Announcer: Please note disclaimers at end of show. 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.
Jason Hartman: Good afternoon and welcome to Show No. 109. This is Jason Hartman and thank you for joining us today again on the Creating Wealth Show. If you are a new listener, be sure to go back and listen to our Core Content. You can do that and find out what the core content shows are at www.JasonHartman.com/radioshows and click on the green Start Here button for core content if you’re a regular listener and need a review. You know we don’t publish those shows twice, but we kind of think it’s been so long since we’ve reviewed some of our core content that we recommend regular listeners go back and review it once in a while as well. It’s probably a good idea to review the core content every six months or so.
Anyway, on this show today, we are going to have the second part of the Addison Wiggin interview that we had on the last show. So, join us for that, but before we get into that, we will look at Dallas, Texas – one of my very favorite cities – in fact, a city I am planning on moving to. Dallas is a great vibrant economy. There are all sorts of opportunities, one of which we will present here in just a moment. And in addition to this presentation, we have a whole separate arrangement with another party in Dallas that we’d like you to know about because there are some special factors on this one.
The number one special factor is that you can actually finance up to 17 properties. Now for any of you experienced investors and if you own several properties, you know that financing more than four properties has been an extreme challenge for the last year or so. And financing more than ten, although they say you can do it, is for all practical purposes sometimes impossible for many people. Well, this opportunity that is not discussed today, but call our investment counselors for more detail and we will cover it on a future show, gives you the opportunity to finance up to 17 properties, not just four, not just ten, but 17. And these properties are pre-rented and they’re all within eight to nine years old or newer. So they’re all built after 2000.
Anyway, let’s listen in to this interview about the current Dallas opportunity. Again, the new one will be reviewed on a future show and featured on a future show. And be sure to join us on August 15th for Creating Wealth in Today’s Economy and then again for the Masters Weekend, only our twice-yearly event on October 10th and 11th. This Masters’ Weekend promises to be a real special one. So find out more about those at www.JasonHartman.com/events and in the Events section, you can subscribe to our new newsletter. I hope you’ve had a chance to get a copy of that. Just go to www.JasonHartman.com Members Only section. Take 30 seconds get a free membership. It’s very easy to join. And you can get a copy of our newsletter in audio format, printed PDF format, or the cool, high-tech, turning-page book format, whichever you like – it’s all free as a sample for you there. But you can get a full subscription at www.JasonHartman.com/events.
And we also posted the Do-It-Yourself Loan Modification kit, which, by the way we’re getting some excellent feedback on and I am just signing the modification documents for modifying my 11th loan today, folks. And check this out, this is a house that I own in Georgia and my payment for the next five years is now only – get this, this was a brand new house when I bought it, okay – a $160,000 property – my payment for the next five years on the First Trust Deed is only $397 per month. That’s a $160,000 property. I tell you, loan modifications are like free money. I love loan modifications. And I just succeeded in the Do-It-Yourself – I did it myself, of my 11th loan mod. So it’s worth a try to do them yourself, save a lot of money.
If you can’t do them yourself, our investment counselors here can refer you to different companies that do loan modification. You can get the Do-It-Yourself Loan Modification kit, which includes a, I believe, 56-page booklet and a 2-hour, 38 minute audio book. And that’s available at www.JasonHartman.com, or if you’d like the complete information on that, it’s available at www.TheDIYLoanModification.com. I know that’s a rather long domain name or URL, so I’ll say it again: www.TheDIYLoanModification.com. Go check that out.
Now, let’s go to the interview where we look at the Dallas, Texas, market – fantastic opportunities. And then we’ll go to the second part of the Addison Wiggin interview. And we’ll look forward to seeing you on the next show where we talk – that’ll be show No. 110, where we talk to Bonner about climbing Mount Kilimanjaro. That’s a very inspirational story. I think you’ll like it. And then I believe Show No. 111 will be my interview with Robert Kiyosaki, the famous Rich Dad Poor Dad author. Let’s listen into the Dallas market.
Jason Hartman: It’s my pleasure to welcome Giro to the show. He is a home rehabber and does investment properties, rehabs them, and then resells them to investors. We are going to talk today about the Dallas-Fort Worth market. As you probably know, we’ve been in Dallas for several years now. We like the Dallas market. I have spent a lot of time there. Many of our investment counselors have purchased properties in Dallas. We’re quite keen on this market. Tell us why you like Dallas so much.
Giro: We like Dallas because it’s one of the fastest growing metropolitan areas in the U.S. It’s the fourth largest metropolitan area in the nation. Dallas is the 10th largest city in the U.S. and we feel that the market is under-valued to begin with. Plus we’re buying properties at a discount and we’re offering the investor a very good deal – rent-ready properties, no hassle, no maintenance – all ready to go.
Jason Hartman: Now many of the properties are actually already rented, not just rent-ready right?
Giro: They are. Correct. They’re all rented.
Jason Hartman: You rent them all before you-
Giro: We do.
Jason Hartman: -before you sell them?
Giro: We do.
Jason Hartman: Okay.
Giro: Prior to an investor buying the property there will be a tenant in the property. It will be completely rehabbed and we give a one-year warranty on the property as well.
Jason Hartman: Okay. Before we talk a little bit more about Dallas, which obviously we want to do, I want to talk about rehabbing. When I talk to different rehab people from different parts of the country that specialize in different markets, “rehab” – if you put that word in quotes – what is your definition of rehab because I find that they vary quite extensively?
Giro: They definitely do vary.
Jason Hartman: Some people just slap some paint on there and think that they’ve done a rehab. Some people really gut the house and they put in new kitchens and a whole bunch of stuff.
Jason Hartman: What is your definition of rehab?
Giro: Well, when we target a house, we basically go through all the property. We check the heating and air conditioning units. We check all the plumbing systems, electrical systems. Anything that needs updating we update. Generally, we put in a new HVAC system in the property. We check roofs. We check foundations. We check everything that is structural to the house.
Jason Hartman: And you’re a licensed contractor?
Jason Hartman: In Texas?
Giro: In Texas.
Jason Hartman: And in Arizona?
Giro: And in Arizona as well.
Jason Hartman: How about California?
Giro: Not in California.
Jason Hartman: Okay. It’s funny, we’re both sitting here in California and you’re not licensed in California.
Giro: Exactly. But we do go through the properties completely. We do update the kitchens, the bathrooms. We do a paint job. We do two colors and we most of the time paint them semi gloss because you have tenants in there, so if there’s a turn on the tenant, you don’t have to really repaint again, just do some touch ups. But we completely go through the house. When you walk into a house, whether it’s built in the ‘70’s, or the ‘90#8217;s, or in 2000’s, they’ll look the same. You wouldn’t know that you’re in an older house, or a newer house. They’ll completely look the same.
Jason Hartman: Well, they won’t look exactly the same. I mean-
Giro: Exactly. Correct.
Jason Hartman: They’ll be updated.
Giro: Correct and the quality of the rehab is very nice. Most times, if the kitchens are old, we’ll replace the kitchens. New counter tops, new appliances, as I mentioned new carpeting. We’ll do landscaping on the outside. A lot of times in Dallas there’s problems with foundations, so what we do on our properties is we put a gutter system in because a lot of the rain makes the foundation problems. So, we put a gutter system in and we install the gutters into the ground which helps the foundation problem. So this way in the future, you won’t have an issue with the foundation.
Jason Hartman: Why do they have that particularly in Dallas? Because they have a lot of rain, or what?
Giro: No, it’s something with the soil. The soil dries up and then you have shifting of the foundation. So, the gutters actually help the foundation and a lot of people don’t use the gutters and that’s why they have a foundation problem.
Jason Hartman: Okay.
Giro: So, if we buy a property that has a foundation problem, there’s a lifetime warranty on the foundation as well, that we repair.
Jason Hartman: Okay.
Giro: And we do that through a secondary party. We don’t do the foundations ourselves. But it’s a licensed foundation company and they provide a warranty from Lloyds of London Insurance.
Jason Hartman: Okay, good. So you know I used to say Lloyds of London would never go out of business. But then you look at AIG and you wonder, you know?
Giro: You never know any more.
Jason Hartman: It’s possible for anybody to go out of business nowadays.
Giro: Especially in this market.
Jason Hartman: That’s for sure. Okay. So tell us a little bit about your buying process if you would and why you can offer these to our investors at such a good price.
Giro: Okay. Basically, we deal with the banks. We’re buying all R.E.O. properties. We buy in bulk so we’re able to get a substantial discount. Our process is basically we buy the property, we start the rehab. We complete the rehab and then we rent the property. And then we sell it to an investor. But we’re able to give such a discount because we’re buying in bulk, we own our own construction company, so everything’s in-house. We’re trying to keep costs down as low as possible, so we can pass that along to the investor.
Jason Hartman: And what is the average sales price of the property you’re offering to our investors?
Giro: It’ll vary between $85,000 up to $150,000.
Jason Hartman: Okay.
Giro: And generally, they’re anywhere from .80 to .85 cents on the dollar to the investors. So they’re, as soon as they buy the property, they have immediate equity and they have cash flow as well.
Jason Hartman: And are they all single family detached homes?
Giro: All of them are single family detached homes.
Jason Hartman: Any duplexes, four-plexes?
Giro: We do have duplexes and four-plexes as well, but our primary focus is on single family.
Jason Hartman: Yeah, so those would probably be a little more expensive if they were larger.
Jason Hartman: Yeah, and what areas of the city do you like?
Giro: We work all areas of the city, but we do-
Jason Hartman: Or I should say the metroplex – it’s so huge. Yeah.
Giro: Exactly, it is such a huge area, that’s why we work pretty much the whole metroplex, but we’ve been doing a lot in Arlington, in Fort Worth, in Desoto, Cedar Hill, Plano, Mesquite, Garland, and Dallas, of course.
Jason Hartman: And Dallas, the central area?
Giro: Central area, yes.
Jason Hartman: Now, why did you pick those areas?
Giro: Basically, when we’re buying a property, we look at the rent versus the ARV and-
Jason Hartman: Explain ARV to our listeners.
Giro: ARV is basically what average retail value of the property would be. So if the property is worth $100,000, we’re giving it to an investor anywhere from $80,000 to $85,000, and on an ARV of $100,000 of a property, we want to make sure that our rent is at least $1,050 a month. So, we’re trying to-
Jason Hartman: So, a little higher than one percent RV ratio for our listeners.
Jason Hartman: We go by RV ratio here.
Giro: Sure. And we’re trying to do actually 1.1 percent, so this way it provides maximum cash flow for a lower investment.
Jason Hartman: Okay. Great and you know if these properties are only $80,000, even with 20 percent down with the tougher lending requirements nowadays, it’s still only $16,000 plus closing costs, right?
Jason Hartman:Now do you offer any closing costs allowances or anything?
Giro: We do. We take it on a deal by deal basis because it depends on what we’re into the property for. How much we rehab it for.
Jason Hartman: Right. If you’ve got a real fat profit there, you can offer some more incentives possibly.
Jason Hartman: But if it’s a real skinny deal for you, then that-
Giro: Correct. And we do give a home warranty on the property. We pay for a one year home warranty. And a lot of times we’ll also throw in the management for a year for free as well.
Jason Hartman: How do you pay that management fee? Do you pay it up front? Do you deposit it with the management company?
Giro: Well, we have our own management company.
Jason Hartman: Oh, so you’re a property manager?
Giro: Yeah, we’re a property management company and we basically build it in for a year. Once we sell a property to an investor, we give him one year free property management.
Jason Hartman: And your property management, if they go with your company is seven percent?
Giro: Seven percent, correct – the second year.
Jason Hartman: Any lease up fees?
Giro: Usually a third of a month.
Jason Hartman: A third of a month, when you lease it up initially?
Jason Hartman: Any other advertising fees or anything?
Giro: Actually, not initially. Initially, there’s no fee at all.
Jason Hartman: Well, because you’re covering it for the first year.
Giro: Correct. And then in the second year, if the tenant moves out, they would be charged a third of a month’s rent.
Jason Hartman: Okay. Anything else you want us to know about the rehab? How long does it take you to do your rehabs?
Giro: Anywhere from three weeks to two months, depending on the situation of the property, depending on how much work it needs and how big of a property it is. But generally, within a month, we have it rehabbed and within six weeks, we have a tenant in there and ready to sell it within like the eighth week to a prospective investor.
Jason Hartman: Okay, great. Do you want to go back to talking about the Dallas market in general and then maybe we’ll circle back with some specific properties?
Giro: Sure. That would be great.
Jason Hartman: So let’s just touch on the Dallas stuff real quickly and – I want to talk about specific properties.
Giro: Okay. Perfect. Yeah, we entered the Dallas market because we felt it was a real stable real estate market – probably one of the most stable in the country. And so we entered that market with that in mind and the cash flow, again, we’re emphasizing cash flow – Dallas has a very strong rental market and the price, again for the value on the rent, your value is definitely in the Dallas, Fort Worth market. Plus it has a very large employment base. There are a lot of Fortune 500 companies there, such as Exxon, American Airlines, JC Penny, Radio Shack, Southwest Airlines. And it’s growing considerable. A lot of companies are relocating there; a lot of finance companies are relocating there. The cost of living is real low, compared to, of course, California and other metro areas of its size.
So, we felt you know it’s the highest rent invested dollar for a major economic center in the United States. And you’ll have your highest return on investment in the Dallas market we feel. So we do feel it’s a great market to be in for investors for a long-term hold because we feel the market is undervalued to begin with. And plus you’re getting the property anywhere from .80 to .85 cents on the dollar as well.
Jason Hartman: Okay. You know when you talk a little bit about your business model – just to kind of go back to that before we look at these properties – you’ll provide full data on each property?
Jason Hartman: A property analysis for the investor of their wants and needs, high quality properties, high quality rehabs, you own the properties. You are the seller?
Jason Hartman: They’re not assigned or they’re not third-party deals – which, by the way, I should caution our listeners. There’s a lot of stuff out there people are selling, which they don’t really control themselves, or at least not control properly, so be careful. We’ll probably talk about that on another show. Did you want to mention something on that, though?
Giro: Sure, every property that we sell, we own. We do not assign contracts or do anything like that. We actually close on the property. We rehab it, as I mentioned, and we sell it to an investor. Nothing is third party. It’s all through us directly.
Jason Hartman: Yeah, and what that means to you investors listening is that they really have control of the property, unlike with some of these other groups. Okay, so not assigned, it’s a strong rental market, the properties are pre-leased.
Jason Hartman: They’re turn-key properties. They offer good cash flow and then you have a team that really specializes in investors. And the advantages here – reduce the time, hassle, risk of buying investment property in this area, be more selective about properties with the best return on investment than are generally available through other sources. They’re fully rehabbed, done right, leased at maximum market rates. These are kind of your promises to the investor – professional staff. I don’t know is there anything else you want to say on there?
Giro: That’s pretty much the whole nut in the nutshell. That’s the basically what we do. But we provide a great service to the investor and they’re really getting a quality house from us. We’re not just putting a Band-Aid on the rehabs, and we’ll provide pictures of every property, interior photos, and exterior photos.
Jason Hartman: And the investors can go out and see them if they want to jump on a plane and go to Dallas?
Giro: Absolutely, one of our representatives will meet them there. Take them around, show them the house.
Jason Hartman: Wine them and dine them?
Jason Hartman: Pick them up at the airport.
Giro: Without a doubt.
Jason Hartman: Okay. Maybe, maybe not – can’t promise that. And you like the brick homes?
Jason Hartman: Tell us about that.
Giro: We like the brick homes because there’s more of a value in the brick homes. Even lenders like brick homes in Dallas. Again, sometimes you’re dealing with foundation issues in Dallas and the frame homes tend to have more problems than the brick homes do. So, for lending purposes and for long-term value, we stick with brick homes. We don’t like to really do the frame homes.
Jason Hartman: Okay. You like three and four bedrooms?
Jason Hartman: But you’ll do two bedrooms?
Giro: We do have two bedrooms as well, but we see that the value in the rental is in the three and four bedrooms.
Jason Hartman: And minimum two baths, though, right?
Giro: Minimum two baths, correct, yeah.
Jason Hartman: Two-car garage, right?
Giro: Two-car garage as well.
Jason Hartman: Built in the last 10 to 20 years, usually, but you don’t always follow that rule it sounds like?
Giro: Correct. Sometimes they are older and other times they’re newer as well. But we have a variety. If an investor is specific where he wants let’s say 2000 and better, we’ll provide that type of property for them.
Jason Hartman: Looking at the bullet points you gave me, you say – one of the bullet points is good neighborhoods and schools.
Jason Hartman: Can you quantify a good neighborhood and school?
Giro: Well, the neighborhood basically will be a working class neighborhood. It’s not a high end area, but it’s your working class neighborhood with a good quality school where I wouldn’t mind bringing my own kids to the school.
Jason Hartman: And then it’s not rural.
Jason Hartman: Okay, so you’re near major employment, shopping, and other services nearby.
Jason Hartman: All right good. Let’s talk about some specific properties here.
Giro: Here’s a property that’s a four-bedroom, two-bath. It’s built in 1980 – two-car garage, 2,277 square feet. It’s an older area, but a mature area. As I mentioned, it’s built in 1980. The average retail value on the house is about $145,000. The rental will range anywhere from $1,400 to $1,500 and we’re selling it for $119,000.
Jason Hartman: That’s a great RV ratio. And what year was it built again?
Giro: It was built in 1980.
Jason Hartman: Okay, so that’s a little bit older. We don’t usually do older stuff. The oldest we really go is 2000.
Jason Hartman: But you know, for all of you listeners, we just wanted to open up some other opportunities for you because one of the things that we’re finding is there are some pretty awesome deals out there that don’t conform to our prior criteria. So, you know, we want to be a little bit flexible with our model, when we find good things here and there that don’t exactly fit into that box, but they’re still good deals and good investments. And you know we like a lot of this other stuff. We like the brick houses, things like that. One of the other things about these types of properties that we’re finding is that in – of course, it’s nice to buy a brand new property, it’s a clean slate. It’s really simple when you’re doing that from 1,000 or 2,000 miles away. There’s a certain comfort level to that I agree, but in these older, established neighborhoods, one of the advantages you do have is you’re not having a bunch of people buying properties all at the same time. So there’s usually not much competition for renters in them because it’s one house on the block maybe, maybe two, who knows, that’s got a “For Rent” sign in front of it.
Giro: Yeah and they are established areas. So, you are getting people that want to live in those areas. Not that people don’t want to live in newer areas as well, but the older areas have a lot of desirability as well because there’s shopping around, everything is there conveniently. We also have some newer houses I can talk about as well. We have one that’s built in 2004. It’s a three-bed, two-bath, two-car garage, 1,423 square feet. The ARV, average retail value, is about $90,000 on it. We’re selling it for $70,000. Rental rate on it is $1,050 a month. So if you put 20 percent down, which would be about $14,000, plus closing fees, you’re looking at a total payment – principal, interest, taxes and insurance and property management – of around $637 a month. So your monthly cash flow is about $412 per month on that property. And if you minus out the 7% property management fee for the first year, you’re looking at almost a $500 cash flow monthly on a $14,000 investment.
Jason Hartman: That’s fantastic. Yeah, really good.
Giro: They’re great deals.
Jason Hartman: Okay, what else?
Giro: We also have other ones. We have a three-bedroom, two-bath, two-car garage, 1,600 square feet, built in 1999, and the average retail value is $145,000. Again, we’re selling it for $119,000. It’s been completely rehabbed. Everything’s new in the property. We’ve put all new laminate wood flooring, it has a fire place, rental value again is $1,400, and the RV is about $145 on that one as well. And it’s all brick.
Jason Hartman: You also have some plexes occasionally from time to time. And I guess you have a duplex in the Fort Worth area now?
Giro: Yes we do.
Jason Hartman: Tell us about that one.
Giro: he duplex is the average retail value is $119,000 on it. We’re selling it for $95,000. The rental rate on it is $1,300 per month. It’s actually $650 on each side. There are 3-bedroom, 2-bath, and no garages on this one, unfortunately. But it was built in 2005, so it’s a fairly new build. It’s all brick. We did rehab it – all new kitchens and we fenced off each yard so each side of the duplex has its own yard. And it’s a great value for the money.
Jason Hartman: Excellent. Okay, good. Well, what else would you like to say just in closing to wrap up about the Dallas market, the opportunities that you offer, etc?
Giro: Sure, if you’re an investor looking for positive cash flow and you’re in it for long term, Dallas, Fort Worth, is definitely the market to be in. We provide an excellent property, again, fully rehabbed, management is in place. All you do is get a check at the end of every month and it’s totally hassle-free. So, I think investing in the Dallas market would definitely be great for your portfolio.
Jason Hartman: Excellent. Well, thanks so much for joining us today. I appreciate it.
Giro: Thank you, it was really a pleasure being here.
Interview with Addison Wiggin Part II (continuation from Show No. 108)
Jason Hartman: So, how did the U.S. become the empire of debt? I believe that’s your – not your last book, but the one before your last book, is Empire of Debt that you did with Bill Bonner, which I really enjoyed by the way. How did we get into this position? I mean it’s just so crazy that we’re here, you know? It’s like too crazy for fiction.
Addison Wiggin: Yeah. Well, yeah, that’s a good way of putting it. Well, I think the biggest thing is nothing fails like success. We’re the victims of our own success in some ways. After World War II, the United States economy comprised 50% of world GDP and we spent you know a good portion of the next 30 years rebuilding the world and restructuring the financial system. And after the Bretton Woods conference in 1944, all of the countries that came to the table – all of the victorious countries from the War, agreed to make the dollar the reserve currency of the world. And along with that status comes a lot of leeway and a lot of ability to overextend yourself economically, culturally, politically.
There’s a lot of things that we can do by being sort of the predominant economy on the planet that collectively have allowed Americans to build up a set of illusions about our own ability to be successful in the future. And effectively, we’ve factored risk out of our financial outlook and, at all levels of society, that’s what we were looking at in Empire of Debt. At all levels of society, from personal consumption through State and local governments to corporations to the Federal government – that’s the most egregious example, but we’ve all just borrowed beyond our means because we just have this confidence that the U.S. economy is so dynamic and has been the world leader for so long that that will continue. And that day when we have to pay all that money back, pay all the loans back, come up with the interest payments to service that debt, can just be postponed indefinitely.
And we published the book in 2005 and it hit the book market like a pound of lead. It just dropped. Nobody was really interested in hearing what we had to say. It was the height of the housing market. Everybody was picking up adjustable rate mortgages and the idea that-
Jason Hartman: They were reading David Lereah’s book.
Addison Wiggin: Yeah, DOW 36,000 and stuff like that.
Jason Hartman: Right, books like that, yeah.
Addison Wiggin: And then just two short years later, we had a worldwide credit crisis. That was the result of this entire financialization of the global economic picture, entirely led by the United States’ financial markets and accompanied by this attitude that we could just live beyond our means forever. And for the first time, since last fall, we’ve finally gotten a lot of people that are asking questions that they haven’t asked for almost a generation.
Jason Hartman: But those people asking all these smart questions don’t seem to be getting much play or much attention in Washington. I mean why is it that a government is so afraid of letting a bubble pop? Why can’t the bubble just pop? Things will correct themselves. It’ll be a few ugly years and then we’ll move on. Everything Obama’s doing, everything Bush did was to re-inflate the bubble.
Addison Wiggin: Right. They want to recreate the economy. I love Obama’s phrase that he kept repeating throughout the late part of the election campaign and then even in the months before he actually took office, he kept saying, “We’ve got to get the economy back on track. The first thing we have to do is get it back on track. Well, it was on the wrong track in the first place and that’s why it ran into trouble. So, just the idea that we have to get it back on track is misguided in the first place.
But the system itself isn’t designed to address problems that are of this magnitude because the elected officials in Washington – we did a lot of this work in I.O.U.S.A. – We’re showing that the people in Washington are not leaders, they’re following. They’re basically there trying to get re-elected and they’re taking polls and looking at what people on the street think. And the people on the street are thinking, “Well, some smart guy in Washington is going to figure this out, or some banker in Wall Street is going to come up with some answer. And I don’t really have to think about it. I can sort of abdicate my responsibility for understanding how the economy works.” And then you get – as long as somebody in Washington is doing something about it, then everything will be fine. So you get a lot of people in Washington who, rather than letting the correction do its work, a correction is a healthy thing for an economy because it busts through all the bad loans and makes people who have bad business models rethink their business models, and come up with new inventions and new ideas. Instead of letting that process develop naturally, politicians want to do something about it. And the only thing they can do is spend money that they don’t have.
And in this case, it’s worse than ever because we have been running deficits for a number of years before the crisis hit. And the problem with running persistent deficits is when the crisis hits, you don’t have the resources to deal with it, to do something about it, so you have to go into the bond market and borrow and borrow and borrow. And that’s the cycle we’re in right now. You have a lot of people promising to get the economy back on track by doing the exact same things that derailed it in the first place.
Jason Hartman: Well, you know, can’t we rely on Barney Frank? I’m saying that sarcastically, of course.
Addison Wiggin: Yeah. You know, Barney Frank is interesting. We, Bill Bonner and I were visiting Ron Paul in Congress last week, and we sort of learned that the fate of the dollar rests in Barney Frank’s hands right now because he’s the Chairman of the Banking Committee. And the purchaser of last resort for this entire cycle that we’re in in the bond market is the Federal Reserve itself. If China refuses to buy up our debt, the Federal Reserve has been going into the market and buying up the debt to make sure that there is a buyer of last resort. And they’ve also been buying up some of the toxic assets that have been plaguing the banks on Wall Street.
So, the balance sheet of the Fed has gone up by a couple trillion dollars since last October, but we can’t look at it. Nobody can open the books of the Federal Reserve, unless the Federal Reserve invites the GAO to come and audit its books. And they have to do so in writing by a formal letter. And so Ron Paul has drafted legislation to try to get that law changed, get the Federal Reserve Act changed so that the Fed would be more transparent and we could see exactly what kind of activities they’re engaged in. And it’s sitting in committee right now in the Banking Committee waiting for the support of Barney Frank to bring it to the floor for a vote. They have 179 votes right now to bring it to a vote, but it won’t go anywhere until it has the support of the chairman of that committee.
Jason Hartman: Yeah. You know, Addison, in my educational programs that I do, I’ve identified six ways that the country could get out of the mess it’s in. And there may be more than six, but these were the six that I thought of. I want to run them by you and see what you think about them. One way is to just default. Just say to all of the other debt holders, “Look, we can’t pay. Sorry.” To all of the entitlement programs, “We promised you this and that, Social Security, Medicare, we can’t pay. Sorry.” Obviously, this would be politically way too harsh and very unpopular, probably cause a huge uprising.
Addison Wiggin: But historically accurate.
Jason Hartman: Yeah, it is.
Addison Wiggin: That’s what most countries do.
Jason Hartman: It has happened in the past, but most countries don’t have the luxury of the reserve currency like we do, see?
Addison Wiggin: Right. Absolutely.
Jason Hartman: So the other way is raise taxes. And you correctly identified in the I.O.U.S.A. movie that raising taxes just won’t work. There just aren’t enough taxes to collect. I mean if you taxed everybody at 200%, we couldn’t pay for the problem, right?
Addison Wiggin: Yeah. The one specific example that we use in the movie is if you just let the Bush tax cuts elapse, which is one of the politically tenable ideas that are out there, that would only represent about between 8 and 10 percent of the annual fiscal deficit. I mean, raising taxes is not an option either.
Jason Hartman: It’s just, I mean, regardless of what – if you’re on the left side and you say, “Hey, you know soak the rich. Soak everybody, whatever,” there’s just not enough money there to get, right? I mean, you can’t raise taxes enough to pay for the-
Addison Wiggin: Well, and you break the machine in the process.
Jason Hartman: Right, well, we all know that. But some people don’t believe that. So raising taxes won’t solve the problem. The other thing, which we’re seeing some inklings of this now, is to just have a big yard sale. Sell off assets. Sell the ports to Dubai. The BLM could sell off land. In California here, in my crazy state that makes no sense whatsoever, they’re talking about selling the San Quentin Prison. Okay? I saw in the news, maybe it was two months ago now, that we’re toying with the idea – now, I don’t know if this ever happened, of selling military equipment to Muammar Gaddafi. Okay?
Addison Wiggin: Right.
Jason Hartman: You know, toll roads to foreign governments and so forth. I mean, selling off assets and cannibalizing some of the wealth of the country to pay the $56 trillion bill we have coming at us. The fourth way is to just steal, use the American military – use economic hit men. I don’t know if you’re a John Perkins reader? You probably are. I’m just kind of assuming that. But use that machine to basically steal from other countries. They accused us in Iraq of, “Oh, it’s a war to steal the oil,” which didn’t really turn out to be that way, but that’s one way. It’s been done throughout history obviously. Napoleon did it. And then the fifth way, which would be good news, is innovation – technological innovation – something that saves the day that’s maybe an America-centric thing, whether it be energy, biotech, nanotech, or something else altogether.
And then the last way, the sixth way, which I think is the way it’s going to occur, is to just inflate because the country can keep its promises in nominal dollars and make them worthless in real dollars. We can repay China; we can pay our own citizenry with devalued money. And I think that’s what’s going to happen. And I think investors really need to base their investment strategy off of an inflationary future.
Addison Wiggin: Well, I think that that’s probably right and I will just point out, too, there’s probably a seventh way, which is the government could cut spending. They could cut the amount of promises that they make. But that’s even more politically untenable than raising taxes.
Jason Hartman: Right. You know I kind of left that under the default option. You know that’s really-
Addison Wiggin: Yeah and just because it’s not going to happen.
Jason Hartman: Really sort of the first one – I don’t expect – I’m banking on the fact, Addison that the government will not become responsible any time soon.
Addison Wiggin: That’s probably a good assumption to start with. But I would say that I think what we’re facing though, like the magnitude of the crisis if you will, is going to require all six. I think what we’re going to look at is inflation for sure. That’s what they’re already engaged in trying to do that. We have this theory in the Daily Reckoning on the central banker who has driven the Zimbabwe government into the ground, but he had no other choice because he was economically isolated from the world, and in 1980, the Zimbabwe dollar was roughly equal to the British pound and now, just this past spring, they printed their first – what was it? A hundred trillion dollar note.
Jason Hartman: Yeah, I think they lopped off some zeros.
Addison Wiggin: They’re trying to print their way out and that doesn’t work. So they’re going to have to find a recipe of – theft is always a popular one, or default – maybe we’re going to have to default on some of them. We’re going to have to cut spending on programs that have just overextended themselves and it won’t be a politically popular thing to do, but it will be economically necessary. The government is going to come to an end where they can’t do it anymore, especially if interest rates rise because people lose faith in U.S. Treasuries. So I would agree with all six of your ideas, but I don’t think that any one of them is going to do the trick. It’s going to be a combination of all of them.
Jason Hartman: It’s going to be a blending of all six things, yeah.
Addison Wiggin: Yeah.
Jason Hartman: I hear that China and Brazil are talking about trading in their own currencies and not using the dollar as the reserve currency. What do you think the status is of the dollar maintaining its reserve currency status? OPEC doesn’t want it. Even the famous supermodel, Giselle wants to be paid in Euros, not that the Euro is much better. But you know as long as the U.S. can maintain that reserve currency position, we can keep up the illusion for a long time, can’t we?
Addison Wiggin: Well, we certainly can and we have been and a very interesting thing happened during the credit crisis last fall. In September, the dollar shot up in value. People, as they repatriated capital from other parts of the world because emerging markets were falling, as people were taking their money out of the U.S. stock market, and putting it in money markets, and in buying Treasuries, you saw a huge flood of money flow into the dollar and into Treasuries. It was, even despite all the things that we’ve been talking about today, there’s nowhere to run really when financial crisis hits in the minds of most investors.
So those two assets: the U.S. dollar as the reserve currency of the world, and the U.S. Treasury were still the flight-to-safety trade in crisis. And that idea could last for a long time until there’s a viable alternative. And I actually wrote a lot about this in a book called Demise of the Dollar, that we went through a period from 2002 until that credit crisis, where the dollar was falling steadily against all the other fiat currencies of the world because in November – actually it was November 22nd in 2002, Ben Bernanke who was then the Fed Governor rather than the Chairman, issued his famous helicopter statement, where he said they, “… could replicate, through tax cuts and low interest rates, the effect of throwing dollars out of a helicopter and having them flutter to consumers below to re-inflate the economy.”
And since that time the rest of the world is like, “Wait a minute, this guy’s in charge of the reserve currency of the world?” That’s the flipside of the inflation trade is they’re going to keep pumping, pushing on it until they get that recipe going again. And that’s what results in a cheaper and cheaper currency. And I think that’s coming. That’s coming real soon – as soon as they get the mix right, whatever that happens to be.
Jason Hartman: Yeah and I tell you, my thing is the more I hear this type of stuff and read it, is I just want to have a lot of debt that’s long and fixed and attached to real commodities that have legitimate economic value in the world that everybody needs.
Addison Wiggin: Right, the other part of the tension in the Reserve Currency argument is right before the G-20 meeting a couple weeks ago, we saw Russia suggest that the IMF use the – there’s a strategic depository receipt that they use for trade around the world and Russia had suggested that we back that with gold and have the IMF back replacement for the dollar as the reserve currency. And then China and Brazil both showed interest in having that happen, too, and roughly at that same time, the Chinese were talking about how much gold they were acquiring. So there are a number of ideas floating out there that having the dollar as the reserve currency of the world is not a good thing for all concerned.
Jason Hartman: Yeah. Yeah. It’s really true. Well, look Addison, in sort of summing all of this up, what advice would you give to listeners? What are you doing personally, with your own portfolio?
Addison Wiggin: Well, it’s interesting. In the pre-interview when you and I were talking before, you asked me if I was a gold bug. And I said, “No, I’m not a gold bug because I think that understanding monetary policy and a lot of the efforts that the Federal Reserve are taking in order to re-inflate the currency, understanding those efforts and realizing that they’re going to result in inflation and increased value of gold in nominal terms and also commodities and resources, is not the same as sort of being a cheerleader for gold. But I do think, my personal strategy right now is gold historically is not a good investment, but it’s a hell of a good insurance policy if the financial system continues to have the problems that it’s having.
So, I think that the safest strategy right now is gold, precious metals, commodities, natural resources. But you have to be careful of when you buy in because as we have these short rallies, there’s a lot of jitteriness in the market and people are willing to jump in and begin speculating on the resource side, on the commodities side. As we saw last year, they can collapse just as quickly as equity markets can.
Jason Hartman: Any thoughts on the picture of what the financial world is going to look like in five years, ten years? When you see I.O.U.S.A., it paints a pretty ominous picture. Do you want to elaborate on that?
Addison Wiggin: Well, I think that what we’re seeing is, in a historical sense, we’re seeing the – we’ve had, over the last 500 years, different economic empires. We had the Spanish, then the Dutch, then the French, and then the British, and United States. We’re witnessing a period of time where we’re shifting to a new economic empire and all the indications right now are for that switch to move over to the Chinese because of the economic policies that they have in place right now. They’re the low cost producer of the world. The same way the United States was in the 1800’s. I think we’re looking at that. That trend is in place right now and it will continue to assert itself. So ten years down the road, we’re going to look at an even more dominant Chinese economy in terms of the global economy.
But we’ll also see politically and perhaps even militarily the Chinese are going to start asserting themselves more than they have in the past. The one difference is that all of the empires that I mentioned up to the Chinese have all followed more or less an Anglo Saxon type of capitalism and if it moves to the Chinese, it will be the first time it moves away from that kind of free market idea that has guided the development of the global economy for the last 500 years. And that’s a daunting prospect for those of us who believe in free markets, free trade, and the spread of liberty and human rights around the world. So I think that that would be one impediment to – it would be kind of a social impediment to seeing the rise of a Chinese economic empire.
Jason Hartman: Yeah, and a lot of people would say, if they were to try and detract from that concept, they would say, you know the Chinese don’t have the creativity that a free society engenders like America. People don’t have the rights they have here, although, that seems to be changing. We have more and more draconian laws all the time here.
Addison Wiggin: I think those are some things that we tell ourselves, too, that the Chinese have been traders and small time capitalists for 5,000 years. And there’s a strong argument that really what they’re doing is they’re throwing off the yoke of the communist experiment and just allowing people to trade as they have for most of their culture.
Jason Hartman: But wouldn’t you say though that their economy has too much central planning in it even now? It’s a pretty big machine. I don’t know the answer.
Addison Wiggin: Yeah, perhaps. Well, and also there’s the criticisms of the banking system being as feeble as the U.S.’s banking system turned out to be. So there are a number of challenges to that. But the historical trend seems to be afoot that the Hegelian idea of the world spirit is moving towards the Chinese. And it’s something that we as investors would be wise to at least pay attention to.
Jason Hartman: Yeah, good stuff. Well, thank you, Addison so much. Tell people where they can buy the book, you know come to the conference, whatever you’re interested in mentioning.
Addison Wiggin: The best place to go is just to go to Daily Reckoning.com. We publish there daily for free. You can sign up by email right on the website, just enter your email and then click subscribe, and the Daily Reckoning is free. That helps us kind of establish the way we see the world. And then www.AgoraFinancial.comwww.AgoraFinancial.com – all one word – is the site of most of our publications. And I actually write for a publication there too, called the Five Minute Forecast, which we try to distill the daily news down into five minutes and pick all the pertinent nuggets out that contribute to the way that we see the world and a lot of the themes that we’ve talked about today develop on a daily basis.
Jason Hartman: Good stuff. Addison Wiggen, keep up the good work. Thank you so much for our insights and for joining us on the show today. Appreciate it.
Addison Wiggin: Great, thank you for having me.
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Duration: 50 minutes