I kind of figured that out when I was about 15 years old. Maybe the first thing to being successful as an agent is, you know, you just to being successful at anything, you gotta have full commitment. And I was very much committed to finding a way to be successful. Here's a couple things. And this will apply to anybody in any endeavor in any part of life, I think so. The first thing I noticed when I went to work for a company called Century 21 Academy, it was a real estate office. They just, you know, they always have a sub name. They called this one Academy because it was at the beginning of the Alphabet. In those days, you know, people use the yellow pages. Imagine that so. Or the white pages, too, in a phone book. I got in there, and I remember looking around that office and thinking, you know, I was listening to the conversation of people. You know, agents were there smoking cigarettes. That's when you could smoke inside. Isn't that disgusting? The office was, like, full of smoke. Totally disgusting. They were smoking cigarettes, sitting around having coffee. They were complaining about the company wouldn't spend enough money on marketing and advertising. They wanted to buy notepads to pass out in their farm area. Farming is a thing real estate agents do, where they go and pick a neighborhood and call it a listing farm, where they try to get listings in those neighborhoods and, you know, they'll pass out little scratch pads and refrigerator magnets and all kinds of goodies like that. And, you know, I remember hearing conversations of these agents complaining about how the broker wouldn't spend $180 to buy them notepads and things like that. You know, before that, I worked in two small businesses that my mother owned. I basically kind of managed them in a way, I guess. You know, she paid me minimum wage to work there. And one of them was a Pioneer Chicken franchise. And if you don't know what that is, it's basically like a crappy version of Kentucky Fried Chicken. Okay? Not as good a franchise. This Pioneer Chicken franchise was in the really bad area of Los Angeles where there were tons of crime and gangs and it was a really crappy environment. I would work there. And I remember my mother bought that franchise when I was in high school. We'll still still working full time at the Leukemia Society. Okay? That was her day job, and she bought this franchise. She saved up money. She had to save up $100,000 cash, have debt of $100,000, and then equipment leases for all the, you know, kitchen equipment and business equipment of $75,000. That was a $275,000 investment way back then. And here these real estate agents, these dumb agents, are complaining about how they can't spend $180 on their business. And I thought, what a bunch of losers these people were, you know, because my mom's whole goal with her $275,000 franchise that she had was to earn 60 to $80,000 a year. And she thought if she could save up and acquire about three or five of those businesses over the course of several years, she'd be doing pretty good. And you know what I mean, you can adjust those dollars for inflation from when I was, you know, 19 years old, or really I was about 17 years old, I guess, when she bought Pioneer Chicken. But, you know, that was amazing. And I thought with real estate you could, you could make a lot more money with very little investment. So that made me very committed to the business as an agent. And I knew I wanted to be an investor. And I knew that the road to being an investor was in that day because I didn't know anything. I didn't have any connections. There was no guru, like, frankly, like me to help you do it. Okay, that's what I thought I'd do. I just thought I'd learn the basics and then I try to learn about investing and what do you know? About six months later, when I was 20 years old, one of my clients who I'd sold a property to, his name was Jim Wool, he had this condo in Huntington Beach, California. He wanted to sell it. He came to me and said, you know, Jason, I didn't like this one so much. He bought it from me a few months earlier. And he said he didn't like it because it was like a little one bedroom condo. And he said, why don't you list it for me, let's sell that one. And he'd purchased several properties from me. He was a good client. And, you know, I was just a kid and I said, you know, instead of selling this property for you, Jim, I want to buy it from you. And I structured the deal and I bought that. And that was my first property. To answer your question about what kind of clients I worked with, you know, I basically worked with either first time buyers or small investors who bought really crappy rundown government repo properties, HUD and VA repos in mostly in Riverside and San Bernardino counties in the Inland Empire area of Southern California. You know, these houses were boarded up, they were terrible. I would literally show property in my Volkswagen Jetta and I, you know, I'd meet the person there or drive them there and I'd get out of the car and I'd have a flashlight and that's quite literally how I would show the house to them and then I'd write a bid. Hopefully if they wanted to make a bid on the property, and if it got accepted, I got a commission. And that was. That was the story. But you, you really asked about your real estate, Jake, as a way to become a real estate professional. Professional. And just remember that will not necessarily help you that much. Okay. You don't have to get a real estate license to be a real estate professional as the IRS designates it. Okay. So just understand that it sounds like you may have listened to the recent show I did with Diane Kennedy, the cpa. There's a lot more detail there. If you have further questions, you can leave another voicemail and I'll answer those questions. Okay. Because it's a long topic. But I wanted to get to your other question, which is more applicable to our listeners. Okay. About investing. So here is that question.

Hey, Jason, it's Jake Kilfin. I got a question for you today about 3D printing. I know in previous podcasts you've mentioned that you think 3D printing could possibly be a technology that could turn around the US economy, but I'm really wondering about 3D printing homes. I saw in a Business Insider article recently that a Chinese company built a home for $5,000 in one day using a 3D printer. And so I'm really wondering if that's the case and 3D printing becomes widely available in the future, what that could potentially do to the rental market then, and what also it could do to the homes that we already own as rentals that will devalue them or increase value. I'd like to just get your take on that. Thanks.

Okay, so that's a great question, and it's one I've been thinking a lot about. I have seen those same articles. I think I actually saw that one in Business Insider. And you know, the thing about 3D printing is it cuts out the late. It doesn't cut it out, but it reduces the labor cost. And this is just like any technology. Every technology pretty much makes things less expensive, more efficient, better, more powerful, etc. Etc. Now, these 3D printed homes that they've, that I've seen so far are really not too nice at all. Okay? They're. They're definitely not as nice as the stuff you're buying through our network. And the thing to remember about 3D printing is it reduces the labor cost, but it probably doesn't reduce the materials cost that 3D printed home in China was. It was not. It would not qualify as a very nice home. It would definitely not be one of our rentals. Look, there are a bunch of developers out there around the world. And you may have seen these in your travels. I've certainly seen them. Who are building homes and commercial properties, retail and office properties, out of shipping containers, cargo containers. Those are super cheap to build too. Okay. They're cheaper than a 3D printed home. Probably. This is something that could put a downward cost on construction cost in terms of building houses, for sure. I think that's certainly possible, and that could be deflationary. However, the thing you must understand with 3D printing is it still takes materials. Okay? That widget is produced from materials. Now, those materials have to come from somewhere. What are they? They're either metals, they're plastics and petroleum products. They're concrete type products. They're not going to be lumber. Okay? But those materials cost money, okay? So remember, the 3D printing cost is really more about labor cost than it is about materials cost. It's still takes about somewhere in the ballpark. Not exactly, of course, maybe a little less for 3D printed, but somewhere around the same amount of material in terms of actual materials to produce any kind of 3D printed product, there may be a little bit less waste because there's this difference between additive and subtractive or deductive manufacturing that 3D printing is all about. And so, I don't know, you know, more to come, I don't know. But look at this does not just apply to real estate by any means. This applies to everything. And so far, what we have definitely discovered with technology is that the limits to human wants by many people called needs. I'm sure if you have a teenager, they need a nice new car. They don't want one, they need it. It's like a necessity. They need the brand new iPhone. It's not a want, it's a need. Right? There's no limit to what we will want and need. You know, if you told me years ago that I would be carrying around on my body a $700 smartphone and not worry about it getting stolen, I would have thought, you know, I would have thought, wow, that's crazy. But now everybody's doing it, right? We all regularly carry around iPads, expensive electronics. You know, I just got back from Starbucks. I took my $3,000 laptop with me, and I had my $700 iPhone, by the way, that's the value of the phone if you don't have a contract. So that's the real value. The human capacity for wants is limitless, okay? And so if it gets cheaper to produce houses or any kind of thing or gadget or widget with 3D printing, which it most certainly will. I think we will just want more and want something better and that's what'll keep the price up. So I don't know. The jury is out. We'll see where it goes. But remember, whether we have inflation, deflation or stagnation, we have got the best performing asset class in the world, bar none, because every single asset class will be affected by that same technology. So let's watch it as it goes. Okay, let's get to our guest as he talks about government debt versus private debt. Interesting interview. I'm looking forward to seeing what you're thinking on this one. And please go leave more comments on the voicemail@jason hartman.com it's really easy to do. Here we go with our guest, it's my pleasure to welcome Richard Vague to the show. He is the founder of two consumer banks and energy company and the author of the Next Economic why It's Coming and How to Avoid It. In our pre talk today, just before we started the interview having him on the show, he said some fascinating things to me about Japan, China, the U.S. the commodities prices, oil prices, and I'm sure you're going to like his insights as well. Richard, welcome. How are you?

Fine, thank you for having me.

Give our listeners a sense of geography. Where are you located?

Philadelphia.

Good, good stuff. The City of Brotherly Love. Richard, tell us a little bit about what's going on in the world. And I guess your thesis is this mainly stems from China, right?

Yeah, we've got trouble brewing in a very major way in China. And our insight really comes from the fact that our 08 crisis was really a result of a very rapid runaway growth in private debt. And when we dug into it, we saw that that was also true of Japan in 91. When we all thought Japan was going to take over the world. In the 80s, it was just runaway private debt. Same for the Asian crisis in 97. Frankly, same for the US 1929 stock market crash. They all had this in common. So we really ask ourselves if that's been true in the past, where do we have runaway private debt today? And in China, we've had $12 trillion growth in private debt since 08, where their economy has only grown about 4.5 trillion. We've got a big situation brewing.

Okay, so explain to the listeners if you would, Richard, why is that the case, making the distinction between private and government debt? You know, many people are concerned about government debt, especially in the US Right now, and the unfunded entitlements coming in the future, saying that that could lead to very severe inflation. I'd love to get your take on whether or not you agree with that, but also make the distinction, if you would, between, you know, why is private debt the problem and not government debt? Most people are talking about government debt, I think. Right.

Well, you're exactly right. But I'd tell you in each of these major crisis, and we've looked at all 22 where there's data, you know, across the globe, government debt was actually benign or improving in the period immediately before the crisis. So government debt's almost a contraindicator. When government debt's getting better fast, it's often meant that a crisis was coming. And the reason is runaway private debt makes things really good for a few years. This is true of the United States in 05 06, we thought we had found the economic miracle. Houses were being built, jobs were being created, taxes were rising, and that's why government debt was improving. Same is true in Japan in 91, Asia in 97. And the reason private debt becomes a problem really boils down to two things. First of all, you build way too much of something and secondly, you make way too many bad loans in the process of doing that. In the US in 08, we built way too many houses and the amount of bad loans that we made was about $2.5 trillion at the peak in 08. Well, the US banking system only has about a trillion and a half dollars in capital. It's pretty clear to see that it was going to be a crisis.

Okay. So one of the assumptions that you have to make there is when private debt gets really high is that it's careless debt. Right. You're saying, I mean, certainly it was in the housing crisis last time around that the debt is irresponsible. But I mean, it is possible that there could be a lot of debt, but it could be responsible debt. Right. And you know, maybe I'm just getting too theoretical here, but I guess it's usually that's probably never the case.

Well, we've looked at it pretty carefully over a whole lot of countries, in fact, we've looked at it exhaustively and we put a threshold on it, which is to say that if in any five year period the growth in private debt to GDP is above 17 or 18%, that's when you have a problem. And if you think about it, private debt growth ought to lead to commensurate GDP growth. So private debt shouldn't grow that much in its excess of gdp. That's the signal that it's unproductive debt.

Okay, so you find that when you look around the world right now, the country that is in the scariest position with this private debt issue is China, right?

Yep.

What's going on there? Just drill down on that for us, will you?

Well, they have, you know, as I alluded to a moment ago, since 08, which by the way, was when the west collapsed there for a year or two. And China prior to 08 had been living off exports to the west. But when 08 came, China's exports dropped off a cliff. So China kind of had to do something. China either had to kind of go down with the west, at least for a while, or keep growing. And it elected to keep growing through the use of debt. And since 08, they've grown private debt, $12 trillion, which is the most frankly by far of any country in that period of time in world history on an absolute basis and is in a percent of gdp. GDP for China in that period has only grown about a third that much, or four to four and a half trillion. And what is China has been doing is building and manufacturing a lot of everything, most notably housing. And you hear a lot about the ghost cities in China. These are cities that have de novo cities that have hundreds of thousands of condominiums and office buildings and like that are empty.

One thing I do want to say about that is that I've talked about that many times on the show in the past and I had a couple of guests, they kind of gave China a little bit of a pass on that, saying that in the west, when you think of a finished house, it's finished, it's got a certificate of occupancy. In China, they don't actually finish the units, they just build the structure and people come and, you know, put their cabinets in and their plumbing in and all that kind of stuff. So it's just really a shell, as if that's, you know, a lesser issue. And, you know, it probably is a little lesser issue, but it's still an issue nonetheless. Right.

Well, there's 49 million homes in China that are owned but not occupied, and there's.

Owned by who?

By your limo driver or the hotel manager or. It's been a form of savings in China, you know, since real estate has gone up since the post, since the Ding Xiaoping era, since the post Mao era. Real estate has gone up for 40 years now. So people assume that, you know, if I buy a house that's it's going to be worth more In a few years.

Yeah, it's the greater fool theory. You know, no matter how much I pay, some greater fool will come along and pay more. Right. We've certainly seen that in the US in cycles.

If there was that much analysis in it at all, frankly, you know, and now housing prices are declining, so there's 49 million empty but owned houses. There's another 4 million built but unsold houses. So it's, it's a big problem. And the level of finish in the house is really somewhat immaterial.

Right? Yeah, very interesting. Okay, so, you know, everybody talks about Japan's debt lately. And you know, I had a guy in my show that was saying short Japan debt and I assume he was talking about public debt, you know, that he just said Japan is going to default. There's just no question about it. Japan debt will default. What's your take on Japan?

Well, Japan fits this paradigm exactly. The same paradigm that happened in the US in 08 and China that is happening now happened to Japan in 91. At that point in time, their private debt to GDP in five years had grown 29%. Remember my threshold was like 17 or 18%. So they got up to 220% private debt to GDP, far above where we are. At that time their public debt to GDP was only about 60% and things came crashing down because they built way too many office buildings, et cetera, et cetera, et cetera. Their stock market and real estate markets collapsed since that time in trying to prop up their economy. Now that's been 24 years since that time. In that 24 years, they've grown about 0% per annum. For the entire 24 years, their public debt has gone from 60% of GDP to 240% of GDP. So it is a massive issue. Private debt, however, is still high. In Japan, it's come down from 220% to 180% to GDP. So it's come down some, but it is still by historical stance standpoint, very high. So Japan is kind of got a double negative going. Way too much private debt, way too much public debt. They're really the outlier in the world today. But one thing I would say to your friend is China prints its own currency and most of its debt is in its own, is in yen. So you know, a sovereign entity can, can pay off its debt by printing new money. So I'm not sure that I buy, at least in any near term timeframe, a default.

But do you buy inflation? I mean, it seems like Japan has been trying to get inflation for two decades and they can't make it happen.

I have a very strong belief about this.

Yeah, tell me.

Have been trying to correlate inflation to government debt. It simply doesn't correlate. If you look at the broad sets of data, private debt interest rates are more responsive to trends in private debt. The higher private debt growth, the more likely it is that you have high interest rates. And the softer private loan growth, the more likely you are to have low interest rates. And frankly that statement goes for inflation as well. They all three correlate. And in China you kind of don't have loan growth. So I don't see any near term. And by near term I probably mean five years or more. Any real meaningful upward pressure on inflation or interest rates or private loan growth in Japan?

So it's private debt that's the issue. So then what is your prediction for the US in terms of inflation versus deflation?

We have more loan growth and GDP growth that just about anybody in the world right now. And that's not saying much. It's like being the tallest midget. We're growing in this 2 to 3% range. I see US growth continuing to lead the world or leading the world over the next 10 to 20 years, but it's going to be relatively modest growth. It's going to be kind of sideways. It's going to be better than Europe 0 and Japan 0. I think China's growth is going to plummet to near zero. The US will look better than others, but it'll be pretty tepid.

So that's the growth question. Is that inflation or deflation or just stable?

Yeah, that's a low level of inflation, which is kind of where it is now.

It just seems logical though that governments, I mean we'll say politicians really first and then governments as a whole. But politicians love to make promises to voters that they know they can't really keep in real dollar terms. So they make the promise. They grow the size of government. Government gets bigger, it gets bloated, it spends more money, it goes into debt. And then the answer the way out of that debt. Really the best business plan for a government is to inflate your way out of the debt. And when you're in an awesome position as the US is my contention with the reserve currency and the biggest military the human race has ever known to keep it that way. And of course the biggest economy too. I mean it seems like such a convenient plan. Why doesn't massive amount of government debt, massive amount of entitlement programs in Your eyes lead to inflation. I mean you gotta pay for all this stuff. So the way you pay for it is by devaluing the dollar or whatever currency you're talking about, whether it be Zimbabwe, you know.

Yeah, yeah, but if, but if that were true, Japan would be experiencing inflation, Europe would be experiencing inflation. That formula just doesn't work. In the past when we've seen inflation, it's been a function of high population growth or high private debt growth.

So where is the US on the private debt spectrum now? And by the way, what is the best way to look at private debt and to analyze it? You know, maybe the best website. Are you talking about all types of private debt or you're looking at housing or student loan debt? I mean there's huge private debt.

We look at all. Our statistic is all consumer and all business debt. And the Fed's Z1 report has this reported beautifully and reported regularly. It's a little harder to get in some other parts of the world. We have all this kind of neatly mapped out in our website, which is deb economics.org but where we are is in the US business plus consumer. And by the way, the way it breaks down, we have about 25 trillion dollars in private debt versus about 17 trillion in government debt. And our private debt is about 13 trillion consumer about 12 trillion business. And on the consumer side it's nine and a half to 10 trillion mortgage and only 3 and change trillion in other forms of consumer debt.

Hang on one second though, that's really interesting because just over a trillion of that is student loan debt. So you're saying there's 3 trillion total. So one third of all that other debt after you take away mortgages and business debt is literally student loan debt. That's staggering. That is unbelievable. Wow. And not dischargeable in bankruptcy, by the way. The only loan debt that isn't. But go ahead with what you're saying.

No, no, you're exactly right. Now I put a little different spin on it. It's certainly a third of the unsecured consumer debt, but it's only one out of $25 trillion in private debt. And so in terms of it resulting in any kind of systemic crisis in the US that's not going to happen. It'll certainly cause a lot of pain for a lot of folks that have borrowed to go to school.

You were analyzing the US private debt picture and I'm just trying to get to what does that mean to us.

Well, we have such an overhang to put it in context in the, in 1950, private debt to GDP in the United States was 50%. Today it's almost 150%. So it has tripled in my lifetime, frankly. And that high level just dampens economic growth. You have consumers that are still largely over leveraged. You have businesses that are still largely over leveraged. And that makes both consumers and businesses less able to spend and invest because they're having to service debt. That is a key thing to note when looking at the economy. To put it in more specific terms, in the US there's about 52 million mortgages. Nine million of those 52 million mortgages are still underwater. Those are consumers with a $300,000 house and a $400,000 mortgage on that house. That's a big part of what kind of makes our economic growth so tepid compared to what it was half a century ago.

So ours is 300% higher than it was in the beginning of your lifetime. What does this look like in China? Just give us the comparison of us to China. How bad is it for them?

Well, China, you know, it's in the US it's 146%. In China, it's over 200%. It's like 200.

So that causes lower growth. I can certainly see that because all the consumers are stuck and the businesses are stuck servicing debt rather than growing. But, you know, that debt payment goes somewhere. Isn't it just, you know, isn't it just cycling around the economy? I mean, the lender, you know, gets their payments if there's no default. And frankly, they're getting their payments in cheaper dollars. Even if there's only moderate inflation, you're getting cheaper dollars back than you loaned out, except for the interest rate.

Yeah. You just articulated the argument that a lot of mainstream economists would make about why private debt doesn't matter. And a lot of economists kind of don't even include private debt in their model.

I agree with you. I don't think many are talking about it. You're one of the few. So tell us about what's going to happen to China.

Well, I think the main thing that's going to happen to China is already happening, and that is you have a absolute collapse in commodity prices. Let's take iron and steel as an example. In 02, just as China was beginning this just huge GDP growth, iron and steel at that point in time, 2008 to O11 increased 12,000 fold in price. Since 11, it's collapsed by over 50%. That's the point where China. It was clear that China had Built way too much and wasn't going to be able to use all that they built. So iron's down by over 50%, steel's down by over 50%. We have similar declines in copper, aluminum. China was one of the big net users of oil and a big part of the decline in oil that we've seen. Not the biggest factor, but one of the two or three biggest factors is the declining use of oil in China. And that over capacity, that overabundance really is going to mean that there's downward pressure on commodities for many years to come. It's going to take a long time for the demand to catch up.

What happened in China? I mean, how did they just. Did they just. I kind of asked you this off the air before and I sort of know your answer, but I want to ask you, for the listeners, did they just, you know, overshoot the mark? Do they think they were going to grow so much more than they really did? And, and they thought they would need more housing and they thought they would need more roads and more trains and more infrastructure, and they just didn't need it. So now they've got all this steel sitting in a yard somewhere.

Well, demand had been growing very fast up to 08. And so a lot of these plans were built on the belief that China was going to be like it had been for the previous several decades. But the other thing that's going on in China is the whole system is built to try to report high GDP numbers. If you're a local official in a province in China, you've been given marching orders by the guys at the top to grow GDP in your region. So it rolls up to impressive high GDP numbers at the top. Well, you get a high GDP number by building something. If you build 100 houses and don't sell any of them, you still get almost full credit in GDP for those hundred houses you built. And that's really what's been going that your bonus and your status in the party and all these other things, you know, boils down to how much GDP you're milking out of your region.

You know what it's reminiscent of? I mean, this may be kind of an odd comparison, but, you know, it's reminiscent of that government agency who has a certain budget. It's allotted every year. And the whole goal of the agency is to spend all of the budget, because if you don't spend it all, they'll reduce your budget next year. So if you want to increase your budget, which increases your power, which increases your everything, you Got to spend irresponsibly. There's nothing logical about that. Boy, that's what happened. So they're just trying to report GDP numbers and they're not doing anything that actually makes sense. So what does this mean to the rest of the world as China experiences more and more slowdown, more and more trouble? I mean, I think to China it means they're deathly afraid. Their leaders are deathly afraid of civil unrest because the population is just too big to control, frankly. And, you know, there's too much inkling of information from the outside that's coming in. And that's a legit concern of the party, isn't it? So what's going to happen? Are they going to have a meltdown? What's it going to look like?

You know, I think like I said earlier, they own the banks. So, you know, classic definition of a financial crisis is you have the collapse of the banks and the government has to intervene to rescue. In China, the government owns the banks, so it's going to preemptively intervene, I suspect, to prop up the banks. So what it really means is this, just this dramatic deceleration in growth from what was 15% a few years ago and it's 7% now to something much closer to zero. And that's going to have profound implications for borrowers. But the other thing that happens is the rest of the world feels this. Asia Pacific, Australia, Korea, to a lesser extent Japan, certainly places like Singapore, Thailand and others have been making a living over the last decade exporting to China and leveraging up at the high commodity prices that China's growth resulted in. Well, that's all coming unraveled. So I think there's going to. You're already seeing banks like HSBC and Shanghai and others report really problem levels of earnings and loans. You're seeing commodity producers in places like Australia report problem earnings. You're seeing that all up and down Asia Pacific. There's going to be bank failures, there's going to be reversals in a lot of things. But you're also seeing that in Africa and South America, East Africa, places like Brazil and Peru and others really have made a living off massive exports to China at the kind of high prices that China's growth resulted in. So they're going to have, you know, you're already reading it, you know, in the newspapers in all of those countries. You know, you're going to see trouble in Europe, particularly among the luxury goods producers. You know, BMW, you know, most of their sales have been to China. You know, Louis Vuitton. The list goes on and on. The United States will feel it. The United States will feel it less in my view, than just about anywhere in the world. There'll be winners and losers in the U.S. you know, if you're a consumer and all of a sudden your gas bill is lower, that's a good thing. If you're a producer of, you know, steel or an oil exploration company, you're in trouble.

Okay, so the subtitle of your book is how to Avoid It. Okay, why it's Coming and How to Avoid it. And we've gone into, you know, why it's Coming pretty well. A very thoughtful conversation on that. What should we do? What should people listening. And by the way, we have listeners in 164 countries, but it's largely a US or North American audience, of course, but you know, many listeners in Europe and Asia and so forth. You know, what, what should different people in different positions be doing to avoid this crisis?

Well, you know, it's interesting because we've, we've extended, expanded our study back, you know, a couple of hundred years in a place like the United States has had a crisis. They had, we had a crisis in 1819-1837-1857-1873, 1893, 1907, 1929. This is a recurring pattern and it is, you know, our work is demonstrating that in every single one of those cases it's runaway private debt in the period preceding the crisis. And so the lesson is very simple. You know, and I think this message needs to go to banks and to their regulators more than anyone else is when aggregate loans grow more than 5 or 10% to GDP in a two or three year period, that's when you need to be on the lookout. That's when you need to be as a regulator looking to, to moderate growth either by capital levels or jawboning or any of the other things regulators are so capable of doing.

Very interesting. Give out your website if you would. I know you have a few of them, whichever ones you like.

Well, the website where all our data on this is is called www.debt-economics.org. if you get on there, we have a lot of Excel spreadsheets for all of the major countries in the world where you can go in and take a look at this if you're a geek and you want to get into it.

So that geeky stuff is pretty interesting to a lot of our listeners. Before you go, can you just elaborate a little bit on the stages of a crisis? You have a chapter with that title in your book. And I just kind of like to maybe circle back and outline that again for the listeners. These different stages, how does it all develop and then fall apart? And then, you know, of course it just happens again usually.

Well, you know, it's interesting because I've lived through a couple of these and I was in the banking industry when I lived through a couple of these. What happens at first is there's some reason that banks let loan growth starts to percolate. When banks start lending more. It is really and truly the case that things get better, at least at first you're lending, people are building buildings or building office buildings or building manufacturing plants. People are getting employed. This is a wonderful thing. Well, all that good news causes banks and other lenders to want to lend even more. And one of the things lending does and people this is a widely underappreciated fact, but it is an absolutely true fact. And that is lending itself causes prices to go up. If I increase my lending on housing, that means if I loosen my criteria, means more people are eligible to borrow.

And you have inflation. That's a classic definition of inflation. Right. And that's my argument why Fannie Mae and Freddie Mac should really go out of business. I mean you'd have to hopefully do it slowly and peacefully so it wouldn't be create a huge disaster. But they should be unwound or you know, they should deleverage the housing market because then you know how I mean the stated goal of Fannie Mae is to make housing affordable. They've done the complete opposite.

They've made it less affordable over lending causes prices to go up in not just in housing but in commodities and everything else as well. So at that point in time prices start going up. Well, since people don't really understand this phenomenon that makes lending increase all the more because all of a sudden I'm more confident about lending because price trends are so positive. I know that I can make a more aggressive loans because housing values are going up. Well, that's circular logic of course, but that doesn't stop it from happening. So things get, lending starts accelerating and things feel even better. You know, the business community is euphoric. Tax receipts in the government go up so that the government feels great. The government feels like there's an economic miracle. You feel like you're going to take over the world. Remember when this was happening in Japan in the 80s, we all thought Japan was going to take over the world. And frankly a lot of the same stories have come out about China. Oh no, China's going to take over the world? No, it's just runaway prior little ending and it's going to come back on itself. It's going to reverse. So at some point in time somebody realizes the emperor has no clothes and things start to unravel.

Very interesting, fascinating stuff. Well Richard, this has been a great discussion. Thank you so much for joining us today folks. That's Richard Vague and really insightful. Thanks for joining us.

Thank you for having me. What's great about the Chauges you find on jasonhartman.com is that if you want to learn how to finance your next big real estate deal, there's a show for that. If you want to learn more about food storage and the best way to keep those onions from smelling up everything else, there's a show for that. If you honestly want to know more about business ethics, there's a show for that. And if you just want to get away from it all and need to know something about world travel, there's even a show for that. Yep, there's a show for just about anything only from jasonhartman.com or type in Jason Hartman in the iTunes store.

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