George Gammon on Inflation and Financial versus Real Economy Jason Hartman brings on Macro-Addict, Entrepreneur, Investor, and Real-Estate expert, George Gammon. Jason and George talk about U.S. inflation and compare it to Columbian inflation.
Hey, Jason just wanted to send you a quick message of gratitude. I woke up this morning to all of the panic in the stock market, seeing that the market was down 1000 points. And CNBC was getting me all worked up. And then I realized, wait, I’m not in that game. I’m in the real estate game. And I just even with its challenges, I’m so grateful that I got into the game and got in with properties. That makes sense because the rent income keeps coming in. And real estate is certainly not a perfect investment. But I’ll tell you what, I don’t wake up in panic because I just lost thousands and thousands and thousands of dollars pretty much overnight, which I know a lot of people did. So thank you glad we connected and I’m glad to be in the income property game instead of the Wall Street game for my future.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class. That will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and get involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:38
Welcome to episode number 1397 1397 and I am here with George gammon coming to you from meta gene Columbia I still want to say meta game. I say meta you you say meta game, and they haven’t labeled us a total gringo and run you out of town.
George Gammon 1:55
Well, they’ve, they’ve labeled me run me out of town okay.
George Gammon 2:00
Jason Hartman 2:01
well, hey, George, I had you on the show the other day. And, you know, it’s been great spending five days here in meta gene. And I gotta say, I am so pleasantly surprised. This is a delightful place. You know, I grew up as a kid hearing about the Midian cartel and all of these terrible things. I saw movies with Chuck Norris and getting rid of the drug smugglers and all this kind of stuff. This place is charming. I mean, you got incredible restaurants, artistic architecture, artistic food, people that are exceptionally nice and helpful. You know, I remember years ago when I was like 22 years old, and I went to Europe for the first time as an adult. I was born in Europe, but I remember the Italians were always super helpful. Those were like the really helpful people in the French they’re like, get out of here. You know that I care about you. But the Colombians are just so nice. And so helpful. You know, when I’m struggling reading something, they just come up and said, Can I help you? You know Spanish and A really, really pleasant surprise. But since this show is about real estate investing and economics, we talked a little bit about your real estate deals in the US, and here in Colombia. And I got to thinking and we talked about this a little bit the other day, about inflation. And of course, South America and Central America has been infamous for their terrible inflation disasters. Right. You know, I sent you over a chart this morning. That’s pretty interesting. And we were talking about how the humble peso and by the way, since I have some here, we might as well just pull them out of the wallet. Yeah, take the 50 right. Yeah. So so this is 50 pesos no 50,000 or Oh, this is 50 out was 50 mil pesos 50,000. So that’s thousand. Okay, so this ain’t worth very much is it? About 15 bucks $15 or so. Now, you can always well, it gives you a hint, at least when you’re looking at any kind. See you denominated in really high numbers. You just have to think that when they created that currency, a single unit single peso must have had, I don’t know, roughly the equivalent of like the concept of $1, I guess.
George Gammon 4:15
Yeah. Well, they didn’t have that many zeros to begin with.
Jason Hartman 4:18
George Gammon 4:18
Yeah. It’s not like they started saying, Well, what should our main right, you know, which the main number
Jason Hartman 4:24
one was building?
George Gammon 4:27
Jason Hartman 4:29
That that’s my point, though, right, is that it’s just a clue that there must have been rampid inflation in that country. Right. Looking back, just let’s look at that chart for a moment. Yeah, this is premise. No, there is your chart. Okay. This is from Columbia. reports.com, I believe is the website. But George inflation rates of 30 to 40%. Here in the house, yeah. What are your thoughts about that and, you know, just anything you want to say To our listeners about inflation in general, do you agree with Milton Friedman, that it’s always a monetary phenomena now? No. Okay. Tell us about that
George Gammon 5:08
now, because there’s, I think you can disprove that pretty easily, especially with what we’ve had since 2008. Because they’ve increased the money supply. Incredibly, if you look at a chart of them to it’s just unbelievable. I mean, talking stick
Jason Hartman 5:23
right, left, right. So a lot of money has been created. And we’ve had some inflation but it is an imbalance with the money creation. There’s
George Gammon 5:30
two components that are you freedom got it, right. It is about money, but it’s also about velocity. Okay. He saw
Jason Hartman 5:36
a lot of velocity was consistent, right. And so if philosophy is low, even if money creation is high, since it’s not moving through the economy, you don’t get a high inflationary effect.
George Gammon 5:50
Yeah, that’s exactly right. I always just use a very simple example and say those, let’s just pretend that you are the Fed printed a trillion dollars and just stuffed it under your mattress, right? We’re not going to have price inflation because the money is under your mattress. It’s not circulating in the broader economy. Yeah, right. Yeah. Because in your closet or buried in your backyard,
Jason Hartman 6:11
so that a bad example? Sure, but what have they done? I mean, is it’s still hanging at the banks, and it’s not trickling down if you will to use a well worn cliche.
George Gammon 6:21
Yeah. So so that’s the easiest way that I can explain that is that there’s there’s two different economies, there’s a financial economy, and then there’s the real economy, right? And the way that you would have to get velocity, the only way to really good velocity up is through the real economy. So what the Fed does, it increases their balance sheet basically prints mine at creates it out of thin air, it creates reserves and those reserves are held with the Fed at the bank accounts of the member banks, right. So it says there the member banks ago, it’s called a JP Morgan right
Jason Hartman 6:59
there. They have their own bank account and they’re just sitting,
George Gammon 7:03
right the fat you have ever written. So it’s their reserves. So then what happens was us Wells Fargo, Bank of America is exempt. So you bank with the VA. I’m with Wells Fargo, I write you a check. And let’s say it’s a check for 10 grand, and then that 10 grand would go the Fed would move that from Wells Fargo’s reserve account to be a vaes reserve account to match up the deposit. Right. So on our and the consumer, it’s a deposit or a bank liability, right. And on the on the side of the banks on the back end, that just goes that’s a liability, the Federal Reserve, that’s technically an asset but the bank on their balance sheet so that 10,000 would go from the reserve account of Wells Fargo to Bank of America’s reserve account. So that’s happening on the back end there so they could print 20
Jason Hartman 7:55
Go ahead. One thing I just want to say, you know, just remember from a bank’s point SPECT of its opposite of the way we think of it, when a bank has a deposit, that’s a liability to the bank, right? When they make a loan, that’s an asset to the bank. We think of it the opposite way. So just want to go ahead.
George Gammon 8:12
Yeah, but what’s really interesting is, and this is probably a topic for a completely different discussion, but when they create a loan, they also create a deposit at the same time. So technically, the deposits are created by loans
Jason Hartman 8:25
by debt. Money is lent into existence, which is a very far flung idea that is really hard to get your head around. But yeah, maybe that’s how that’s like three more episodes we got to do on that.
George Gammon 8:37
That’s a big one. Yeah, exactly. Okay. So what happens is the Fed if they created 20 trillion, and just had it in reserves and excess reserves, then that’s really not going to get out that’s under your mattress, because it’s held at the Fed. It’s not into the system. It’s not in the economy. Yeah, going back to our earlier point, in order to get that into the economy. retail banks would have to increase retail lending, car loans, home loans, etc. And that’s what would get it into the real economy. But then people would have to spend it faster to increase that velocity. So is that going to happen? Is it not? That depends on demographics? It depends a lot on psychology, there’s multiple Vario consumer confidence, the wellfest. Yeah, a lot, a lot of things. Absolutely. Yeah. But it has to go from the financial economy into the real economy, right. And the only transmission mechanism that they currently have is retail lending,
Jason Hartman 9:34
right? So if there’s no retail lending, it really doesn’t matter how much money they print, it simply won’t show up too much in the CPI. Okay, so the inflation doesn’t happen unless that money gets into the retail sector. You talked about the financial economy and the real economy. I sometimes refer that as to, you know, Wall Street versus Main Street. You know, there’s two economies. Absolutely. And this is why the distribution of wealth becomes very, you know, yes. A lot of favorites, right? Absolutely. The rich, the banksters, the Wall Street class, they’ve benefited from all of this. And it has a trickle down to the Main Street economy where Joe sixpack lives. So it’s a really unequal distribution,
George Gammon 10:17
isn’t it? I would say it’s even more perverse than that. Because Joe sixpack, or Joe retiree, yeah, is going to make a lot more money if interest rates are at 6%, then at zero percent, okay, because they’re not making any money on their savings. And what most people don’t think about the interest rates right now in the United States with negative Yeah, real terms, right. So if you ask for inflation and taxes, that’s right. So if you’re a saver, and you’ve had this plan for the last 30 years to retire, and you did the right thing you saved right you delayed gratification. It’s totally unfair to older people. Yeah. Because and then they’re basing their number on what’s this 7% return on their money. That’s how they’re gonna have enough money. to retire? Well, if they’re only for the last 15 years, if they’re only getting zero percent or 1% or 2%, then then that’s compounded. That means there’s a lot less therefore retirement. And so they’re actually going to end up spending less money taking out less debt, and therefore that decreases velocity further. So it’s one of those unintended consequences where the feds trying to increase inflation by dropping interest rates low and they’re actually doing the opposite. Yeah.
Jason Hartman 11:31
So what can our listeners do? What what what can people do to help themselves It’s so unfair that retirees are having to invest in speculative things and risky things. For the risk curve, they should be able to do laddered CDs and bonds and build his own treasuries and treasuries and retire and get the benefits of all the fruits of their labor for the last minute, decades. We haven’t
George Gammon 12:00
gotten into insurance companies or pension funds either. Yeah. Which there’s technically savers. So the pension funds, if the pension funds, they make the promises to the people. Well, those promises are predicated upon 7% return. And those pension funds haven’t got even close to that. And we have a global pension crisis, right. It’s not just an Illinois and California thing. That’s, it’s not just a US thing. It’s an every country, right. So you forced those pension funds to go further out the risk curve? Yeah. So if we have a recession, which eventually we will, then they’re not only not going to get that 7%, they’re going to get crushed, because they took on too much risk. And however much they’re short, now, they’re going to be even more short. So let’s say they’re 50% funded. That means you are getting 50% of your your pension that you expect. Well, that’s most likely going to be a lot less when we hit the next recession because they’ve they’ve had to take on so much more risk as an example instead of just going to treasuries now they go into junk debt.
Jason Hartman 12:58
Yeah, like like junk bonds. derivatives like the ones county tax assessor was investing in in the mid 90s. Bob Citroen, it’s a famous, you know, Orange County where I lived at the time declare bankruptcy. Yeah.
George Gammon 13:09
Or they’ll invest in private equity. They’ll invest in like SoftBank. Yeah, SoftBank takes that pension fund pension money and invested in we work on investment we work was a joke from the beginning is not as much of a joke as there are other companies. Did you hear about wag? No, I don’t even know wag. What’s wag. Okay, so wag was another brainchild of SoftBank. Okay. And that was a dog walking app.
Jason Hartman 13:33
Oh, yes. I know. wag. Yes. From because I actually use students the consumer. Yeah. So it all it is is just an app where you find someone to walk your daughter, right. It’s a sharing economy concept where you just get Pete freelancers to do, right. Yeah,
George Gammon 13:45
yeah. So SoftBank invested 300 million into that 300 million, you
Jason Hartman 13:52
can build an app like that for far less
George Gammon 13:55
than $300 million. Right?
Jason Hartman 13:57
Yeah, that’s insane.
George Gammon 13:58
Yeah, this is just an obvious Investment hasn’t gone well. They take a huge haircut on we work. And that’s a whole pension. Not all, but that’s a lot of that could be your pension mine.
Jason Hartman 14:07
Okay. So pensions, insurance companies,
George Gammon 14:10
insurance companies, because that’s how they’re going to make a lot of their money is by taking all those premiums and what they don’t have to pay back out, you know, they invest that it’s Warren Buffett, and then you get you get that return. Well, if interest rates are zero or even negative, then that’s going to force all those insurance companies to go out of business along with the banks. I mean, there’s just an oddly enough if the banks go out of business, then they’re going to lend less, which again, goes back contracts the economy even more and the money supply and velocity, right. It’s just the economy is it extremely complex system, yet billions of variables and billions of transactions on a daily basis. It’s just like the weather. One way I look at it is, you always hear those stories like in Florida, Australia, where they’ve got a problem with like, let’s call it a insects. We’ve got too many mosquitoes. So they introduced some frog from India to eat the mosquito. Right. And they’ve been two years they’ve got a way worse frog product. And they had an insect, right? And then they bring in otters or whatever, eat the frogs. And that creates an even bigger problem. It’s a kicking the can down the road problem. Yeah, but each time they kick that can down the road, it becomes a bigger problem. Typically exponentially. Yeah,
Jason Hartman 15:22
right. Right, right. With all this in mind, what can people do? You know, we we’re not going to influence or change the powers that be. They’re way too powerful. They have their own agenda. What should we do as individuals?
George Gammon 15:36
I think the easiest thing you can do is if you own a home, make sure that you got a fixed rate mortgage. That’s number one. That’s something easy. It’s there’s no excuse not to have that. I also like people have a little bit of gold just as an insurance policy. I like to have some diversification, but I’m not sure that everyone can do that and see what else can everyone do? Also, I think educate yourself. Yeah. understand what’s going on. You talked about a lot of the macro stuff on your show, which I think is really important. So to you,
Jason Hartman 16:05
George Gammon 16:06
yeah. But I mean, you’ve got a real estate driven show. And you’re still talking about macro. And that’s, that’s really, really important. So I think maybe some other real estate investing podcasts might get kind of myopic, and right and what they’re talking about, and, you know, what I’ve noticed with real estate investors, is they’re very good at bottoms up analysis, but they’re horrible at tops down. Like, what does that mean lately? ignore it. Yeah. What’s that mean? explain that a little bit. So I won’t mention any there’s some online forums that are very popular that I like a lot, right? Yeah. But you go on there and see what these pros right real estate investing experts are talking about. And it’s always bottoms up stuff. It’s always about all this neighborhood and this you know, the population is increasing coming in or this zoning laws changing or
Jason Hartman 16:57
it’s always or I got a great deal
George Gammon 16:59
structure that do all these things. But then they completely ignore the Federal Reserve. They ignore interest rates. They like to interest rates when they’re talking about, you know how much it’s going to cost me to finance, right? They never consider, okay, our interest rate cycles as an example, if you go back to the 1700s, you can see that the interest rates in the United States have run in cycles about 20 to 30 years now, we’re 40 years into the last down cycle, right interest rate starting in 1981. Okay, so if history repeats itself, and I’m not saying that it will, yeah, but the probability is pretty high that at some point in time, it we’re gonna have another interest rate cycle that goes back up. Yeah. So most real estate experts as an example, probably don’t even know that they’re not even freaking
Jason Hartman 17:48
out that picture. Yeah. Yeah. Yeah, absolutely. That’s a good point. And if and when we have that upcycle all of those fixed rate mortgages that are in the hands of investors Now will become a much more valuable asset, because they won’t be able to duplicate them. No, but anybody coming into the game, after you if you got one of those fixed rate mortgages, they won’t be able to get it correct. So they won’t, they will either not buy the property, which means a shortage in housing supply. there’s fewer buyers for investor buyers, yeah, a shortage in rentals, or they have to pay a higher rate. So they can’t compete with you as effectively as offering their property for rent in the marketplace. Right?
George Gammon 18:31
Yeah, especially if it’s due to inflation, if interest rates are going up as a result of inflation, were higher inflation expectations, which would be most likely and we didn’t talk about it, but the Fed has discussed paying the yield curve like they did back in the World War Two. And if they’re doing that, then they’re going to let inflation run hot. And that’s just another reason to have that fixed rate mortgage because inflation if it exceeds the interest rate that you are paying That’s a transfer of wealth from the lender to the borrower. So you have to ask yourself, okay, if I can get a mortgage right now 3.5%, I’ll just call it Yeah. And you can, okay. So 3.5%, then you’ve got to ask yourself, okay, what is the real rate of inflation, right, and taking it to a more granular level? What is the real rate of rent inflation? Right? I think that’s another thing that even if real estate investors do look at it from a macro perspective, they just look at inflation in general versus rent inflate is really using my rent to pay the mortgage, right? Sure. So it’s really the differential between the rental rates and the mortgage that you’re paying, that is a fixed cost, right. So even if CPI is going up at 3%, but of rents are going up at 6%, then there’s that differential and that’s going to be that transfer wealth because you’re paying that loan back with fewer dollars. Are devalued don’t value the rent. That’s fantastic.
Jason Hartman 20:05
I gotta ask you, what does George gammon think the rate of real inflation is? I mean, you know, the government will tell us it’s give or take 2% most of time. What do you think the real rate is, of course, while my listeners know that it’s manipulated in three ways for waiting substitution and hedonic indexing, what do you think the real rate is? Are you your shadow stats? Guy? You like john Williams work, right? I
George Gammon 20:27
do. Yeah, I do. I love it. But that would imply that they measured it correctly
Jason Hartman 20:30
in the 70s. Fair enough. Yeah. To have a reference point. Yes.
George Gammon 20:34
Yeah. And I don’t think they can measure inflation effect. It’s just impossible. There’s too many components to it. So if I had to throw out a number just on what I see when I’m not in the states much but you know, when I go to AAA, yeah, when I’m in the state, or I look at my health insurance or the cost of XYZ, I think compound is gonna be going up at north of 5%. I’d say at least six 7%
Jason Hartman 21:00
So interestingly, that math, we talked about the three and a half percent mortgage, if you borrow it three and a half percent, even if you’re paying the debt yourself, and there’s no rent or ever, okay, and you get to deduct that interest. And just for ease of numbers, let’s say your combined state and federal tax rate is 50%. Because of Cz, okay, that’s 1.75% tax deduction. So you’re really only paying 1.75%. And if inflation is five,
George Gammon 21:34
Jason Hartman 21:35
That’s a phenomenal deal without ever renting your property. Yeah, without even producing any income.
George Gammon 21:41
Yeah, yeah, I was a lot if you know what you’re doing. There’s a lot of advantages to real estate. Unfortunately, people think they just use that as a one size fits all. Like, as an example of you like little rock and I like Kansas City, right? Well, that means that if I buy an LA Well, I’m making the same decision as George Jason, you’re definitely not because I’m buying real estate and just they don’t understand and then also to I think it’s going back to what we were saying with education. It’s important that the even if you’re a person that’s a small time investor, you want to buy a couple properties from your network, that you still listen to your podcast and understand what’s going on with quantitative easing, the Fed and macro picture. Absolutely, absolutely very important. Good stuff. George, tell us where they can find your YouTube channel. George gammon is my name or George gammon, calm and George’s typical spelling. gammon is ga m m. o n.
Jason Hartman 22:37
Excellent. George gammon. Thanks for joining us.
George Gammon 22:40
Thanks for having me.
George Gammon 22:42
Grow smart, not big. One of the things that small business owners become quickly addicted to is the notion of growth. After all, the reason why most of us go into business in the first place is to make our mark on the world with a thriving successful business. Now to the entrepreneur, the is little in life. It’s more exciting than finding new business deals, building new relationships, and growing your business from a small fledgling startup into a strong pillar of the community. What frequently gets lost in this scramble for success though, is the ultimate goal that you’re aspiring to achieve. For most business people, that goal is wealth and the time to enjoy life. Many entrepreneurs grow their way into wealth, but find that the more their business grows, the less time they have to enjoy anything. Now the reason for this is because larger businesses have more problems to solve more customers mean more decision makers to please more deals to renegotiate, and more times that issues need to be smoothed over if something doesn’t go according to plan. The trap that many business people fall into is that they start their business by doing everything themselves, and then continue to do everything themselves until they are so stressed out that a nervous breakdown ensues. In most cases, the The root of this problem comes from a fundamental misunderstanding of what business owners are attempting to achieve. Many think that the goal is to achieve more revenue. But the real goal is to achieve more economic freedom. There are two fundamental elements that make up economic freedom. One is money, and the other is time. Now both are necessary to live your dreams, and neither is sufficient without the other. The problem that’s created by growth obsession is that a business will expand its way into lots of money, but will do so by dominating all of the owners time. This apparent paradox is the exact opposite of economic freedom. Instead of building the money and time to follow your dreams, you’ve built a steady stream of money that requires you to constantly invest all of your time in order to keep it flowing. The alternative to this model is growing smart instead of growing big. The difference between growing big and growing smarter One of paradigms. The way that your paradigms are shaped will determine how your business grows. Consider the paradigm difference between growing big and growing smart. First, growing big, you increase revenue as fast as possible by finding deals and growing production. income per year of work is what matters. You say I need to spend time managing and growing my business or I need every customer that I can get. expansion is how I will grow revenue. I don’t trust anybody else to run my business the right way. And without my constant effort, this business will fail. Let’s compare that to growing smart, where you increase revenue through innovations that allow you to become more efficient and spend less time earning your next dollar of income and income per hour of work rather than year of work is what matters. You say I need to eliminate the aspects of my business that waste time but the Produce income. And I focus on customers that produce the most value for my business. Also, expansion only makes sense if my systems are already automated. You decide I must trust somebody else to run my business the right way. And a business that requires my constant effort isn’t one that I want to run. You see, in the end growth is what fuels business it’s the reason why you ventured out from the apparent safety of employment to create an enterprise of your own. Ultimately, it’s the way that you grow which will determine how or whether you achieve economic freedom. By avoiding the common fallacy that bigger must be better. It allows you to grow in a way that is smarter and consistently pushes you closer to a future of wealth, time and freedom. action item, shift your business paradigms to grow smart instead of big. Avoid the trap that many entrepreneurs fall into Growing revenue eats up your time until you have no time left to do anything but work. Always remember that economic freedom is achieved when you have both money and time, one without the other will be of little use and helping you achieve your goals.
Jason Hartman 27:23
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