On this podcast Jason Hartman interviews Dr. Mark MacVay on the importance of understanding banking, debt and economics as it relates to investing. Many topics are discussed including, but not limited to: the Bretton Woods system, our debt-based monetary system, the Federal Reserve, central banks, fiat money, full-reserve banking, fractional-reserve banking, the gold standard, taxes, inflation indexed welfare benefits, money supply, discount rates, reserve rates, “the discount window”, seigniorage, money creation, the secret insidious hidden tax we all pay, monetary reform and more. What do all these seemingly borin
Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Newport Beach, California. During this weekly program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, or a new slant on real estate, 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 nine states. This program will help you follow in Jason’s footsteps on the road to financial freedom through real estate. You really can do it. And now, here’s your host, Jason Hartman.
Jason Hartman: Thanks for joining us today on this podcast. We have a special guest here in the office with us and it is one of our clients, Dr. Mark MacVay and the reason I have been after Mark for a while to come in and talk to us on the podcast is because he has really become an expert, if you will. He’s not an economist by training or anything like that, but it’s been a real strong interest of his to study economics and monitor policy and the Federal Reserve, and inflation and investments, and things like that. And I’ve sure learned a lot from him over the years and he likes the idea of buying real estate and using debt as a way to hedge against inflation because, of course, as you know, listening to previous podcasts – hopefully, you have been – that we get to pay our debt back, or our tenant gets to pay our mortgages back in constantly depreciating, cheaper future dollars.
So it’s a pleasure to welcome Dr. Mark MacVay. Mark, welcome.
Karam: Well, thank you very much for having me, Jason.
Jason Hartman: Great to have you here. Why don’t we start off by just talking a little bit about some very basic ideas, some fundamental things of what is inflation, why does inflation occur, and then later, we’ll talk what we should do about it and we have in previous podcasts. But what is inflation?
Karam: Well, sadly today, most people consider inflation to be a rise in consumer prices throughout the economy, whereas the real definition of inflation is an expansion of the money supply. Now, as a result of that expansion, the money supply, we have more money chasing goods and services throughout society, so those goods and services will rise in price.
Jason Hartman: Okay, because it’s just supply and demand, so inflation occurs where inflation is the result of too much money.
Karam: Printing more money.
Jason Hartman: Printing more money, if you will, but nowadays, it’s really electronic, so it’s not really that they print it anymore. They just invent it, create it, and we’ll talk about that.
Karam: It’s, yeah, numbers on a keyboard.
Jason Hartman: Yeah, it’s a result of too many dollars chasing too few assets or too few goods and services. So it’s really just a supply and demand issue and when the money supply increases, it causes inflation because there’s more demand for stuff and so the dollar becomes less valuable, right?
Karam: Right, well, inflation is the very act of putting more money into the system. Now, the result of that is, as you said, increase in prices throughout the economy.
Jason Hartman: Who puts money into the system?
Karam: The central banks in conjunction with the big banks in the system.
Jason Hartman: So that means that the Federal Reserve system, Alan Greenspan’s system, Paul Volker’s system, and now Ben Bernanke’s system, they create money? How do they do that? What’s the process?
Karam: Yes, well, it’s sort of a, maybe collusion’s too strong of a word, but the Federal Reserve and our U.S. government, when the U.S. government wants money, they basically put forth say a T-bill or a bond or something. The Federal Reserve will then create money to buy that bond. Now that promise is now considered an asset in the Federal Reserve. That’s what the reserves are made of. There’s no gold backing our money anymore.
Jason Hartman: So the money is just currency rather than real money, like gold would be real money because it’s a true asset –
Jason Hartman: –in and of itself, whereas a dollar is a Federal Reserve note. It says right on the dollar.
Karam: Right and that’s a very subtle, but important, distinction that I’m glad you brought up. In the past, before we had the establishment of the Federal Reserve, you could look at a dollar bill and it would say “Redeemable in One Ounce of Gold,” for example. Thanks to the Federal Reserve and for the last 70 years, we’ve gotten away from that such that right now, if you look at a dollar bill, it’s basically feel-out money. It’s good for all debts, public and private, but there’s nothing backing the note.
Jason Hartman: Right, so it’s really just a promise.
Karam: Fancy IOU.
Jason Hartman: Yeah, fancy IOU. That’s a good way to put it. So let’s make a couple distinctions. First of all, it’s important for listeners to know that the Federal Reserve is not a governmental agency. It’s sort of a pseudo-governmental agency or it’s a corporation that’s separate from the government, right, but it’s got kind of a very, as you said, cozy relationship with the government. So you wanna maybe expand or elaborate on that?
Karam: Well, you’re right. It’s not a governmental agency, although it’s certainly designed to sound as such. It’s a consortium of private banks that have basically been given a charter by our federal government to operate and establish monetary policy on behalf of the whole nation, and because we’re the most powerful nation in the world, by extension, the entire globe.
Jason Hartman: And that was in the early 1900s?
Karam: The Federal Reserve Act was passed in 1913 and I might note that the income tax was also passed in 1913. It was a bad year.
Jason Hartman: Thirteen is not a lucky number.
Jason Hartman: Is it?
Karam: No, it wasn’t.
Jason Hartman: So the Federal Reserve and the income – and the federal income tax was passed in 1913. Now is there a connection there you want us, the listeners, to know about?
Karam: I think it was more than just a passing circumstance that both were passed together. Many would say that the Federal Reserve was established by the less powerful bankers in the United States in order to bail them out if there were ever a panic and certainly, if you look at recent events, for example –
Jason Hartman: Subprime mortgage meltdown, credit bubble.
Karam: The subprime mortgage, right, the bankers, who for many years now, have been making very hefty profits on these mortgages, now it’s coming to light that lending money to people who can’t afford to pay it back might cause a problem. They’re going to the Federal Reserve for a bailout, a little handout.
Jason Hartman: Right.
Karam: So they make the profits in the good times, but during the lean times, they get bailed out as the common man, you and myself, that bear the brunt of it.
Jason Hartman: Now, when you say we bear the brunt of it, probably the listeners are thinking we bear the brunt of it like we did in the late ‘80s, early ‘90s, through the S&L crisis, which was a slightly different kind of crisis, but similar to. Charles Keating was sort of the famous name associated with that one and Lincoln Savings and Loan, where the taxpayers foot the bill. But really, inflation is a different kind of tax. You probably wanna talk about that.
Karam: Inflation is a hidden tax. It’s something that’s hidden from the average person in the sense that they scratch their heads, they see prices rising, but they never really put two and two together. So when the average individual out there hears that Federal Reserve has injected liquidity into the system to help this credit crunch, what that means is they’re adding to the money supply.
Jason Hartman: Yeah.
Karam: Now, two things: No. 1, the banks have first crack at the money supply before prices have risen, so they get to use money before it’s been cheapened.
Jason Hartman: Before it’s been devalued through inflation.
Karam: Before it’s been devalued through inflation. By the time that added money supply hits the system, you and I see it in the form of higher prices, higher gasoline prices, higher milk prices, higher tuition, healthcare, etc.
Jason Hartman: Okay, and I wanna talk to you in a few minutes here about what is the true rate of inflation and how does the government monkey with it, and you know, how is it reported and so forth. And so you just mentioned that they add to the money supply. The Federal Reserve increases the money supply to do a bailout of these subprime or really now Alt-A or many lenders in the credit world and banks and so forth. That’s all very current in the news right now, and then we’re recording this, by the way, August 2007, so just so the listeners know. How do they add to the liquidity? How do they increase the money supply? There are a few ways they do it, right?
Karam: Well, there are several ways they can do it, but No. 1, they can directly inject credit into the system. For example, some of the banks have asked, basically pledged their assets, which are these mortgage-backed securities of questionable value, in exchange for money that the Federal Reserve then prints up on the spot and injects it into that bank.
Jason Hartman: In the simple terms, and I do this somewhat, but I’m not in favor of being a lender; I like being a borrower. I think it’s a much better deal and it’s the position of power, if you will. At times, I have purchased notes or trustees and as such – and you know I did this recently because we’ve talked about it – I bought one recently, oh, several months ago, for $38,000.00. So I went to a private lender or a hard moneylender. You can call it either one. And I gave them a $38,000.00 check and then they gave me a pack of papers, a note and a trustee on a house that someone had borrowed from them. And so they basically sold this loan or this note to me.
And then I was entitled after buying it to the stream of payments and the interest and the principle that is owed to me on that note. Now the reason I don’t like it is that No. 1, inflation hurts a lender and benefits a borrower, and you may wanna mention something about that.
Karam: Well, correct, and you and I have discussed a many time. In an inflationary environment like we’re currently experiencing and we can talk about CPI and the accurate measure of inflation.
Jason Hartman: We will in a minute.
Karam: Shortly. It actually perversely pays to be a debtor, and by debt, I don’t mean going on lavish vacations, fancy plasma screen TVs. I mean buying an asset and using debt to leverage and purchase that asset, and then paying that debt off over a long period of time in progressively worthless dollars.
Jason Hartman: Right, and so on that topic, it’s interesting because over the years, as you’ve talked about investments that you’ve done, I think that was a pretty big stretch for you because you’re an East Coast person and you’re pretty conservative. I think that’s a fair statement.
Karam: That’s more than a fair statement.
Jason Hartman: Okay, you’re very conservative. So you did not like the idea really of using debt to invest and you would always put at least 20 percent down on the properties you would purchase, I would remember. And then maybe a year and a half ago or so, that we started talking about it, and I know your friend John is a saver and you were talking about how he is getting destroyed by inflation. And the borrower or the debtor is benefiting through inflation.
Karam: Right and actually, this goes back to conversations that you and I have had over several years when you were probably instrumental in changing my mindset about taking on debt and investing, and that in conjunction with just doing some reading on my own because I became naturally curious about things, financial things, economic. It really led me to sort of see change in my thought, where by before, I was pre-debt adverse. I mean I have a primary mortgage on my house for which I put down 20 percent. It really led me to the whole concept of investing in real estate and using debt to pay that off, secure in the knowledge that the dollars that would be paid off throughout the years would be progressively worthless.
Jason Hartman: So go back, listeners, if you wanna hear some elaboration on this point because it is very important, and listen to the podcast – I can’t remember what number it is; it might be No. 16, but it’s called the Great Inflation Pay-off. So let’s talk about that for a minute. If someone purchases say six properties, six houses, spread around the United States, which we kind of affectionately call the Six-Pack, as you know, and they take on $1 million worth of mortgages to do that. And they hopefully put minimum down and use leverage to reduce risk, accelerate wealth creation, but also, what isn’t factored into any performance really is the inflation benefit because inflation essentially pays down your mortgage, right.
So that $1 million a year from now, say you got an interest-only loan, you get your mortgage statements a year from today and they still say, well, you owe $1 million. But what do you really owe?
Karam: Well, that’s an excellent question. Assuming you agree, and this is a slightly different subject, that the inflation rate is much higher than it is currently stated by the government, let’s just call it 10 percent to keep the numbers even. If you owe $1 million and inflation’s 10 percent a year, then your effective real debt after a year is $900,000.00. That $100,000.00 has just been inflated away.
Jason Hartman: Because a dollar today is worth more than a dollar tomorrow and a million dollars today is worth a lot more than a million dollars in a year. And even if you go by the government’s numbers, which are faulty – I know we both agree on that – even at 4 percent inflation rate, which is not true – at least I sure haven’t noticed it – it’s like getting a free $40,000.00 reduction in your loan balance, right?
Karam: Absolutely, absolutely.
Jason Hartman: Yeah, and if it’s 10 percent, it’s $100,000.00. And the other thing the listeners have to remember is that has, just like appreciation on a property, if it appreciates at 6 percent a year, you made $60,000.00 at the end of your first year. But the debt or the inflation benefit compounds just like appreciation does, doesn’t it?
Karam: Oh, absolutely. In fact, I would just add there’s a great book by a man named Daniel Amerman called The Super Power of Your Mortgage and he argues – he’s a financial guy, so he’s got the numbers to back up what he’s saying – that throughout the ‘70s when inflation was ravaging the economy, one of the biggest benefits that went to the little guy who owned his own home was the fact that he had a mortgage on it. And the fact that his entire mortgage was inflated away for them most part.
Jason Hartman: Right. And if you don’t use debt when you invest in real estate, you get the benefit of inflation causing the real estate to appreciate in value, but you don’t get the debt – or the benefit of the inflation rate paying down the debt for you. And nobody sees this. It’s so unapparent to people.
Karam: Right, when the shows on CNBC and other stations like that compare, say real estate to stock investments, they don’t factor in the leverage component of it. They certainly don’t factor in the inflation component of it because I never heard any one of them actually talk about that at any great length, other than regurgitate the governmental numbers.
Jason Hartman: Either they don’t understand it or they’re a mouthpiece for the vast Wall Street conspiracy.
Karam: Yeah, well, consider who does the advertising on, say, CNBC.
Jason Hartman: Oh, Money Magazine or Wall Street Journal or any of those.
Karam: Forbes; we could go on and on, absolutely.
Jason Hartman: Yeah, we sure could.
Karam: Yeah, you and I agree on that.
Jason Hartman: Yeah, absolutely. When you hear in the news media, you hear, well – and this is amazing how quickly the ship has turned around from two months ago, or maybe three months ago – Bernanke and the Federal Reserve, their whole party line was we’re gonna stave off inflation. We wanna be really on top of keeping inflation low. Well, it’s not really that low, but they think it is. Or at least, they tell us it is. What is the balancing act, if you will, that the Federal Reserve is always saying that they’re making between inflation and interest rates because, as real estate investors, of course we want the lowest interest rates on our mortgages, or we wanna borrow cheaply, but what goes on? Why do they have to raise rates? Why can’t we just have low rates forever?
Karam: Well, it is a balancing act in the sense that they obviously wanna keep our own domestic economy here on solid ground, meaning domestic growth, a vibrant stock market. At the same time, every day, the United States government goes into debt to $2 – 3 billion to foreign interest, so Japan and China come to mind, and they’re lending us money and we’re giving them IOUs. Well, they want a decent return on their IOUs. They want their interest rate to be high. They would not look favorably upon it if we had to lower interest rates because that means they’re getting less of a return. So Bernanke has a tough job of balancing that versus keeping the domestic economy here afloat.
Jason Hartman: Okay, so how do they do that? Is it through the Treasury bill, the T bill? Is it when T bill rates are low, then China gets a lower interest rate on the money we owe them?
Karam: Truthfully, again, I’m not an economist, but I believe that’s more or less correct. When we borrow abroad, we give them notes, bills, various maturities and it’s basically nothing more than an IOU that’s tied to – ultimately, to the Federal Reserve and their overnight Fed Funds Rate.
Jason Hartman: Yeah, and the other reason, when interest rates get very low, it’s bad in some ways because what does it mean? It means if money is easily accessible, then there’s more inflation. When you can borrow cheaply, then there’s more money in the system, right?
Karam: Artificially low interest rates, meaning interest rates that are much less than the real rate of inflation, encourage speculative excess and there’s no greater example of that than what we’ve seen the last seven or eight years in housing throughout certain parts of the country.
Jason Hartman: So California, Southern Florida Company, Las Vegas?
Karam: Yeah, today there was just an article on the Drudge Report about the Miami condo implosion; 60,000 units or something like that on the market or coming to market over the next year.
Jason Hartman: Yeah, that is really scary what’s going on in that market and I’m so glad we never recommended it here because we just knew that that whole high rise thing was – that was just over speculated. It was just too much of a bubble. One of our rules is the property must make sense the day you buy it.
Jason Hartman: And so that’s one of the things. One more thing about interest rates, though. In order to attract foreign investors, our interest rates need to be reasonably high or they will invest somewhere else.
Jason Hartman: So the reasons for higher rates are to pay back our debt and offer a better return to other countries.
Karam: To keep borrowing from other countries to sustain our federal government.
Jason Hartman: Yeah, and to sustain our huge deficits.
Jason Hartman: And then also to stave off inflation and then also to have foreign investors buy our investment products, if you will, our debt, really and they won’t invest here if our rate of return isn’t high enough. I don’t think we ever really drove the point home talking about a few minutes ago about that note I purchased and how money is created by banks, which is really just a fascinating, fascinating topic. So banks create money out of thin air.
Karam: Absolutely, and I had to get my mind around this by reading several different sources because I truly didn’t understand it.
Jason Hartman: This is mind-boggling. It really is.
Karam: Money literally is debt. It springs from debt. When you sign on the dotted line on your mortgage paper, that money is created on the spot as your loan. That’s how money springs to debt. Now to go backwards a little bit and to put it in broader context, our banking system is what’s called a fractional reserve banking system, so for every thousand dollars the Federal Reserve creates, and it could be money, it could be credit, whatever, that springs through the bank. Now those banks are allowed to create another $900.00. Every time $1000.00 enters their bank, they’re allowed to just print up into existence another $900.00 and it cascades on down the line.
Jason Hartman: Sure, because they can loan money that they don’t have.
Jason Hartman: That’s what fractional reserve banking is. So most listeners probably think of it in the sort of apparent way. Well, gee, what do banks do? They take in deposits, your savings account, your checking account, they take in money and then they loan money out. They pay you 3 percent or 5 percent on the money they borrow from you as a depositor. They’re really borrowing your money, if you will, and then they loan it out to someone else at 7 or 8 percent or if it’s a consumer loan, much higher than that. But there’s a lot more to it than that. It’s really a much better deal than that for the bank, isn’t it?
Karam: They’re making interest on money they created on the spot, No. 1. I think most people, if they really stop and think about it, at least on some level, they realize that there’s more to it than simply taking in deposits and then lending them out at higher interest rates because if that were really the case, then at some point in time, you would go to the bank for a loan and the bank officer behind the desk would say well, I’m sorry, we’ve lent out all our deposits. We have no more money to lend you.
Jason Hartman: We’re out of money.
Karam: But has that ever happened to anyone? So there’s obviously much more going on there than meets the eye.
Jason Hartman: Right.
Karam: And that’s what was fascinating to me when I started reading about it.
Jason Hartman: In other words, like that note that I bought for $38,000.00, now that note is an asset that I own and I bought it, and I can turn around just like the note was sold to me and I can sell it to you. And you might pay me $38,000.00, you might pay me less, you might pay me more depending on the terms of the note, what the interest rate is and so forth. And this is really what the Federal Reserve does, right? Banks come to the Fed and say here is all of our lending and so give us more money. Just create it because we’re giving you now, paper to show that we’ve made loans. So debt is an asset.
Karam: Debt is an asset in our Federal Reserve System in our current monetary system. There’s many people under the delusion that somewhere buried beneath say Fort Knox or the Federal Reserve building is a huge treasure chest of gold, if you will, but the truth is that’s not the case.
Jason Hartman: It used to be the case, though, a long time ago, right?
Karam: The Reserves are nothing more than debt. What they consider assets is nothing more than debt and it’s ultimately the debt of the federal government.
Jason Hartman: So it used to be that way when we used to be on the gold standard, right?
Karam: Up until 1913.
Jason Hartman: Okay, yeah, that’s really interesting, so.
Karam: Just as an aside, to get back to something we talked about before, was say if you look at a graph of consumer prices throughout the history of our republic, it’s more or less stable from the inception of our republic near 1786 to let’s say 1913. But thereafter – I was referring to the establishment of the Federal Reserve – from 1913 on, the dollar has lost 95, 96 percent of its purchasing power.
Jason Hartman: Yeah, so the dollar has devalued dramatically since coming off the gold standard.
Jason Hartman: Now, that’s an interesting point. Let’s talk about inflation and how it’s calculated because it seems like, and when I listen to CNBC or whatever news channel, or read various media, various magazines, everybody’s telling me inflation is low. Yet, when I live and actually experience life as a consumer, everything seems very expensive, except one thing. Technology. Technology’s getting cheaper and products widgets that I buy at Costco, those are getting cheaper because the world is kind of awash with goods made in China mostly, and then technology really does create value. We have the right as people, in my opinion, to expect progress. Things should be better than they used to be ten years ago or 100 years ago, and that’s just progress; that’s technology. Medical care should be better, technology should be better. I’m looking at your new iPhone over there. That’s a pretty swank device.
Karam: I love that thing.
Jason Hartman: I know you love it. I wanna get one. Those things actually have gotten cheaper, but a lot of stuff is a lot more expensive. Talk about how they’re monkeying around with the system and what’s really impacted. What’s expensive?
Karam: I think you just hit the nail on the head. If you were to watch say CNBC again, and they’ll say the inflation rate is under control at 2 – 3 percent, that just defies reality because, tuition, healthcare, gasoline, a gallon of milk, they’ve all just exploded in price over the last few years. So it defies common sense that inflation is under control. Now what the government has done over the last say 20 some years is they’ve progressively altered their definition of inflation.
Jason Hartman: How convenient.
Karam: There is an excellent website called www.shadowstats.com by John – I believe his name is John Miller – that shows that if you go back and use the way inflation was calculated 20 some years ago, you’ll find that it’s nowhere near 2 – 3 percent. It’s close to 8 – 10 percent the way it was calculated and should be calculated.
Jason Hartman: Over the last 20 years.
Karam: Right and there’s several things they do to sort of jerry rig this CPI these days, the Consumer Price Index.
Jason Hartman: When we say rate of inflation, per the government, we’re talking about Consumer Price Index or the CPI, right?
Jason Hartman: Okay.
Jason Hartman: Now I know they divvy that up and they have another thing they call the Core Rate and then they use the Hedonics Index and –
Karam: And there’s the whole idea of substitution, meaning that if beef goes up in price, the government will assume that people will switch to chicken, which is cheaper. And as you allude to the Core Rate is the CPI without food or energy. Now, I don’t anybody that can live without food or energy, so –
Jason Hartman: I agree.
Karam: I think it’s just ridiculous and it’s amazing the American people can be so complacent about it.
Jason Hartman: Why does the government want to hide inflation? What would be the motivation behind it?
Karam: Well, it’s pretty straight forward. A lot of the entitlements in our current system are tied to the CPI.
Jason Hartman: Social Security.
Karam: Social Security.
Jason Hartman: Medicare.
Karam: Medicare, Medicaid’s.
Jason Hartman: Government salaries.
Jason Hartman: For government workers.
Karam: If the government can through their own jerry rigging the CPI, they can pay less out because according to their stats, inflation is less; therefore, your Social Security check is less.
Jason Hartman: Right and also, when it comes to money that the government owes to foreign governments, so say we owe China a billion dollars, for example, and we inflate our currency, we’re really paying them less, right?
Karam: Sure. If you owe a billion dollars, but the real inflation rate is 10 percent, then you owe $900 million. You just inflated away $100 million of debt.
Jason Hartman: Boy, that’s a pretty cool deal.
Karam: It’s a nice trick if you can get it.
Jason Hartman: Yeah, it’s a nice deal.
Karam: I wish I could do that.
Jason Hartman: But what it really requires is it requires belief. I mean, essentially, you’re –
Karam: And slight of hand.
Jason Hartman: Yeah, you’re describing what is essentially a Ponzi scheme.
Jason Hartman: Okay, so it requires that China or whoever we owe money to believe that the dollar is worth something and it requires that the citizens believe the dollar is worth something, right?
Jason Hartman: Otherwise, the whole thing doesn’t work.
Karam: Right. Once people realize that it’s nothing more than an IOU and the federal government is, the United States is just awash in debt, people might think twice before accepting it as a means of transaction.
Jason Hartman: How else do they hide inflation? They change the CPI; they change the rating and the substitution of items within the Consumer Price Index. They also do what they call the Core Rate, which is the Consumer Price Index, but stripped of the most important things, food and energy, which obviously, no one can live without that. And then there’s another thing they do. They do the Hedonics Index. The root of that is, you know, hedonism or pleasure. What do they do there, Mark?
Karam: Well, the truth is it’s a complicated subject. I don’t entirely have my mind around it, but I’ll give you a crude analogy, if I may. If our computer increases its computing power from one year to another, and that computer initially cost $1,000.00, then because it has twice the computing power a year later, the government assumes that it’s worth half as much, even though you still paid the $1,000.00.
Jason Hartman: Yeah, see it’s just –
Karam: It sounds good in theory, but it doesn’t really work in reality.
Jason Hartman: Right, so you still have to buy the $1,000.00 computer. You’re still spending the $1,000.00, but you are getting more, but there’s no cheaper computer that’s half price even though the speed is doubled, right?
Karam: Exactly, it’s designed to capture increases in productivity and technology. They factor that into the equation, but it works well in theory; it doesn’t work well in reality.
Jason Hartman: Yeah. Good point. Okay, so what’s on the horizon for inflation and the future of the debt asset? I like to call it the mortgage asset because on one of our prior podcasts, we talked about the three dimensions of real estate and the mortgage is a major part of the real estate asset. I always just thought until a couple of years ago that it was really all about leverage, not putting my own money into the deal so much. But really, it’s also about inflation, which is a wonderful extra benefit that I really don’t see anybody talking about but us.
Karam: You’re absolutely right. What’s on the horizon? I hate to sound much like a doom-and-gloomer, but I only see perpetual inflation on the horizon for the following reasons: our United States government is heavily in debt, not only from a massive entitlement system, but from all the military ventures abroad.
Jason Hartman: And an aging population that is costing more in terms of Social Security benefits and so forth, and medical.
Karam: Oh, absolutely. I mean by some estimates, the true nature of the debt that the United States owes is $70 – 80 trillion. It’s just obscene when you factor in the entitlements and that’s truly going on, so the only way that the United States, who’s boxed themselves in a corner, can deal with those debt obligations is to inflate the currency, to inflate their debt away by printing more and more money.
Jason Hartman: Or to suddenly become massively productive beyond China and I don’t think that’s gonna happen.
Karam: I don’t think that’s gonna happen any time soon, so if inflation – and here’s to get back to what we talked about at the very beginning – if inflation is consistent and it’s only going to get worse, now is the time to become a debtor, especially with long-term interest rates being near historic lows.
Jason Hartman: Yeah, because you know, Mark, the conventional wisdom has always been “save for a rainy day.” We all heard our parents say that and our grandparents say that, but they really grew up with the Depression era mentality, which back then, saving was a good deal. Cash was king in a deflationary or Depression era environment, and barring that happening again, which, you know, it happened 78 years ago and I don’t see that type of an exact thing happening in the future, but your savings get destroyed through inflation, right?
Karam: I agree with you. I think it’s important to save so at least you have some cushion to fall back on in case your job hits hard times. However, people need to be aware that saving cannot be the only tool you have in your financial arsenal and they also need to be aware that year upon year, those savings are being eroded away by inflation that we talked about.
Jason Hartman: Yes, so I guess maybe a good way to sort of sum that thought up is saving money is for emergencies and saving money is kind of based on the philosophy of playing not to lose. Well, investing and using prudent investment grade fixed rate debt on appreciating assets that someone else pays the debt back for, real estate historically appreciates, and your tenant pays off your mortgage for you. So that’s high quality investment debt. That is playing to win. So use a combination of the two. Save money; don’t deplete all your savings. Obviously, have some money in the bank to fall back on for emergencies, vacancies, job loss, etc, but the vast majority should be based on buying assets like real estate with prudent debt so that you can win through inflation as well as the other dimensions of real estate. Good advice?
Karam: Absolutely. Very well put.
Jason Hartman: Okay. Let’s just talk about saving for two seconds and we’ll wrap up here. If you save money in a CD – our mutual friend who likes –
Karam: Our friend John.
Jason Hartman: Yes, who likes to invest in CDs thinking it’s an investment. You earn maybe 5 percent, just for round numbers; maybe you’ll do five and a half nowadays.
Karam: And you’re taxed on that, as well.
Jason Hartman: Yeah, so you pay about 2 percent of that in taxes, so now you’re down to 3 percent and if the inflation rate is 4 percent –
Karam: Yeah, you’re negative 1 percent in the hole.
Jason Hartman: So you’re losing 1 percent based on the government’s inflation number, but the real inflation number means you’re losing maybe what, 8 – 10 percent at the end of the day.
Karam: Oh, absolutely. To go back to our friend John, who’s obviously at the extreme edge of the spectrum, he paid off his house as soon as he could.
Jason Hartman: Oh, never pay your house off!
Karam: And his strategy is just to put as much cash as possible in his CDs, his savings accounts, etc, and he’s a very conservative guy. He’s very risk averse, but I don’t think he fully appreciates the economic conditions under which we toil these days, meaning the silent inflation that’s going on behind our backs.
Jason Hartman: Yeah, that insidious hidden tax of inflation. People used to win by saving and times have changed, and that’s why the advice has to change and the game plan has to change.
Jason Hartman: Okay, anything you wanna mention in closing?
Karam: Nope, this is a wonderful conversation. I hope to have more of them. Thanks for having me.
Jason Hartman: Okay. Thanks for joining us, Mark, and we will look forward to talking to you on the next podcast. Thanks for listening.
I’m here with Senior Area Manager, Karam, and we wanted to talk to you quickly about his recent trip. He just returned yesterday from Jackson, Mississippi. Karam, what did you find there?
Karam: Well, Jason, it was a very interesting trip. Unlike other areas, this is a very unique area in the sense that we live here in California and we go to all these markets, and every market is different. Jackson, Mississippi, on the other hand, the way it is different from the other areas is they don’t have the apartment complexes like we have in most of our metro areas.
Jason Hartman: Yeah, so you don’t have that high density attached housing, huh?
Karam: That’s correct. So what happens is all these houses have high demand of rental, and on the rental side, there is not too many houses available for rental, so there’s a quick rental and you get the high rents, so the cash flow is better. But you have to drill it down to the micro area, the communities that we want to invest in, buy the investment properties. The first thing we look at is the school system. Now, if you look at any particular city and suburb, it may have a good school system or it may not be in the good school system. Now, one particular city may be half in one county and the other half is in a different county.
Jason Hartman: So that was true of Hattiesburg, right?
Karam: That’s correct, yes.
Jason Hartman: So if you look at Hattiesburg, you can’t choose by just Hattiesburg. Some of the area is not so good –
Karam: Not so good.
Jason Hartman: And some is a desirable investment area.
Jason Hartman: You were telling me about how they gave you a list of 131 properties that the broker thought would be good for our investors and the process of you narrowing it down and what you narrowed it down to. Why don’t you tell everybody about that?
Karam: Well, I just narrowed it down to 21 properties.
Jason Hartman: Out of 131.
Karam: Out of 131, and that’s all I will sell from, 21 properties, and they are in a good school system, good quality product. Looking at the communities, the location of the communities, location of the properties, and that’s all I came up with.
Jason Hartman: Excellent. So Karam, talk to us about this specific property you’ve got in front of me. This one is $179, 760.00, so we’ll call it $180,000.00. It’s almost 1700 square feet. The projected rent is $1500.00 a month and return on investment, Karam?
Karam: Yes, 42 percent believe it or not.
Jason Hartman: Forty-two percent projected ROI and if you qualify for all that goes on tax benefits, projected first year ROI is 128 percent. Don’t try that in the stock market, huh?
Karam: That’s correct. The reason is these areas, not only the high rent, but the property tax is very, very low.
Jason Hartman: Only $195.00 a month on that property. Wow.
Jason Hartman: Good stuff. Okay, Karam, anything else you wanna talk to us about. Let’s – you’ve got one more property, maybe this one in Indianapolis; that looks kinda interesting. There’s some big discounts on this.
Karam: Yes, Indianapolis really surprised us, that market, and we are getting great deals.
Jason Hartman: Yeah, we weren’t expecting this one to be so good.
Karam: Yes. Great deals and I’ll give you an example of the property that I saw yesterday. Twenty one hundred and one square feet, four bedroom, two and a half bath, brand new single family house, comes with a rent-ready package, meaning washer, dryer, refrigerator, blinds, garage door opener, front and back yard sodded, for only $127,000. You know what that means, Jason, per square feet price?
Jason Hartman: Yeah, that’s amazing. You’re buying like very close to the cost of actual construction here. How much?
Karam: $60.00 per square foot only.
Jason Hartman: $60.00 per square foot. That is unbelievable. It’s like the downside risk is almost nothing. Go back and listen to our podcast on risk evaluation.
Karam: And again, return on investment is 41 percent.
Jason Hartman: So 41 percent projected return on investment, and these are some good properties. Give us a call or check out our website for more properties and all the details are listed there. And we will look forward to talking to you on the next podcast. Thanks.
Hey, I just wanted to announce a couple of quick things for you. If you are able to come to one of our live events, we would love to see you and meet you in person. We’ve had people fly in from all over the U.S. for them. So hopefully, you can join us for some of those events. Also, remember our rental coordinator is here to help with your rental properties. If you need assistance with your rentals, your property managers, your advertising, remember we’re here to help and we stay with you through the life of the investment. So feel free to call our office anytime and ask for the rental coordinator for assistance on your rentals.
Also wanna remind you, listen to our old podcasts. At least go back to podcast No. 13 forward and listen to all the podcasts after that. You’re welcome to listen to all of them. The ones before No. 13 are older, but they’re also good, but the newer ones are No. 13 and forward, which are really good ones to listen to, so please take advantage of that.
And remember, the overall market commentary right now, due to the mortgage meltdown, the subprime issues that are going on out there in the market, is that rents are going up all across the nation. When people cannot qualify as easily to buy a property, they are forced to rent. So let that work in your favor by accumulating more rental property assets and don’t be afraid to ask for more rent and raise your rents. That’s a good thing to do.
Also, if you are interested in career opportunities with us, our company is growing quickly and we would love to talk with you about career opportunities. We’re in the process of getting approved for franchising. If you’re interested in a Platinum Properties Investor Network franchise, we’d be happy to talk with you about that and get you set up there once we are finished with our approval process.
Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com. Remember that we are not tax or legal advisors. So give us a call on any of these issues, and remember, we are here to help, and we will look forward to talking to you on the next podcast.
This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.
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Duration: 39 minutes