On this Flash Back Friday, Jason Hartman answers a couple of listener questions. He hosts Richard Vague, an economist and author of The Next Economic Disaster. They discuss China’s economic issues as well as its correlation with the US economy.
Jason Hartman 0:00
Today’s flashback Friday comes from Episode 494. Originally published in March 2015. Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.
Announcer 0:22
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 multi millionaire who not only talks the talk but walks the walk. He’s been a successful investor for 20 years and currently owns properties and 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 1:05
Welcome to the creating wealth show. This is your host, Jason Hartman. This is episode number 494. You know, we’re getting close to Episode 500, early 500. Wow, that’s a big deal. It’s a big deal, but it’s going to be even a bigger deal when we’re at Episode 1000. And then 1500 ben 2000 and then do infinity and beyond this Buzz Lightyear would say, Well, we’ve got a good guest for you today who’s got an unconventional outlook on inflation or deflation, and that is Richard vague. He is the author of the next economic disaster, why it’s coming and how to avoid it. And his thesis is definitely not mainstream, but it’s pretty interesting and I’ve been thinking a lot about it since I just interviewed him a couple of days ago. That is the idea that inflation or deflation, as it were, really determined more by private debt than government debt? And most people would say, you know, even Milton Friedman, the famous late Milton Friedman, the economist who said, inflation is everywhere and always a monetary phenomenon. And by that, you know, you could interpret that different ways, I’m sure. And he explained it in his extensive works, which are fascinating, by the way, most people would interpret that to say, Well, it depends on the amount of currency the government creates. And as the government creates more currency, in order to service its debt, because it got itself into trouble by spending too much just like a drunken sailor, reminding me of the reagan quote, to say that the government spends money like a drunken sailor is an insult to drunken sailors. But,
Jason Hartman 2:52
yeah, something else something else. Anyway, this is an interesting interview. So you know, see what you think of it. I’d love to hear some feedback on it. We really love to get your comments. I’m really excited that people are starting to go to the website, they’re going to Jason hartman.com or even Hartman media.com. And they are leaving us a voicemail, and asking a question, making a comment, whatever it might be. So we’re going to play a couple of those listener comments here on this show. So please do that. Go to Jason hartman.com. Ask a question, leave a comment, write a review on iTunes, any kind of engagement, we just love it and appreciate it. So thank you for that. As I talked about, many times, in past episodes, the six ways that the government would get out of its mass, right, the six ways in which the government would relieve the liability it’s gotten itself into, and, again, inflation being a really a terrific business plan for governments. It really is far and away in my opinion, the best plan for them and Same is true for central banks. But you know, most specifically governments, governments, I mean, it’s a great deal for them, especially a government like the United States that has the reserve currency of the world, and the power to maintain that reserve currency status, which I believe it will for many, many years to come. Regardless of what you know, Simon black says I was reading one of his things today, you might know about the sovereign man, Simon, black, interesting guy, for sure. But, you know, all of these people talking about everybody leaving America and the dollar collapsing. They’ve just been so wrong. What can you say? You know, the gold bugs have been so wrong, the Bitcoin people have been so wrong. Frankly, I’m just gonna pat myself on the back here and brag a little bit. I’ve been more right than any of these people. For many years, representing the best performing investment asset class in the United States is If not the entire world, and that is income property. It is amazing. And you know, now that you get to hear these flashback Friday episodes that we’re doing, I’m really kind of putting myself on the line here because, by the way, I don’t even listen to them before I don’t have time to listen to them. I just, I just tell my producer, oh, I just pick one. I go back, I literally do it this way. I go to Jason Hartman calm and I look through the old episodes, and I say, Let’s run episode number you know 292 again, or whatever. I’m just giving out a number there. Make that the flashback Friday episode this week because the topic looked interesting. I of course, I can’t remember exactly what I said on that show. So I might make a fool of myself. An open mouth can gather foot or feet foot. Sorry about that. My grammar is actually better folks. What was the saying I just saw it. A closed mouth gathers no feet, you know the foot and mouth. You don’t put your foot in the mouth in your mouth. When you Say something. So that is a risk to play flashback Friday, but you know, just listen to it. I mean, I remember doing some calculations during the the worst time of the great recession and looking around at stock markets around the world that were all in in just complete chaos, it was a mess. Okay, looking at gold, which was rising at the time, and you know, everybody thought, oh, gold is going to be the thing, right? And Bitcoin didn’t even exist yet. And silver was doing crazy things to income property because it’s a multi dimensional asset class. Because it’s multi dimensional, you get return in multiple, multiple ways rather than just the simplicity of buy low, sell high, or, you know, with dividend paying stocks, buy low, sell high, collect some small dividends, right. It’s the best it was the best performing asset class in the world then, and you know, the last few years it’s obviously been phenomenal. So the city grit to income property is to stay in the game and have a sustainable investment to stay in the game. Because you never want to be forced to sell a property, you might want to choose to sell a property, if that makes sense. You know, I’ve been messing around a little bit with my portfolio lately and buying and selling some stuff and doing 1031 exchanges on some things. And hey, that can be a fantastic opportunity. But you want to keep you don’t want to have to reduce your portfolio size, maybe that’s the way I should put it in a time of bad market. And the way you do that is by buying right? Okay, buying properties that makes sense the day you buy them. It’s one of my 10 commandments, as you know, Thou shalt not gamble. That’s number five, and managing cash flow, and then also being being diversified. Okay, thou shalt diversify another commandment. So very important things there. Now with this government versus private debt thing, I also want to bring you back to ministry. Where I have talked about the six ways the government can get out of its mass, okay? And one way of course is to default and just not keep promises not pay Social Security, not pay Medicare, not pay Obamacare. Okay? That wouldn’t work too harsh, politically unpopular, they could raise taxes, there’s not enough taxes to raise, okay, you can’t solve the problem raising taxes, they can have a yard sale, sell the ports Did you buy, maybe sell military equipment to Libya, etc, whatever else. Now, they’re selling our drones to other countries. You know, our drone technology and our drone planes. I don’t like that idea very much, because I always end up in the wrong hands. It always happens. They could steal, they could use the military power or the Economic Hitman to go and take resources from other countries. On the positive side. We could have technological innovation, that would be great. You know, technology may well rescue us. It’s a pretty amazing time to be alive. As I’ve said many times before. Number six, Inflate the most likely, they will simply inflate their way out of the problem. But if they don’t, that’s okay because we have the best yield producing asset class and in a non inflationary now what I mean by that is the either stagflation, airy or deflationary environment, we have the best yield producing asset class and that’s income property. And the fact that it’s multi dimensional allows you to react to different circumstances differently. And that is one of the beauties of income property. So as long as you don’t buy that speculative appreciation oriented asset class, you don’t buy that overpriced property in California or South Florida or the overpriced markets in the northeastern United States. As long as you don’t do that. You can act you can adapt to these changes in the marketplace. All right. So think about that, as we get to our guest today. listener comments and a couple announcements, we’ve got our Memphis property tour. And by the way, we are doing a members call to the members of Jason Hartman University. Our monthly call is tonight. And of course, it won’t be the day This podcast is released because I’m recording the day before. Join Jason Hartman University you get way more than your money back for joining that dumb little hundred and $20 a year membership right? It’s really cheap. Our members who are on the call tonight, get the Memphis property tour for half price. So that’s the that’s the lowest price ever, for a property tour we’ve ever done ever. I think you’ll really like that and it’s not like we need to have a sale on this. Okay, because it’s, it’s still early. The tour isn’t till the end of next month. We’ve already got quite good response to it, but we just announced it. We want to give the members a nice benefit. So remember, you get discounts on all of our events if you join. So just go to Jason Hartman calm and in the upper right hand portion of The website, you can join Jason Hartman University you can become a member it’s a measly hundred and 20 bucks a year. You’ll love it. Also, thank you for the latest reviews. You know, I don’t have them handy. I want to read them on the air here. We have been getting some very nice reviews on the podcast on iTunes, SoundCloud and Stitcher Radio. So we very much appreciate that. Thank you for the reviews. If you haven’t written one for us, please do it along with taking a moment. And now let’s take a couple of listener questions.
Richard Vague 11:31
Hey, Jason Stapleton again. I’m gonna give a quick little background maybe for ask questions. start listening your podcast three years ago and I was 25. And you really convinced me that real estate was the way to go. Since then, I’ve purchased four rental properties. And they’re working out really well. I’m looking to acquire professional real estate status by getting my license, which I’m starting school this weekend. And I saw on your profile that you became a At the age of 19. And so I’m wondering, did you did you work mostly with investors or owner occupants when you first started? And how did you how did you get into working with investors? Because really, that’s what I would love to do is work mostly with investors. Because that’s mainly where my passions at. And I’m also I’m also wondering practices activities, what mindset What do you think made you such a great agent and brought massive success to you? I would appreciate your response. Thanks.
Jason Hartman 12:35
Okay. So Jake, thank you for the question. And you know what, that one does not directly apply to this show to most people listening. So I’m gonna, I’m going to keep the answers a little bit short. Imagine that me with a short answer. Can you imagine? So first of all, yes, I did get my real estate license at age 19. I was in my first year of college I started part time, I became interested in real estate investing at age 16. I grew up kind of on the poor side on the on the crappy side of town in Los Angeles, California. And I did not want to be poor, I wanted to be successful. I kind of figured that out when I was about 15 years old, maybe the first thing to being successful as an agent is, you know, you just to being successful with anything, you gotta have full commitment. And I was very much committed to finding a way to be successful. Here’s a couple things and this will apply to anybody in any endeavor, in any part of life, I think. So the first thing I noticed when I went to work for a company called century 21 Academy, it was a real estate office, they just, you know, they always have a sub name. They call this one Academy because it was at the beginning of the alphabet. In those days, you know, people use the Yellow Pages, imagine that or the white pages do in a phone book. I got in there and I remember looking around that office and thinking you know, I was listening to the conversation of people a you know, agents were They’re smoking cigarettes. That’s when you could smoke inside isn’t that disgusting? The office was like full of smoke. totally disgusting. They were smoking cigarettes sitting around having coffee they were complaining about the company wouldn’t spend enough money on marketing and advertising. They wanted to buy notepads to pass out in their farm area. Farming is a thing real estate agents do, where they go and pick a neighborhood and call it a listing farm where they try to get listings in those neighborhoods. And, you know, they’ll pass out little scratch pads and refrigerator magnets and all kinds of goodies like that. And, you know, I remember hearing conversations of these agents complaining about how the broker wouldn’t spend $180 to buy them notepads and things like that. You know, before that. I worked in two small businesses that my mother owned, I basically kind of manage them in a way I guess, you know, she paid me minimum wage to work there. And one of them was a pioneer chicken franchise. And if you don’t know what that is, it’s basically like a crappy version of Kentucky Fried Chicken, okay, not as good a franchise, this piner Chicken franchise was in the really bad area of Los Angeles, where there were tons of crime and gangs and it was a really crappy environment. I would work there. And remember, my mother bought that franchise when I was in high school will still working full time at the Leukemia society. Okay, that was her day job. And she bought this franchise, she saved up money. She had to save up $100,000 cash, have debt of $100,000 and then equipment leases for all the you know, kitchen equipment, business equipment of $75,000. That was a $275,000 investment way back then. And here, these real estate agents, these dumb agents are complaining about how they can’t spend $180 on their business. And I thought, what a bunch of losers these people were, you know, because my mom’s whole goal with her $275,000 franchise that she had was to earn 60 to $80,000 a year. And she thought if she could save up and acquire about three or five of those businesses over the course of several years, she’d be doing pretty good. And you know what? I mean, you can adjust those dollars for inflation from what I was, you know, 19 years older, or really, I was about 17 years old, I guess, when she bought pioneer chicken. But you know, that was, that was amazing. And I thought with real estate, you could, you could make a lot more money with very little investment. So that made me very committed to the business as an agent, and I knew I wanted to be an investor. And I knew that the road to being investor was in that day because I didn’t know anything. I didn’t have any connections. There was no guru, like, frankly, like me, to help you do it. Okay. That’s what I thought I do. I just thought I’d learn the basics and then I try to learn about investing and what do you know about six months later, when I was 20 years old. One of my clients who I’d sold a property to his name was Jim wooo. He had this condo in Huntington Beach, California. He wanted to sell it. He came to me and said, you know, Jason, I didn’t like this one so much. He bought it for me a few months earlier, and he said he didn’t like it because it was like a little one bedroom condo. And he said, Why don’t you list it for me? Let’s solve that one. And he purchased several properties from me. He was a good client. And you know, I was just a kid. And I said, you know, instead of selling this property for you, Jim, I want to buy it from you. And I structured the deal and I bought that and that was my first property. It to answer your question about what kind of clients I worked with, you know, I basically worked with either first time buyers or small investors who bought really crappy rundown government repo properties, HUD and VA repos, in mostly in Riverside, and San Bernardino counties in the Inland Empire area of Southern California. You know, these houses were boarded up. They were terrible. I I would literally show property in my Volkswagen Jetta. And I, you know, I’d meet the person there or drive them there. And I get out of the car and I’d have a flashlight. And that’s quite literally how I would show the house to them. And then I’d write a bit hopefully, if they wanted to make a bid on the property. And if it got accepted, I got a commission. And that was, that was the story. But you you really asked about your real estate Jake as a way to become a real estate professional. And just remember, that will not necessarily help you that much, okay? You don’t have to get a real estate license to be a real estate professional, as the IRS designates it. Okay, so just understand that. It sounds like you may have listened to the recent show I did with Diane Kennedy, the CPA. There’s a lot more detail there. If you have further questions, you can leave another voicemail and I’ll answer those questions. Okay, because it’s a long topic, but I wanted to get to your other question, which is more applicable to our listeners. Okay, about investing. So here is that question.
Richard Vague 18:58
Hey, Jason j kilson a question for you today about 3d printing. I know in previous podcasts, you’ve mentioned that you think 3d printing could possibly be a technology that could turn around the US economy. But I’m really wondering about 3d printing homes. I saw a Business Insider article recently, that a Chinese company built a home for $5,000 in one day with using a 3d printer. So I’m really wondering is if if that’s the case and 3d printing becomes widely available in the future? What that could potentially do to the rental market then, and what also could do to the homes that we already own as rentals that will devalue them, or increase value like this, get your get your take on that? Thanks.
Jason Hartman 19:52
Okay, so that’s a great question, and it’s one I’ve been thinking a lot about. I have seen those same articles. I think I actually saw that One in Business Insider. And you know, the thing about 3d printing is it, it cuts out the late it doesn’t cut it out, but it reduces the labor cost. And this is just like any technology, every technology pretty much makes things less expensive, more efficient, better, more powerful, etc, etc. Now these 3d printed homes that they’ve that I’ve seen so far are really not too nice at all. Okay, they’re, they’re definitely not as nice as the stuff you’re buying through our network. And the thing to remember about 3d printing is it reduces the labor cost, but it probably doesn’t reduce the materials cost that 3d printed home in China was, it was not, it would not qualify as a very nice home. It would definitely not be one of our rentals. Look, there are a bunch of developers out there around the world and you may have seen these in your travels. I’ve certainly seen them who are building homes and commercial properties, retail and office properties out of shipping containers, cargo containers. Those are super cheap to build to. Okay, they’re cheaper than a 3d printed home probably. This is something that could put a downward cost on construction costs in terms of building houses, for sure. I think that’s certainly possible. And that could be deflationary. However, the thing you must understand with 3d printing is it still takes materials. Okay. That widget is produced from materials. Now those materials have to come from somewhere. What are they? They’re either metals, they’re plastics and petroleum products. They are concrete type products. They’re not going to be lumber, okay? But those materials cost money. Okay, so remember the 3d printing cost is really more about labor costs, than it is about materials cost. It still takes about You know, somewhere in the ballpark Not exactly, of course, maybe a little less for 3d printed, but you know, somewhere around the same amount of material in terms of actual materials to produce any kind of 3d printed product, okay? There may be a little bit less waste, because there’s this difference between additive and subtractive, or deductive manufacturing that 3d printing is all about. And so I don’t know, you know, more to come. I don’t know. But look at this does not just apply to real estate by any means. This applies to everything. And so far, what we have definitely discovered with technology, is that the limits to human wants by many people called needs I’m sure if you have a teenager, they need a nice new car. They don’t want one they need it. It’s like a necessity. They need the brand new iPhone. It’s not a want. It’s a need, right? There’s no limit to what we will want in need. You know, if you told me years ago that I would be carrying around on my body, a $700 smartphone and not worry about it getting stolen, I would have thought, you know, I would have thought, wow, that’s crazy. But now everybody’s doing it right. We all regularly carry around iPads, expensive electronics, you know, I just got back from Starbucks, I took my $3,000 laptop with me. And I had my $700 iPhone, by the way, that’s the value of the phone if you don’t have a contract, so that’s the real value. The human capacity for once is limitless. Okay. And so if it gets cheaper to produce houses, or any kind of thing, or gadget or widget with 3d printing, which it most certainly will, I think we will just want more and want something better, and that’s what will keep the price up. So I don’t know the jury is out. We’ll see where it goes. But remember, whether we have inflation, deflation or stagnation We have got the best performing asset class in the world, bar none, because every single asset class will be affected by that same technology. So let’s watch it as it goes. Okay, let’s get to our guest as he talks about government debt versus private debt. interesting interview. I’m looking forward to seeing what you’re thinking on this one. And please go leave more comments on the voicemail at Jason hartman.com. It’s really easy to do. Here we go with our guests. It’s my pleasure to welcome Richard veg to the show. He is the founder of to consumer banks and energy company and the author of the next economic disaster, why it’s coming and how to avoid it. In our pre talk today, just before we started the interview having him on the show, he said some fascinating things to me about Japan, China, the US the commodities prices, oil prices, and I’m sure you’re going to like his insights as well. Richard Welcome, how are you? Fine, thank
Richard Vague 25:01
you for having
Jason Hartman 25:02
give our listeners a sense of geography. Where are you located? Philadelphia? Good, good stuff this city of brotherly love. Richard, tell us a little bit about what’s going on in the world. And I guess your thesis is this mainly stems from China, right?
Richard Vague 25:16
Yeah, we’ve got trouble brewing in a very major way in China. And our insight really comes from the fact that our Oh, a crisis was really a result of a very rapid runaway growth in private debt. And when we dug into it, we saw that that was also true of Japan and 91. You know, when when we all thought Japan was going to take over the world in the 80s. It was just runaway private debt. Same for the Asian crisis in 97. Frankly, same for the US 1929, stock market crash, they all had this in common. So we really ask ourselves that that’s been true in the past. Where do we have runaway private debt today and in China, we’ve had $12 trillion growth in private debt. Since oh eight, where the economy is only growing about four and a half trillion. We’ve got a big situation brewing.
Jason Hartman 26:10
Okay, so explain to the listeners if you would, Richard, why is that the case making the distinction between private and government debt? You know, many people are concerned about government debt, especially in the us right now and the unfunded entitlements coming in the future, saying that that could lead to very severe inflation. I’d love to get your take on whether or not you agree with that, but also make the distinction if you would, between, you know, why is private debt, the problem and not government debt? Most people are talking about government debt, I think, right?
Richard Vague 26:41
Well, you’re exactly right. But I’ll tell you in each of these major crisis, and we’ve looked at all 22, where there’s data, you know, across the globe, government dead was actually benign or improving in the period immediately before the crisis. So government debts almost Country indicator when government debts getting better fast, it’s often meant that a crisis was coming. And the reason is, runaway private debt makes things really good for a few years. This is true of the United States. And oh, 506 you know, we thought we had found the economic miracle. Houses were being built, jobs were being created, taxes were rising, and that’s why government debt was improving. Same is true in Japan and 91, Asia 97. And the reason private debt becomes a problem is really boils down to two things. First of all, you build way too much of something. And secondly, you make way too many bad loans in the process of doing it in the US no way we built way too many houses. And the amount of bad loans that we made was about two and a half trillion dollars at the peak and awake please US banking system only has about a trillion and a half dollars in capital, it’s pretty clear to see that it was going to be a crisis. Okay. So
Jason Hartman 28:08
one of the assumptions that you have to make there is when private debt gets really high, is that it’s careless debt. Right. You’re you’re you’re saying I mean, certainly it wasn’t the housing crisis last time around, that the debt is irresponsible. But I mean, it is possible that there could be a lot of debt, but it could be responsible debt. Right. And, you know, maybe I’m just getting too theoretical here. But I guess it’s usually that’s probably never the case. So
Richard Vague 28:35
Well, we’ve we’ve looked at it pretty carefully over a whole lot of countries. In fact, we’ve looked at it exhaustively, and we put a threshold on it, which is to say that if in any five year period, the growth in private debt to GDP is above 17, or 18%. That’s when you have you have a problem. And if you think about it, private debt grows. ought to lead to commensurate GDP growth. So private debt shouldn’t grow that much. And it’s an excess of GDP. That’s the signal that it’s unproductive debt.
Jason Hartman 29:10
Okay. So you find that when you look around the world right now, the country that is in the scariest position with his private debt issue is China, right? Yep. What’s going on there? just drill down on that for us? Well, yeah, well,
Richard Vague 29:24
they have, you know, as I alluded to a moment ago, since Oh, wait, which, by the way, was when the West collapse there for a year or two in China prior to aid had been living off exports to the west. But when a weight game, China’s exports dropped off a cliff. So China kind of had to do something. China either had to kind of go down with the West at least for a while, or keep growing, and it elected to keep growing through the use of debt. And since they’ve been private debt $12 trillion, which is the most frankly, by far of any country in that period of time in world history on an absolute basis, and as a percent of GDP. GDP for China in that period has only grown about a third that much, or four to four and a half trillion. And what is China’s been doing is building and manufacturing a lot of everything, most notably housing, and you hear a lot about the ghost cities in China. You know, these are cities that have you know, de novo cities that have hundreds of thousands of condominiums and office buildings like that are that are empty.
Jason Hartman 30:40
One thing I do want to say about that is that I’ve talked about that many times on the show in the past, and you know, I had a couple of guests, they kind of gave China a little bit of a pass on that saying that, you know, in the West, when you think of a finished house, it’s it’s finished, you know, it’s got a certificate of occupancy. In China. They don’t actually finish that units, they just build the structure and people come in, you know, put their cabinets in, and their plumbing in and all that kind of stuff. So it’s just really a shell, as if that’s, you know, a lesser issue and, you know, probably is a little lesser issue, but it’s still an issue nonetheless. Right?
Richard Vague 31:15
Well, there’s 49 million homes in China that are owned, but not occupy. And there’s an
Jason Hartman 31:24
owner owned by who,
Richard Vague 31:26
by your limo driver or the hotel manager, or it’s been a form of savings in China, you know, is since real estate has gone up since the post since the Dane gapping era. Since the post Mao era real estate has gone up for 40 years now. So people just assume that you know, if I buy a house, that’s it’s going to be worth more in a few years.
Jason Hartman 31:51
Yeah, it’s the greater fool theory. You know, no matter how much I pay, some greater fool will come along and pay more right and we’ve certainly seen that in the US and in sight.
Richard Vague 32:00
If there was that much analysis in it at all, frankly, you know, and now housing prices are declining. So there’s 49 million empty but own houses. There’s another 4 million build, but unsold houses. So it’s, it’s a big problem and then the level of finishing the house is really somewhat immaterial.
Jason Hartman 32:22
Right. Yeah, very interesting. Okay. So well, you know, everybody talks about Japan’s debt lately. And, you know, I had a guy on my show that was saying short Japan debt, and I assume he was talking about public debt. You know, he just said Japan is going to default. There’s just no question about it. Japan that will default. What’s your take on on Japan?
Richard Vague 32:43
Well, Japan fits this paradigm. Exactly the same paradigm that happened in the US and in China that it’s happening now happened to Japan in 91. At that point in time, their private debt to GDP pee in five years had grown 29%. Remember, my threshold was like 17 or 18%. So they got up to 220% private debt to GDP far above where we are. At that time, their public debt to GDP was only about 60%. And things came crashing down because they built way too many office buildings, etc, etc, etc. Their stock market real estate markets collapse since that time in trying to prop up their economy now that’s been 24 years since that time. In that 24 years, they’ve grown about zero percent per annum for the entire 24 years. Their public debt has gone from 60% of GDP to 240% of GDP. So it is a massive issue private data However, is still high in Japan, it’s come down from 220% to 180% to GDP. So it’s come down some but it is still by historical standards standpoint, very high. So Japan is kind of got a double negative going way too much private debt way too much public debt. They’re really the outlier in the world today. But one thing I would say to your friend is, China prints its own currency and most of its debt is in its own is in yen. So, you know, a sovereign entity can can pay off its debt by printing new money. So I’m not sure that I buy that is at least in any near term timeframe, a default
Jason Hartman 34:48
but do you buy inflation? I mean, it seems like Japan has been trying to get inflation for two decades and they can’t make it happen.
Richard Vague 34:54
I have a very strong belief about this. Yeah, Tony had been trying to correlate Inflation to government debt, it’s simply doesn’t correlate if you look at the broad sets of debt, private debt, or interest rates are more responsive to trends in private debt. The higher private debt growth, the more likely it is that you have AI interest rates and the softer private loan growth, the more likely you are to have low interest rates. And frankly, that statement goes for inflation as well, they all three correlate. And in China, you kind of don’t have longer. So I don’t see any near term and by near term, I probably mean, you know, five years or more, any real meaningful upward pressure on inflation or interest rates or private loan growth in Japan.
Jason Hartman 35:47
So it’s private debt. That’s the issue. So then,
Richard Vague 35:50
what is your prediction for the US in terms of inflation versus deflation? You know, you know, we we have more loan growth and GDP growth that just about anybody in the world right now, and that’s not saying much, hey, you know, it’s like being the tallest midget, you know, we’re growing in this two to 3%. range. And I I see us growth continuing to lead the world are leading the world over the next, you know, 10 to 20 years. But it’s going to be relatively modest growth, it’s going to be kind of sideways. It’s going to be better than Europe, zero, Japan’s zero, I think China’s growth is going to plummet to near zero. The US, the US so look better than others, but it’ll be pretty tepid. So that’s, that’s the growth question.
Jason Hartman 36:41
Is that inflation or deflation or just stable?
Richard Vague 36:45
Yeah, that’s, that’s, that’s a low level of inflation, which is kind of where it is. Now.
Jason Hartman 36:52
It just seems logical, though, that, you know, governments, I mean, will say politicians really first and then governments have Whole, but politicians love to make promises to voters that they know they can’t really keep in real dollar terms. So they make the promise they grow the size of government government gets bigger, it gets bloated, it spends more money, it goes into debt. And then the answer the way the way out of that debt, the the really the best business plan for a government is to inflate your way out of the debt. And when you’re in an awesome position as the US is my contention, you know, with the reserve currency and the biggest military, the human race has ever known to keep it that way. And, of course, the biggest economy to I mean, it seems like such a convenient plan. Why? Why doesn’t massive amount of government debt, massive amount of entitlement programs in your eyes lead to inflation? I mean, you got to pay for all this stuff. So the way you pay for it is by devaluing the dollar, or whatever currency you’re talking about. Whether it be Zimbabwe, you know,
Richard Vague 37:58
if that works through Japan would be experiencing inflation, Europe would be experiencing inflation at form, it just doesn’t work. In the past when we’ve seen deflation, it’s been a function of high population growth or high private debt growth.
Jason Hartman 38:12
So whereas the US on the private debt spectrum now and by the way, what is the best way to look at private debt to analyze it, you know, maybe the best website, are you talking about all types of private debt? Or, you know, you’re looking at housing or student loan debt. I mean, you know, there’s huge private debt.
Richard Vague 38:30
We look at, we look at all because our statistic is all consumer and all business debt, and the feds z one report, as this reported beautifully and reported regularly, it’s a little harder to get in some other parts of the world. We have all this kind of neatly mapped out in our website, which is
Richard Vague 38:54
debt hyphen, economics.org.
Richard Vague 38:58
But You know where we are is the business plus consumer. And by the way, the way it breaks down, we have about $25 trillion in private debt versus about 17 trillion in government debt. In our private debt is about 13 trillion consumer about 12 trillion business. And on the consumer side, it’s nine and a half to 10 trillion mortgage in only three and change trillion and other forms of consumer debt.
Jason Hartman 39:29
Well, hang on one second, though, that’s really interesting, because just over a trillion of that is student loan debt. So you’re saying there’s 3 trillion total. So one third of all that other debt, after you take away mortgages and business debt is literally student loan debt. That’s staggering. That is unbelievable. Wow. Yeah. And not dischargeable in bankruptcy, by the way, the only the only loan debt that isn’t, but go ahead with what you’re saying.
Richard Vague 39:58
No, you’re exactly right now I’ll put a little different spin on it. You know, it’s certainly a third of the unsecured consumer debt. But it’s only one out of $25 trillion in private debt. And so in terms of it resulting any kind of systemic crisis in the US, that’s not going to happen. It’ll certainly cause a lot of pain. For a lot of folks that have borrowed to go to school,
Jason Hartman 40:23
you were analyzing the US private debt picture, and I’m just trying to get to what what does that mean to
Richard Vague 40:30
us? Well, we have such an overhead, you know, to put it in context in the in 1950, private debt to GDP in the United States was 50%. Today, it’s almost 150%. So it is tripled in my lifetime, frankly. And that high level, just dampens economic growth. You have consumers that are still largely over leverage. You have businesses that are still largely over leveraged And that makes both consumers is in businesses less able to spin and invest because they’re having to service debt. That is a key thing to know when looking at the economy. To put it in more specific terms. In the US, there’s about 52 million mortgages. 9 million of those 52 million mortgages are still underwater. Those are consumers with a $300,000 house and a $400,000 mortgage on that house. That’s a big part of what kind of makes our economic growth so, so tepid compared to what it was, you know, half a century ago.
Jason Hartman 41:41
So ours is, you know, 300% higher than it was in the beginning of your lifetime. What What does this look like in China? Just give us the comparison of us to China. How bad is it for them,
Richard Vague 41:52
like China? You know, it’s in us. It’s our third 46% in China. It’s over 200% it’s like 200
Jason Hartman 42:00
That causes lower growth, I can certainly see that because all the consumers are stuck. And the businesses are stuck servicing debt rather than growing. But you know, that debt payment goes somewhere, isn’t it? Just, you know, isn’t it just cycling around the economy? I mean, the lender, you know, gets their payments if there’s no default. And, you know, frankly, they’re getting their payments and cheaper dollars, you know, if there’s only moderate inflation, you know, you’re getting cheaper dollars back than you loaned out. Except for the interest rate.
Richard Vague 42:28
Yeah. You just articulated the argument that a lot of mainstream economists would make about why private debt doesn’t matter. And, you know, a lot of economists kind of don’t even include private debt in their model. You know,
Jason Hartman 42:42
I really have I agree with you. I don’t think many are talking about it. You’re one of the few. So tell us about what’s going to happen to China. Well, I think
Richard Vague 42:48
the main thing that’s going to happen to China is already happening and that is you have a absolute collapse and commodity prices. Let’s take iron and steel as an example in oh two Just as China was beginning, this just, you know, huge GDP growth. You know, iron and steel at that point in time 208 in Korea, excuse me two Oh 11 increase 12 fold and price. Since 11. It’s collapsed by over 50%. That’s the point where China it was clear that China had built way too much and it wasn’t going to be able to use all that they built. So irons down by over 50% Steel’s down over 50% we have similar declines and copper aluminum. China was one of the big net users of oil. And a big part of the decline in oil that we’ve seen not not the biggest factor but one of the top two or three biggest factors is the declining use of oil and in China and that over that over capacity, that that over abundance Really is going to mean that there’s downward pressure on commodities for many years to come, it’s going to take a long time for the demand to catch up
Jason Hartman 44:09
what happened in China? I mean, how did they just did they just I kind of asked you this off the air before and I sort of know your answer, but I want to ask you for the listeners, did they just, you know, overshoot the mark, they think that we’re going to grow so much more than they really did and, and they thought they would need more housing and they thought they would need more roads and more trains and more infrastructure and they just didn’t need it. So now they’ve got all this steel sitting in the yard somewhere
Richard Vague 44:31
well demanded men growing very fast up to date. And, and so a lot of these plans were built on the belief that China was going to be like it had been for the previous several decades. So but the other thing that’s going on in China is the whole system is built to try to report high GDP GDP numbers. You know, if you’re if you’re a local official in your province in China, you’ve been given marching marching orders. Buy the guys the top to grow GDP in your region. So it rolls up to impressive high GDP numbers at duf. Where you get a high GDP number by building something. If you build 100 houses and don’t sell any of them, you still get almost full credit in GDP for those 100 houses you’ve built. That’s really what’s been going that your bonus and your status in the party and all these other thing, you know, boils down to how much GDP you’re milking out of your region,
Jason Hartman 45:30
you know, what agrees it’s reminiscent of, I mean, this may be kind of an odd comparison. But, you know, it’s reminiscent of that that government agency who you know, has a certain budget, its allotted every year. And the whole goal of the agency is to spend all of the budget because, you know, if you don’t spend it all they’ll reduce your budget next year. So if you want to increase your budget, which increases your power which increases your everything, you know, you gotta spend irresponsibly. There. There’s nothing logical about. Boy, that’s, that’s that’s what happened. So they’re just trying to report GDP numbers, and they’re not doing anything that actually makes sense. So what does this mean to the rest of the world as China experiences more and more slow down more and more trouble? I mean, I think to China, it means they’re deathly afraid their leaders are definitely afraid of civil unrest. Because the population is just too big to control, frankly. And, you know, there’s too much inkling of information from the outside that’s coming in, and that’s a legit concern of the party, isn’t it? So what’s going to happen? They’re gonna have a meltdown. What’s it gonna look like?
Richard Vague 46:38
You know, I think like I said earlier, they own the banks. So you know, classic definition of a financial crisis is you have the collapse of the banks and the government has to intervene to rescue in China, the government owns the banks. So it’s going to preemptively intervene, I suspect to prop up the bank. So what it really means is this just this dramatic deceleration and From what was 15% a few years ago, and it’s 7% now to something much closer to zero, and that’s going to have profound implications, you know, for bar words for Berlin. But the other thing that happens is the rest of the world feels this, you know, Asia Pacific, you know, Australia, Korea, to lesser extent, Japan, certainly places like Singapore, Thailand, and others have been making a living over the last decade exporting to China and leveraging up at the high commodity prices that China’s growth resulted in. Well, that’s all coming unraveled. So I think there’s gonna you’re already seeing banks like HSBC and Shang Chi and others report really problem levels of earnings and loans. You’re seeing commodity producers in places like Australia report, problem earnings. You’re seeing that all up and down Asia Pacific, there’s going to be bank failures. There’s going to be reversals in a lot of things, but you’re also seeing that in Africa and South America, you know, East Africa, places like Brazil and Peru and, and others really had made a living off, you know, massive exports to China as the kind of high prices that China’s growth resulted in. So they’re going to have you know, you’re already reading it, you know, in, in the newspapers and all those countries. You know, you’re gonna you’re going to say travel in Europe, particularly among the luxury goods, you producers, you know, BMW, you know, their most of their sales have been to China, you know, Lou avataan, you then the list goes on. The United States will feel it, the United States will feel it less in my view than just about anywhere in the world. There’ll be winners and losers in the US you know, if you’re a consumer and you all of a sudden your gas bills lower, that’s a good thing. If you’re a producer, you know, steel or an oil expert. company, you’re in trouble. Okay, so the
Jason Hartman 49:03
subtitle of your book is how to avoid it. Okay, why it’s coming and how to avoid it. And we’ve gone into, you know why it’s coming pretty well, a very thoughtful conversation on that. What should we do? What should people listening? And by the way, we have listeners in 164 countries, but it’s largely a US or North American audience, of course, but, you know, many listeners in Europe and Asia and so forth. Well, you know, what, what should different people in different positions be doing to avoid this crisis?
Richard Vague 49:32
Well, you know, it’s interesting because we’ve, we’ve expanded our study back, you know, a couple of hundred years and a place like, United States has had a crisis they are we had a crisis in 1819 1837 1857 1873 1893 1907 1929. This is a recurring pattern and it is what you know, our work is demonstrating that in every single one of those cases, it’s runaway private debt. Period preceding the crisis. And so the lessons very simple, you know, and I think this message needs to go to banks into their regulators more than anyone else is when aggregate loans grow more than five or 10% to GDP and a two or three year period, that’s when you need to be on the lookout. That’s when you need to be as a regulator looking to to moderate growth either by capital levels or jawboning or, or any of the other things regulators are so capable of doing.
Jason Hartman 50:35
Very interesting. give out your website, if you would, I know you have a few of them to everyone’s you like
Richard Vague 50:39
well, the the website where all our data on this is it’s called www dot debt. hyphen economics.org. You get on there we have, you know, a lot of Excel spreadsheets for all the major countries in the world where you can go in and take a look at this. If you’re a geek like me, and you want Get into
Jason Hartman 51:01
that geeky stuff is pretty interesting to a lot of our listeners, before you go, can you just elaborate a little bit on the stages of a crisis? You have a chapter with that title in your book. And I just kind of like to maybe circle back and outline that again, for the listeners, these different stages, how does it all develop and then fall apart? And then you know, of course, it just happens again, I’m usually
Richard Vague 51:23
Well, you know, it’s it’s interesting because I’ve lived through a couple of these and I was in the banking industry when I lived there a couple days. So, you know, what happens at first is, you know, there’s some reason that banks let loan grow starts to percolate. And when banks start lending more, it is really and truly the case that things get better. At least at first, you know, you’re lending people are building buildings are rebuilding the office buildings are building manufacturing plants. People are getting employed. This is a wonderful thing. Will all that good news causes banks and other lenders to want to lend even more. And one of the things lending does and people this is a widely underappreciated back, but it is an absolutely true fact. And that is lending itself causes prices to go up. You know, if I increase my lending on housing, that means they’re probably loosen my criteria means more people are eligible to, to borrow and you have inflation. That’s a classic definition of inflation. Right. And, and that’s my argument why Fannie Mae and Freddie Mac should really go out of business. I mean, you’d have to hopefully do it slowly and peacefully, so wouldn’t be create a huge disaster, but they should be unwound and or, you know, they should D leverage the housing market. Because then you know how, I mean, the stated goal of Fannie Mae is to make housing affordable, they’ve done the complete opposite. They’ve made it less affordable. lending causes prices to go up in it not just in housing, but in commodities and, and everything else as well. So, so that point in time how prices start going up? Well, since people don’t really understand this phenomenon that makes lending increase all the more because all of a sudden, I’m more competent battle in name because price trends are so positive, I know that I can make a more aggressive loans because housing values are going up. Well, that’s circular logic, of course. But that doesn’t stop it from happening. So things get lending starts accelerating, and things feel even better. You know, the business community is euphoric. tax receipts in the government go up so that the government feels great the government feels like there’s an economic miracle. You feel like you’re going to take over the world. Remember when this was happening in Japan in the 80s. We all thought Japan was going to take over the world. And frankly, a lot of the same stories have come out about China. That you all know China is going to take over. No, it’s just runaway private lending, and it’s going to come back on itself, it’s going to reverse. So at some point in time, somebody realizes the emperor has no clothes and things start to unravel. Very interesting, fascinating stuff. Well, Richard, this has been a great discussion. Thank you so much for joining us today, folks. That’s Richard, vague and really insightful. Thanks for joining us. Thank you for having
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