Jason Hartman starts today’s show hosting investment counselor Doug as they look at the problem with America’s retirement savings. This has been an issue for a long time and many boomers don’t have enough saved for emergencies. On top of that taxes are hitting this demographic. In the second segment of the show, Jason talks with Laurence Kotlikoff, William Fairfield Warren Professor and Professor of Economics at Boston University. They discuss the massive amount of unfunded mandates that are awaiting the United States. This number is quite high and Kotlikoff’s estimate currently sits at over $200 trillion.
Investor 0:00
The markets were buying in a robust markets there, the population is stable and growing, and the values are stable and growing. It’s not like we’re just buying residential anywhere. We’re buying in good market.
Announcer 0:13
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it on now. here’s your host, Jason Hartman with the complete illusion for real estate investors.
Jason Hartman 1:03
Welcome to episode number 12 of 812 hundred. Nate, thank you so much for joining me today as we talk about the economy and what you as a prudent investor should do. tell you, you know, you’ve heard that we are in a mess. And we’re in a mess in a lot of ways. As I say this, I still think it’s an amazing time to be alive. It just depends how you look at it and what you do about it, right? Because everything in life is what you make it. It’s not what is the counts, but how you take it. And so you can take action that can really make these messy problems of government of the economy of politicians that buy votes and spend too much you can make them work for you, especially with the most historically proven asset class in the entire world income property. And I’ve got Doug here with me today to talk about some of these things before we get to our guests, which will be part one of returning guests. economist professor and software entrepreneur Laurence Kotlikoff, Doug, how’s it going?
Doug 2:06
going pretty well. And you know, I was just thinking when you were doing the intro there, it would be funny if someday you said instead of you know as a prudent investor how you can make your life better say as a complete imbecile here’s how you can completely and totally ruin the rest of your life for all time.
Jason Hartman 2:22
Yes, well, this could be called the dummies guide to investing right now it’s funny when you look at that series of the dummies guides tho those books obviously I’m talking about with the yellow cover. And then the the copycat series I guess it’s the copycat and I don’t know maybe the other one copy this one. But the complete Idiot’s Guide. Why does anybody buy that? Do they really think they’re dumb? Or? I don’t know. It’s funny. It’s funny.
Doug 2:46
One of these days we should do a spoof show where instead of giving people good, prudent advice to help themselves, we should give them advice to completely ruin their lives. Yeah.
Jason Hartman 2:55
Well, yeah, we you know what, maybe we should do that on April Fool’s Day. The next April Fool’s Day Watch out folks, you know, I do. I have been known to do some April Fools episodes. So, so there you go. Okay. So Doug, let’s talk about the American retirement savings problem. And it is pretty significant. Now, you’ve all heard these things and seen these articles about how, you know, the average American, if they had a $400 emergency expense, they couldn’t meet it, you know, like 40% of the population or something like that. That’s tragic. It’s sad when you hear that stuff. But let’s talk more about the mainstream. And look at how much by decade people are saving for retirement. And Laurence Kotlikoff is going to talk in more on part two of this interview that you’re about to hear part one of today about how you can even out these expenses. And Doug, one of the things that occurred to me During this interview with Lawrence, he’s been on several times. But one of the things that kind of odd is that what some people listening may not realize is that, you know, most financial planning is about let’s be more prudent, let’s save for a rainy day, etc, etc. But some people might realize that they’re actually not living it up enough. And that’s kind of an interesting twist. But for most people, not not our listeners, but most people in America. The opposite problem is true, isn’t it?
Doug 4:34
Almost certainly. Yeah, almost certainly. One of the things to think about also, is that when you’re talking about retirement planning, taxes get really important when you get into retirement also, oh, yeah, because one situation that I’ve actually seen to some people who are very close to me in my life, is where they were very successful in their life. They accumulated quite a bit of retirement assets, and they were almost all in a traditional IRA. Where they were subject to required minimum distributions. So now that presents a couple of problems number one, this is known as the RM D prime d. Yeah, required minimum. So they got to take at 59 and a half, you can start taking distributions at 70. you’re required to take distributions, I believe those are the ages, right? Correct. In their case, they have been very successful. And by the time you put their rmds Plus or social security plus a couple of pensions that they have accumulated, they’re already over 150,000 and AGI. So Joe stampers income correct. Thank you. So now what happens is now they can’t get a depreciation offset from something like rental property, which they recently purchased without being a real estate professional which they have no interest in doing. So now they have this suspended depreciation that they can’t get a benefit from. And so that’s one of the things is that you bc articles all the time about your save enough for Tara And you make sure you save for a rainy day, but also make sure you save it in the right way. Because otherwise, if you’re really successful, you could paint yourself into a corner for taxes. Yeah.
Jason Hartman 6:10
Okay, so let me make a comment on this before you go too far. This is one of my many qualms about the absolute scam known as the financial services industry. Okay, it has sold this really silly idea ever since retirement accounts came along, okay. And when these plans came along, you saw all the financial advisors out there with their charts and their graphs and you see these over and over, you know, throw money into your IRA, right or your 401k because the myth that has been sold to people is like this tragic myth. Oh, when you take the distributions out, you’ll be earning less money, so you’ll be in a lower tax bracket. Well, here’s two giant flaws with that and Doug Can’t wait to hear what you’re going to have to say about this, because I don’t think we’ve talked about it before. The one flaw is that the government will actually keep tax rates the same folks, you’re going to hear in this interview with Laurence Kotlikoff that the government is broke, okay, and has a 230 $9 trillion obligation coming at it in terms of unfunded entitlements. So the tax rates are not likely to be lower in the future. Okay. That’s the first thing. But the second thing is, it’s telling you you should be poor in the future who wants to be poor, I want to be richer when I retire. Doug, what do you think I think those are two giant flaws with with this pitch they have
Doug 7:43
I would add a third giant flat to which is that almost every financial advisor graph is based on the assumption that the s&p 500 or whatever index they invest in is going to continue appreciating it prior rates. Okay, so let’s say long past performance
Jason Hartman 7:58
is no guarantee Your future results.
Doug 8:01
Exactly, exactly. So okay. Well, s&p 500. If you take a really long term chart, including depression, recessions, all that kind of stuff goes off, depending on your start and end date at about eight to 10% a year, he will say, hey, that’s pretty good. It is pretty good, except that the economy, as in reality, only grows at two and a half to 3% a year. And so if you have equity values that are growing at conservatively, three times the rate of the economy, that can’t happen forever, you know, the total amount of stuff is only growing at 3% a year and that’s the percent of years really dang good for the economy. And so if you think of the equity markets as claims on real stuff, the population of real stuff is only getting bigger at 2% a year. equities can’t continue growing at eight to 12% a year and definitely at some point there has to be some kind of correction
Doug 8:56
does otherwise.
Jason Hartman 8:58
Otherwise the compound to gets out of line. Right. And that is really quite fascinating that you brought that up. And you know, years ago, we had talks about things like this when we were studying things like the amount of gold in the world. And I know you did some articles. I remember that article. Yeah, my my old financial freedom report newsletter that we used to publish, and I think I want to bring that back. But it’s a lot of work and I have a lot, a lot to get a lot. Yeah, it’s a lot of work. Okay, so maybe we won’t bring it back, but we’re talking about in here. So that is quite interesting. You know, what that portends, to my thinking, is that the growth in the s&p because it’s out of proportion with the GDP, that means that that growth is a result either either number one, financial engineering, okay? And that means companies using leverage buybacks, derivatives, a myriad of financial engineering products and techniques. Okay, or number two, It’s a result of too much forward thinking otherwise known as speculation on gambling, and too much of that is already priced into the market. What do
Doug 10:10
you think? I think it’s the latter. And I also think that it ties into what you were saying with their retirement accounts. Because when the Arista act, and I don’t remember off top my head, but Ursa stands for but it’s like
Jason Hartman 10:21
we retirement, you know,
Doug 10:24
income save saving Act, or something like that. Yeah. But when the arrest Act went into place, and because it created IRAs, for one case, all that kind of stuff, but it did was it created tax incentives to plow capital into the market, because any individual stock goes up and down based on demand, but the only way that the total market goes up and down is if more capital goes in is if capital goes in or capital comes out. total market capitalization is just about a flow of money in or out and so in order to keep pumping the market up then you have to keep thinking of ways to get people to plow their money into the equity markets. That’s the only way the math works well either have to borrow it and plow it in or get people to save it and plow it in.
Jason Hartman 11:07
So what you’ve basically created through tax law and financial engineering, is you’ve created this artificial marketplace. Now, certainly you can argue that Fannie Mae and Freddie Mac created an artificial marketplace. And I would agree with you wholeheartedly. You can argue that the subprime mortgage fiasco before it went down the tubes created an artificial marketplace. And I would agree, you can argue that Sallie Mae, ensuring student loans created an artificial marketplace and I would agree completely, so you have all these artificial marketplaces. And it’s really hard to tell what’s real, because whenever anything’s artificial, like Wall Street is compared to Main Street. You have the potential for a very ugly bubble, very ugly correction, don’t you?
Doug 11:55
Absolutely. And kind of bring it back to real estate. The thing that I like About the real estate value equation is that it’s based on prudently leveraging normal inflation. So basically, let’s just say the real rate of appreciation for a property is zero, and that all of the appreciation for properties are inflation, which you can make a very convincing case for that. Okay, well, if the real appreciation rate for prop zero, and it only stays consistent with inflation, and I buy it with 80% leverage, well, now that inflation that happens with zero real appreciation results in a net value gain that is sustainable, because inflation is reality, right? inflation doesn’t depend on people deciding they’re going to keep funneling money into Morgan Stanley, it’s reality, it’s never going away. In fact, it’s more likely than not almost certain to get a lot bigger for a really long time. So I think that’s one of the things that’s really valuable about the philosophy is that it not only performs better but it’s more fundamentally sound because at some point the rate of growth of the equity markets is going to have to revert back toward GDP because you’re just going to run out of stuff for people to buy it with all this pretend money. No.
Jason Hartman 13:11
Well, I couldn’t agree more. It’s quite interesting. One of the things I brought up in the interview with Laurence Kotlikoff is, and I, you know, I’ve been saying this for years. But if you look around at the real world, versus the Wall Street world, the world of reality versus financial engineering, right, these are two completely different worlds. They do mesh but they are different. And you look the day before the great recession started. Usually people think that’s when Lehman fell apart. Then the day after you looked around in the world, that the amount of real assets in the world were exactly the same. You know, there was the same amount of oil, the same amount of gold, the same amount of silver, the same amount of real estate, all the companies that we’re in business except for Lehman Brothers. You know, we’re still selling their widgets. Everything was Really the same, it was all still there all the real assets didn’t evaporate. But the only way real assets ever get destroyed is is through war. Otherwise, you know, they’re there. And that’s the interesting thing to really ponder about economic swings, isn’t it?
Doug 14:17
Yeah, absolutely. And in fact, because that’s you just really love painting on topics that could go on for hours and hours. There’s no a traditional macroeconomic view is that works good for the economy. When was that? Yeah, that is ridiculous. Because you know what, you know, the only thing war does is kill people and break things. That’s it. The only thing war does is destroy stuff.
Jason Hartman 14:37
Give them one prop for the war thing, though. If we go with the idea, that Necessity is the mother of invention. War does force more technological innovation. I think that is actually fair, but that’s about the only perk because it forces it to market faster, right? Because if something needs to be invented to win a war, there’s more urgent See, then just pay let’s go out on the marketplace and get rich. So maybe there’s a slight economic benefit to war, but it’s minor and temporary because that thing would have probably ultimately been invented anyway,
Doug 15:11
that’s true. Because you know, if you think about the technological innovation that came out of the world war two era, that’s how you got the Saturn rocket that was able to send people to the moon, the technological innovation that came out of the great moderation was Facebook and Twitter.
Doug 15:29
I don’t know, I think Saturn rockets are way cooler than Facebook. And
Jason Hartman 15:33
that’s certainly true. You know, and that gets into a whole nother conversation of when are we going to do something great again, like really build something, you know, like a real space program? Or, you know, a Golden Gate Bridge or Yeah, I mean, I don’t know. You know, that’s a whole nother discussion we don’t have time for But hey, Doug, can you come back? I originally I was thinking, don’t come back tomorrow, but come back tomorrow and let’s just do part two, and let’s dive into the saving by decade topic, we got to get to Laurence Kotlikoff. So, the first half of his interview, and we’ll play the second half tomorrow, so it’ll be a perfect fit for everything. Can you do that? It’s a deal. Okay, sounds good. Hey, without further ado, let’s get to our guests. But be sure to go to Jason Hartman calm and check out our upcoming cruise in November. That’s going to be an awesome cruise and in cruise time, it is urgent that you get registered. So we got to plan this stuff in advance. It’s not like one of our typical conferences where you can wait to the last minute I know a lot of you do that. Go to Jason hartman.com. It’s right on the front page and get tickets for our upcoming cruise today. And let’s get to Laurence Kotlikoff and we will be back with part two of this interview tomorrow but let’s do part one today. Here we go.
Jason Hartman 16:54
It’s my pleasure to welcome Laurence Kotlikoff back to the show. He is a professor at Boston University. A very renowned economist who has probably done more study and research on our unfunded mandate problem that we will talk about today. Can’t wait to dive into that again. And he’s also a software entrepreneur, and he’s got some great software tools to help planning for all of this stuff. Larry, welcome back. How are you ready to be with you? That is very good things. I hope you’re doing well, too. It’s good to have you back. So last time you were on the show? Well, I think we talked about the unfunded liabilities that the United States is facing in terms of all these entitlements that it has promised to people for the next forever, I guess, but maybe that the 15 year mark is sort of the primary one to look at. I don’t know you can say but that total, a lot of people call it the $60 trillion time bomb. You say it’s about I think last time you said it was about 220 trillion dollars. But even that isn’t enough. Is it even worse than that? Right?
Laurence Kotlikoff 17:57
Yeah, the most recent number is that our fiscal gap is 230 $9 trillion large. So what is the fiscal gap? So this is putting all the obligations of the government onto the books, and also all the assets, including all the future tax receipts on to the books and taking the difference. So you’re looking at all the outlays, the government is projecting there, those are all the obligations, including paying for the government’s lunch, defense expenditures, Social Security, Medicare, Medicaid, all these expenditures into the future as projected by this Congressional Budget Office. And then you’re looking at all the tax receipts that are projected into the future. And also, you have the official debt that has to be paid. So you add, you form, what we economists call the present value, the value in the president of all those outlays, you subtract the president of all the receipts, all the taxes to cover the outlays you added in the official debt, you end up with 239 trillion, the official debts about 22 trillion right now. So we’re talking about a fiscal gap a true indebtedness of the country when you put everything on The books that’s 10 times bigger than the number we’re talking about officially. So the Congress has been really good at hiding the bacon hiding the big problems off the books for four decades now, and our kids and are going to pay the price. But we’re also going to pay the price as well, because our kids are not going to be able to afford to pay us all
Jason Hartman 19:20
right. Wow. That is that is absolutely astounding. Now, the question is, though, over what time period does the government have and by the way, I’m guessing you’re just talking about the federal government only, because of course, states and municipalities have big problems do especially if you look at Illinois and California, right. Well, I don’t know California is kind of a mixed bag. I haven’t paid that much attention to it lately, but is messed up is that state is sort of seems like they’re doing okay, in some ways to it. I don’t know. It’s another discussion, but that’s just the federal government. But over what timeframe will we have this 239 trillion with a T dollar shortfall?
Laurence Kotlikoff 19:59
Well, that’s where was calculated as of today. So the government, the country is is short, basically 10 years of GDP. Right now, one way we can deal with this problem is to raise all taxes by all federal taxes by about 50%. That’s just kind of we just had a big tax cut right a couple years ago. But we actually needed when we had a modest tax cut, we need a major tax increase 50% increase. If we don’t do that. Now, let’s say we wait 10 years, well, then we’re going to have to have an even bigger increase, maybe it’s not 50% of 55%. So it’s not like there’s any anything gain by waiting. There’s only a bigger burden left to our kids because there’s fewer of us around that are now around to pay the higher taxes. If we wait for 10 years and people that are now let’s say, you know at some of them are going to die. And then we’ve gotten out from under this problem. scot free if you like, because they’ll die before the taxes are increased. So this is a very much a generational equity, a generational fairness question, how much are we going to invert our kids? So we already have a situation where, right today, we need a 50% increase that our kids will get hit with for their entire lives. Okay. But we to my people, my generation, people, your generation will have to pay higher taxes rest of our lives, but our kids and all future generations will be stuck with this much higher tax burden. That’s best case scenario. Jason, that’s,
Jason Hartman 21:30
that’s pretty scary. This is this is not positive at all. But it does seem realistic. But wouldn’t those tax increases suppress economic activity cost capital flight? Certainly, we’ve already seen this with the that offshoring, and, you know, maybe some of the tax plan will bring that back. We’re certainly seeing people vote with their feet now, because of the salt related taxes, the state and local taxes, you know, that are now no longer deductible. Over $10,000 a year, under the new tax plan, people are leaving those high tax jurisdictions for more favorable places like where I live Florida?
Laurence Kotlikoff 22:09
Well, we’re getting to a point where you’re absolutely right that if we raise taxes too much, we may have all the things you just mentioned, people leaving the country to live in places where there’s lower tax burdens, capital not coming in, you know, for example, if we raise the corporate income tax back up, we may see corporations moving back outside of the US rather than having capital flow in left capital flow out. So there are limits to what the economy can absorb in terms of higher taxation. So we’re getting very close to game over to a point where the bills are so big that we can’t handle it by raising taxes. And the other idea is to you know, cut spending, so you’d have to cut pretty much every expenditure the federal government makes by about a third. So you’d have to reduce the gas on Air Force, jet fuel and air force one would have to be cut by 33% And the associated benefits would have to be cut by about that. And Medicare benefits. So we’re in extremely scary territory, right right now, with our fiscal but not not right now, I mean, this has been going on for decades, I’ve been writing about this for my entire professional career. I just want to
Jason Hartman 23:17
just help us unpack though a little bit, Larry, the timeframe? Like when I asked you that question, you said, well, we’re 230 $9 trillion underwater right now today. But we don’t have to pay that today. We get to pay that over time. So we do get some benefit of what I call inflation and do step destruction, meaning that some of that will be inflated away, right, but we keep adding to it faster, then it’ll probably inflate away.
Laurence Kotlikoff 23:44
This analysis takes into account the fact that you’re going to get some what economists call seniors, which is that because of inflation, you’re going to, you’re going to reduce the debt, you know what you have to pay back and in today’s dollars, and also so the analysis takes that into account already. It’s really really a matter of you got a cancer growing in your body, and you go to the doctor and the doctor is a politician. And he says, He says, Well, you know what, let’s just take a little bit out of it now. And you’ll come back in 10 years, and you go back in 10 years, and it’s much bigger than there was. And he said, Okay, let’s take a little bit more now. Takes even a bigger bite from you. Come back 10 years later, and you’re on death’s door because it’s going after norian. Right. So that’s the kind of situation we’re okay that that is had no time left. That is,
Jason Hartman 24:34
that is a mess. We are in a mess. But I’m guessing by your prior statement, that you would not be a believer in maybe Arthur Laffer his philosophies or Ronald Reagan’s, you know, I mean, they’re obviously connected. You would not be a supply side or a trickle down type of guy, right?
Laurence Kotlikoff 24:52
Well, I tell you what, I went to work for Ray and the Council of Economic Advisors, but not always a senior economist. I wasn’t very high up. I just want to The experience of working at the Council
Jason Hartman 25:01
Oh Yeah, that’d be great.
Laurence Kotlikoff 25:02
And I thought, you know, I’ve done a lot of work on supply side economics I developed with our backers professor at Stanford, sorry, at Berkeley, we developed something called the our back complicated model that simulates the macro economy through time and responses of the economy to in the fiscal system to things like tax cuts. So it’s kind of the penultimate, supply side model. So this is kind of why I always got got hired down at the Council of Economic Advisors, and basically what our Laffer and other people were claiming the model doesn’t produce or reproduce, there’s certain things you know, if you have sky high corporate taxes, for example, lowering them at and having capital flowing from the other from the rest of the world that can help your economy, but just cutting personal taxes actually will not pay for itself. And so we knew that back in 1979 81 when I started working with the council So a lot of what Laffer said, just not true. If it wasn’t then not true today. And then we have some other people on the left. We have a modern monetary theorists today. You can do the same thing. And it’s just a different angle of craziness.
Jason Hartman 26:16
Yeah, I think mmt is just crazy. It’s
Laurence Kotlikoff 26:20
people that want to pretend there you can consume for free. Yeah,
Jason Hartman 26:25
I wish it were as easy as mmt. That sounds so easy. Just Just keep running deficits and spending money and you’ll be fine. But just curious, and I won’t belabor the point. But I just got to ask you like that sort of that common sense view of it the layman’s view, it seems like if you give people a tax cut, and they have more money in their pocket, won’t they spend it and if they don’t spend it, they’re going to save it, which is good, because that’s capital formation for you know, and that savings obviously works its way into the economy to I mean, I don’t know that just seems sort of Common sense, right?
Laurence Kotlikoff 27:00
If you give people a tax cut, then the government will have to borrow more money. And then the principal and interest will have repaid by somebody in the future. So it has to be repaid. So you’re giving, let’s say we give put on a tax cut for the next 10 years. So we let older people like me pay lower taxes, and we don’t otherwise pay for the next 10 years. By the end of that 10 year period, some of us will die. And anyway, I’ve gotten to consume more, but who’s gonna have to pay for that tax cut our kids and our grandkids? Right, right,
Jason Hartman 27:34
right. But the obvious thing is, don’t you when you consume more, don’t you increase the GDP, right you and that’s more taxable.
Laurence Kotlikoff 27:41
We got the Laffer riots, we got the new modern monetary theorists, now we have the old time Keynesians at the more of the government spends, where the more we get, the government gets us to spend more, the economy is going to flourish. Well, on that basis, we should cut taxes. Having a huge party. And what we’ll do is save nothing as a country, we’re saving extra nothing as it is. Because we’re so consumption oriented. Our national saving rate right now is about 4%. of national income and used to be 15% in 1950. So with very little to say, we can’t really invest that much in our country. And that’s why foreigners are investing in our country for us and affect him taking the investment opportunities. That’s why we’re running what’s called a current account deficit. So no, the idea that you can consume your way to prosperity is not something that’s worked in any economy, you know, ever
Jason Hartman 28:34
I agree. And again, not to belabor it, because I do want to we got I want to talk about maxify and stuff like that, but it’s not a debate, at least in my eyes between saving and spending. It’s a debate between, I mean, look, remember when George W. Bush was president, right. And he sent out that I mean, not him, but you know, his administration was running things. He sent out that tax refund and everybody got like 600 and 30 bucks or something, right? And I thought, okay, so everybody got a rebate of $600, or whatever it was, you know, they got more money to spend in the economy. So now they’re going to go to the shoemaker and the baker and the butcher, and they’re going to spend that money and it’s going to trickle through and then those people will pay taxes and, you know, the pie gets bigger. Notice
Laurence Kotlikoff 29:17
the logic of that. I think there’s some logic, if you’re in the middle of a great recession, like we were, Lisa was characterized as greatness. I don’t think in the end, it would have to be that great. But if you have a situation where everybody gets scared, panicked, so I started laying off my employees or your customers and you start laying off your employees, or my customers, and everything starts to melt down deflationary spiral, right? Yeah. Oh, it’s just a economic implosion. We need something to turn around that psychology because what happens here is the economy goes from a good equilibrium, a good position to a bad one. And that’s what happened. I think in the Great Recession, we just got freaked out, because none of the causes of the great recession that we’re led to should be the causes. Were actually true that I have a paper on my website called the cuff.net called the big con, which talks about the alleged culprits of the great recession and what actually the facts are. Now we’ve looked at them over time. So I think we had a panic, the government comes in and starts handing out checks. Now that it got everybody from thinking we’re going to have this terrible time to thinking times are good again, that could have gotten me to stop firing my people, and you just stop firing your people and could have put on the brakes. But it might also just reaches out more. Look how bad things must be if the government’s sending us $640 checks. So what I’m saying is that when we understand that the economies can move, because of the psychology, then we have to be very careful about how we play the psychology game here and change the attitudes and I think a better thing that wish could have done then, when Lehman Brothers collapse was to go over to the building. I would have gone to the building The same day declare bankruptcy would have taken the people coming out of the building. And I would have grabbed one of them. And while each one of them as it came out, I would pick them with a pen, a little needle. They had blood. No, I, I would have as the President, I would have done that. I want to take a pinprick of you, and show everybody in the country that you didn’t die, right. So you’re gonna be able to work. You’re not gonna work for these people. But your work for somebody else next week. Right? And I would have taken a hammer or something hard a sledgehammer to the building. And what this building is still standing. Yeah, yeah. Yeah. That could have changed the psychology much better than handing out checks.
Jason Hartman 31:39
You know what, that is so fascinating that you say that, Larry, because I have long said that the great recession or any economic malady. Really, you know, during any time we’ve gone through this, if most people consider the Great Recession to have started the day, Lehman Brothers fell. That’s Yeah, I mean, I think it really started about a year before that. When the mortgage collapses started, but but whatever, right? If you went to bed, and then you woke up, and you saw that Lehman Brothers collapsed, that hundred and 56 year old company or whatever it was. And then you remember, you looked around before you went to bed before you knew that Lehman Brothers was collapsing. Every asset in the world was there, there was a certain amount of gold, there was a certain amount of oil, there was a certain amount of every resource on Earth, copper, you know, whatever you want, right? And the next day after the collapse, the resources were the same. They didn’t change. They didn’t go away, the oil didn’t evaporate, the gold didn’t disappear. The whole world had the same amount of assets. Now, they did admittedly change ownership, right, but they were all still there, right? Didn’t have the same amount of real estate existed. But because it’s this what Alvin Toffler call this super symbolic economy, and we have this financial engineering that wall street does which is so scary. You know, the credit markets collapse. When you have credit based assets, like real estate, especially in the mortgage pool dries up, well, then the price does decline, right? Yeah.
Laurence Kotlikoff 33:09
Nothing real changes. So you’re going to have the financial system collapse. But it doesn’t mean we don’t have a financial system. We had the biggest bank in the world, the Federal Reserve took over. I mean, that’s another thing. President Bush and President Obama should have said, Look, you know, we don’t actually need Wall Street. We have, we have the Federal Reserve, and they’re going to do all the job that wall street did. So let’s stop getting upset and panicking and go back to work. That’s what we do as Americans. That never happened. So the only reason that we had as you know, you referenced Jason, the mortgage, you know, mortgages I found. It turns out that the subprime mortgages were choose to small relative to the entire mortgage market, and too few of them actually went into default for this to really explain to a producer Great Recession. It’s just too small deal when you have a movie Like The Big Short come out where it suggested in that movie that every other mortgage was liable no dog ninja loan. And everybody decides, Oh, for sure this is the cause. But that’s why reading this article, the group that because it was talking about it, to get some point podcaster it just turns out that when you look at every single explanation of the Great Recession, whether it’s the mortgages, the subprimes, the banks being more leveraged, not true households being more leveraged, they were but they didn’t actually spend the money. They just invested the money. So sometimes they had assets to cover the borrowing of ratings companies do not systematically over raid. In some cases, I’m sure there were some over rating, but not systematically. So every explanation just doesn’t hold water. We have time to look at the facts.
Jason Hartman 34:50
I can’t wait to discuss the big con, I’d love to have you back to do that. Because that’s what’s fascinating and I think our ideas about it agree a lot. So one last thing. Then let’s talk about the solution as to how people plan for what’s coming. Okay. And you have some software to help them do that. But with 230 $9 trillion looming out there that need to be paid somehow, it seems to me like the only solution is going to be inflation, right? The government is going to have to create money to pay the bills. I’ve outlined six possible ways that the government could get out of the mess. If it’s 60 trillion, if it’s 220,000,000,000,239 trillion, whatever the number is, we know we have a problem. So the first one is default and just say, look, sorry, you know, austerity is the way it’s going to be. That’s not going to work. There be riots in the street, right. Look at Greece, look at other examples of that. around the world. They could raise taxes. We talked about that. Now. My view is when you raise taxes, you suppress economic activity. You know, that’s a political debate, maybe more than anything. Number three solution is they could have a yard sale, they could sell the ports to Dubai, they could sell military equipment to Libya, the BLM could sell off land. You know, there are some options there. We do have a lot of resources in the country. Hey, we can sell Alaska back to Russia, right? I’m not recommending it. I’m just saying it’s, it’s available. We could use the American military machine to steal the assets of other countries. That’s the history of the world. Basically, we’re on the good side, we could have some great technological innovation. Okay, some great America centric discovery or resource, biotech energy. I don’t know whatever nanotechnology for the most likely solution, inflate our way out of the mess. It seems to me that you think inflation is coming? That’s what I think.
Laurence Kotlikoff 36:39
So if we defaulted on the debt, we pick up about 22 trillion of the 239 trillion, right? So that’s small change, actually.
Jason Hartman 36:48
Sure, sure. But it could be an ongoing default, you know, say we’re just never going to pay anything sorry. You know, government workers, you’re out of a job, Social Security, you’re never going to get a you know, whatever.
Laurence Kotlikoff 36:57
Okay? Well, defaulting on all the expenditure. I’ll be here. Yeah, that’s like cutting spending. But that will lead to, as you said, riots in the street, basically, you know, people in particular, it’s not going to work their canes and walkers and eating up a congressman,
Jason Hartman 37:11
it’s politically unacceptable, it’s never gonna have any
Laurence Kotlikoff 37:14
problem with inflation is you can’t get much money out of it. So the most you could do. I mean, if you ran hyperinflation today, and you still maintained straighting benefits and rotala dollars, you index them for inflation as they are, you could most deflate away the official debt which is 22 trillion. So again, you’re not going to get well before you get to the point of eliminating in real terms, what do you want, what do you owe on the debt, you will have hyperinflation, your people will treating money dollars as a hot potato, and then you’ll have money circulating much more rapid clip and faster money is like more money so you’ll have prices going up because the money is certainly more rapidly. So inflation i think is going to be the first resort. of the government, but I don’t think it’s going to do much, except produce a lot of inflation just like it isn’t doing much. In Venezuela, the country is still growing. It’s not like they’re able to invest in any, you know, the government can raise resources by running a hyperinflation.
Jason Hartman 38:16
I agree. And it didn’t work in Zimbabwe or Hungary or y Mar Republic or anywhere else. But we have one major advantage the reserve currency the biggest military, the US is in admittedly a better position than any of those right?
Laurence Kotlikoff 38:30
Just you know, we have the advantage just until we lose it now. You know, the British Pound was the reserve currency until Yes. Well, to that point, you know, after world war two we started it became the dollar. I don’t know whether you would date the dollar is predominance. preeminence before World War Two or not. But anyway, certainly the after World War Two, it was the dollar. Yeah. You know, there’s nothing that says it can turn into the one right See, because, you know, people will move out on the dollar, if the dollar is not trustworthy. And if it’s real value is appreciated, because prices are going up.
Jason Hartman 39:10
It could happen. I agree. I just don’t see it happening soon. I can certainly happen. I mean, there, you know, but when you’ve got the biggest military and you’re the biggest customer of the world, let me explain
Laurence Kotlikoff 39:22
one thing though, on this front. us there’s about 17% real GDP right now. So we might think, be thinking that we had like 30% or 50%. But now we’re actually a small ship. We’re significant but not dominant your world GDP. At the end of the century, just in about 18 years, we’re projected to have about 5% of world GDP. So we’re going to be to the world in 2100. What Germany is to the world today in terms of our economy size. So the idea that we can have this hedge of money over the world for decades, forever, is not the case. So I think we need to start understanding our place in the world is not what it was 1950 and that’s not going to be even where it is today down the road. This will be continued on the next episode. Thank you for listening and happy investing.
Jason Hartman 40:13
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