Hello, my friends. And welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. And today we have a very special episode because we’re gonna talk about something that impacts everybody, not just those listening to this show, but everybody in the country and actually around the world. So my guest today really sharp guy, Jeff Deist, from the Mesis Institute, we’re gonna talk a little bit about the state of the economy and inflation, and these are things that impact you, whether you know it or not, and I’m sure you do, cuz we have a very well educated, smart audience on this show, even though we are listened to in over 100 countries, most of our listeners are here in the United States and this is going to hit close to home. So inflation has been, you know, in the headline news for a very, very long time.
And it’s an important subject. In fact, the timing of today’s interview coincided with the latest release of the annual inflation rate, which came out this morning at a whopping 7.1%, which is what was expected, but it’s such a crazy high number relative to what we’ve been seeing in years past decades, past actually four decades to be more specific. And that number that 7.1% keep in mind. That’s the headline rate that’s what’s talked about in the media and among various talking heads, but when you really look at the real rate of inflation, not the nominal rate of inflation, you know, by number that real rate of inflation is actually higher. And so the annual inflation rate that was released this morning in the us has accelerated to 7.1% over the last month of 2021. We’re here in January and that is a sharp for re new high since June of 1982, it is in line with the market expectations.
And you know, we’re comparing that to a whopping 6.8% that came out in November. So it’s still increasing. Now energy was the biggest contributor to that gain. I’m sure that’s not a surprise to many people, but really accelerated across the board housing or shelter rose from 3.8% to 4.1% food. Now I’m talking more specifically food at home, went from 6.4% year over year in November to 6.5. So a small increase, but still it’s over a 6% increase year over year vehicles, both new and used moved a whopping 11.8% for new vehicles and 37% for used cars and trucks. Think about that. Good luck finding a vehicle that is affordable. I mean, if you’re sitting on a bunch of cars and you wanna sell now was a good time. Clothing went up almost 6% medical care services went up about two and a half percent and that’s not talking about healthcare here.
We’re talking about medical care services. Inflation really spiked last year in 2021 for many reasons. I mean, we’re talking about the pandemic induced supply constraints. However we real, those might be, I mean, there’s definitely supply constraints, but how much of it was pandemic induced is another question because there was certainly increased demand. There was a lot of people buying. So demand certainly increased. There are soaring energy costs, labor shortages, which I’m still trying to wrap my head around. I think there’s a lot of people who have just left the labor market and it chosen to stay unemployed or at home for whatever reason, but inflationary pressures like these are expected to last well throughout the year. And certainly in the years to come, I don’t think is short term. And we’re gonna talk about that in today’s interview with Jeff Deist here, because he has some thoughts and opinion on, on that as well it’s anybody’s guess, but just based on the credit based system that we work and live in and where we have been coming from and where we’re headed, certainly points in the direction of more inflationary pressure and increased inflation.
So I hope you enjoy today’s. I do plan on making another one or two with potentially some other guests or maybe just myself about inflation and the impact it has. So let us go on to our interview with Jeff Deist and I hope you enjoy today’s show.
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It is my pleasure to welcome Jeff Deist to the show. Jeff is the president of the Mises Institute, where he serves as a writer, public speaker and advocate for property markets and civil society. He previously worked as a longtime advisor and chief of staff to Congressman Ron Paul, which I find amazing for whom he wrote hundreds of articles and speeches. Jeff is also, or has been a tax attorney, advising private equity clients on and acquisitions, very diverse individual amazing person to listen to. I’ve been following Jeff for years. Jeff, welcome to the show.
Thanks very much, Marco appreciate it.
Well, it’s great having you on. I love your content and, and you know, I think a great place to begin is really about the Mesis Institute. You guys have tons of content, amazing content on there from blog articles that seem to pop up daily to great videos, even for young people to get them started and understanding economics in a very basic way. And I think it’s something that is sorely needed, especially with the school systems that we have today. They’re not providing the type of, in my opinion, financial and economic education and content that we really need to educate, especially our younger generations. So let’s just start off with the Mesis Institute. What is it and what role do you play there?
I hope it is an alternative school, as you mentioned, the, the academic system K through 12 and the universities really, I think in many ways are failing young people. They cost too much money. They don’t provide a very worthwhile or actionable education in many cases, not all, but in many cases. And so I hope that we are a place where people can come and consume education for free as much, or as little as they want. Some people might just wanna read the occasional article or, or follow us on Twitter or something like that. And some people might really wanna dive in. I mean, we have years and years, decades worth of reading material in terms of free online books, videos, you name, you can get a full education but beyond the educational malpractice we’re witnessing. I also think that the profession of economics is in a really tough spot.
I don’t think it’s doing much good right now. In other words, I don’t think it’s serving mankind as a, as a science. It’s not really helping us understand the world better or helping us to become wealthier or happier or healthier. I think mostly economics right now is sinecures for people who work at places like the FED and for people who have jobs in academia and increasingly in the private sector, the big tech companies are hiring economists, particularly PhD economists to do a lot of behavioral stuff, which is really about getting the chimp to click, you know, add another item to the basket or figure out browsing habits and that sort of thing. But in terms of helping us understand the world better, I think economics is falling down on the job. And I think we’ve fallen into this trap where we imagine that the, the role of economists is to sort of tinker with public policy and make us all want to demand more stuff.
This is really the story, the 20th century and economics in now 21st, which is that governments and central banks should stimulate us. We need stimulus. Mm-Hmm <affirmative> whether that’s monetary or fiscal. And if we have enough stimulus, there’ll be lots and lots of demand for stuff, and we’ll all buy more stuff. And that’s how you have a healthy economy, but of course that’s not how you have a healthy economy. You have a healthy economy by producing more stuff, goods and services, and seeing it cheaper and more efficiently over time, thanks to capital investment. And as economies get more efficient, all those things, which used to be luxuries become available to people like us in the middle class. Things like having an automobile or a television, or being able to fly on an airplane. These were once for the very rich in society and the, the fact that we can all afford those things, or most of us can, is a result of deflation and the us economy becoming more efficient. And so we’ve lost our way in economics. And I hope that the Mises Institute stands apart from that, that stands as an antidote to that that provides some clarity that just intelligent lay people, not just academic economist, but intelligently people who have an interest in all this. And if you’re investing you better, indeed have an interest in all this.
Yeah absolutely. You made a lot of really good points. And, you know, the example I like to use often is the iPhone or smartphone. Most of the world now carries smartphone in their pocket technology being so deflationary. And now we have this technology, which has been so disruptive that has empowered so many people to be able to transact, to reach information and knowledge in an instant, to be able to transfer funds within seconds. It’s just amazing how powerful technology is, but you just to kind of close the loop there on the Mises Institute, you guys, you know, are really a leading organization for ideas that really center around liberty and free markets. And it’s really all about the Austrian school of economics, which when I discovered Austrian school of economics, I was blown away because it really resonated with how I think about things in what I believe in terms of free markets and liberties and whatnot.
There’s probably a lot of, lot to unpack there, but I really would like to kind of focus a little bit down the road of economics. You mentioned that we need more stuff, which really is another way of saying that we need to produce, we need to be a productive economy. We can’t just drop money in people’s pockets, whether it’s helicopter money or otherwise to try and stimulate the economy that does work it’s short term, but it’s not a sustainable solution. So I guess really the first question I’d like to ask you here is, do you think we’re living in a false economy, define false however you want, but is this really a true healthy economy or based on fundamentals? Are we living in a false economy?
I think to an extent we are are, and I think to an extent we have been really, since I would argue the late 1990s, the Allen Greenspan era some of your listeners might remember the tech stock bubble mm-hmm <affirmative> and burst during that period, 2000, 2001, we actually had a, kind of a nasty little recession during that period and Allen Greenspan effectively. He told investors in markets, not in so many words that he would do whatever it takes to not have another stock market crash like that, especially like the one in 1987. So that is referred to as a colloquialism called the green span put. And so ever since then, I think we’ve looked at stock markets at equity markets, but also asset prices in housing, especially we’ve looked at them in nominal terms, but we haven’t been thinking about them as much in real terms.
And so as a result of that, I think central banks have worked awfully hard in the west to, to keep asset prices up. And one way to do that is to keep interest rates down. And so if we look back at interest rates in the United States, for most of the 20th century, they averaged well between about five and 8% at the federal funds rate level, which is the overnight rate at which banks lend money to each other. They don’t have to do that much anymore because the fed has got them all swamped with cash from these set buybacks, quantitative easing. I’m sure you you’re all familiar with, but an average of five to 8% and then add a, a percentage point or two on top of that for a prime borrower, maybe add five or 10 points for a subprime borrower. And, and you have the history of the last a hundred years of interest rates in this country.
Now, interest rates also affect what Congress has to spend every year servicing the national debt. Yeah. So with 30 trillion out there in treasury debt, you can imagine that’s a pretty big number, but because the average weighted interest on, on that debt is only be covers between about one and 2%, depending on whether it’s single year, five year tenure, whatever it might be. Congress has managed to keep that most recently at about 400 billion a year as an item in the federal budget. If interest rates are more like five to 8%, that would very quickly triple or quadruple, and so would become the single biggest thing in the federal budget every year. So that’s a pickle when you’ve got this kind of debt, there’s an awful lot of political pressure on the fed to keep interest rates low. And of course there are other reasons, I mean, they’re terrified of having interest rates go up and, you know, hurt the housing market or hurt the you know, auto auto market or whatever it might be.
So I think when interest rates are suppressed like that and sub mics can’t do that forever. At some point, the market does come along and assert itself, but when they’re suppressed lower than what they would be, in my opinion, in a freer natural market for borrowing and lending boy, oh boy, that distorts the economy. It makes an awful lot of thing. Make sense on paper, the M&A market where I worked for 20 years, I mean, an awful lot of those deals work when there’s lots and lots of debt involved and not much equity involved. And that debt is really cheap. There’s all kinds of businesses. The Austrian school refers to this as mal investment. Mm-Hmm <affirmative>, that makes sense when interest rates are low. So because money and credit has been cheap for so long, I think there are just, it’s almost unfathomable.
It’s, you know, it’s very hard to describe all the distortions that might have caused throughout the economy. But yes, I, I, it makes me scared. It makes me worry for my kids, because I do think that the prosperity we’ve enjoyed materially, it has been borrowed to an extent it would be like watching your neighbor, go out and get five new credit cards. Each of them with a $10,000 limit. And all of a sudden your neighbor has all these, you know, new new car, new fancy clothes, a new, big screen TV, whatever. And you’d look at your neighbor and say, wow, he’s really doing well. Yeah, but it’s borrowed.
So clearly we can’t have high inflationary environment forever because that’s not healthy. And, you know, could be argued whether we’ll ever see hyperinflation. It’s my guess that we will never see hyperinflation, but we’ll just gradually continue down that road of strong inflation. And I’m sure the FED does not wanna see deflation, cuz that would be completely destructive to our economy. So do you think that we collectively have painted ourselves into a corner or a box that we can’t get out of? We have to perpetually be in an inflationary environment now and forever based on this credit-based system?
Well, I think we have absolutely. I think Congress and the fed working in what I consider a very unholy alliance is almost like a, a junkie and a drug dealer. Yeah. Congress consistently spends more than the federal government pays into taxes and the fed consistently monetizes that although many years earlier in the sense that they’re buying old treasury debt from, for example, so what this does is it creates an investor’s mind, not a guarantee, but this, you know, this thought, Hey, there’s always a market for treasury. There’s always a backstop. The Fed will always be there. That’s pretty much been true. So yes, I think they backed themselves into a corner and that they can’t allow interest rates to rise rapidly because a would hurt tank the economy and B the, the apprehension problem with federal debt in Congress. And the other thing is I don’t think that they really have an exit plan.
We know that simply creating more money and more debt doesn’t bring any new goods or services into the world in and of itself. You could give everybody in a America, a million dollars tomorrow, and prices would just adjust. And we’d all be the same because there wouldn’t be any more goods or services a result. But the problem is, is that we can get away with this as long as the dollar remains the world’s reserve currency. And as long as there is some appetite for us treasury debt and with, for example, European sovereign debt at not, not only negative real rates, but negative nominal rates of interest, then yeah. 1% on a treasury looks pretty good by comparison. So there’s politics involved too. It’s not just about the financial system and the banking system. There’s also the fact that America’s politically dominant and America’s militarily dominant it.
And that coming outta the Brenton woods agreement and coming outta world war II, we set in place some mechanisms, which would ensure that the us dollar became and remained the world’s reserve currency. So the whole world still needs dollars, right? If you wanna buy oil, if you want to engage international trade, that’s how international payments are settled every day across the world. So the world still needs dollars. We’re still in that sense, a safe haven and the least dirty shirt in the laundry. So I agree with you. I don’t think there’s gonna be hyperinflation. I think that the us dollar will remain Supreme for the foreseeable future, but it doesn’t take hyperinflation just at, you know, 5% a year. If you’re not getting a 6% raise or 6% on your savings, let’s say you’re an older person you’re losing ground.
Well, that’s not only true for income, but that’s true for virtually everything that has debt tied to it. If your assets are not appreciating at least at the real rate of inflation, your actually losing ground. Right. So, absolutely I guess back to my question of you know, whether we’re living in a false economy, I guess if you put it within the context of, are we living in a true free market economy? The answer would be no we’re living in an inflated economic system that is constantly requiring stimulus and juicing currency putting into the system in order to keep it alive. Is that a fair statement?
Well, yeah, to me, that’s a fair statement. I look, I’m very jaundice. I think central banks are one of the great evils of our time. And I also think that what they do and the cultural and social re not just the economic ramifications are maybe the biggest untold story of our time. I don’t think people have any real sense of how distortive all of this is on our own behaviors, but you know, that being said, I don’t know how we undo it so easily. You know, going back to some kind of private payment system or gold standards, something like that is not real easy to do when you’ve got you know, not just the whole economy addicted to dollars, but also especially elderly people who very much need entitlements in the form of social security and Medicare to get by. And those are basically fueled by deficit spending and ultimately by the fed again as a backstop.
So, you know, there’s not just easy answers to all this, but I think explaining to people what central banks really are and how money is supposed to work versus how it does is really important. I think it’s, it’s one of the most important things that any of us can do as individuals or the Mises Institute could attempt to do. And so when it comes to investing, for example, if you understand monetary policy, in addition to, you know, the taxes you’re gonna pay or the opportunity costs or the IRR, whatever, it might be, whatever you’re looking at, you know, if you understand that the only return that matters is not just the return net of taxes and fees, but the return net of taxes and fees and inflation, right. Then I think maybe that gives you a leg up on some of, of your competition.
Yeah. It’s so critical for us today to pay attention to what inflation is, how high it really is and how it impacts us in our daily lives. And this is especially true for people who are on fixed income or elderly people who are living off saving because their purchasing power is being eroded far faster than I think the mainstream media leads most people to believe which kind of goes to the whole thing of, do we even believe the GDP numbers, I mean, is GDP, you know, a, a lie as a measure of the economy because they pass a $1.9 trillion bill, and that’s just dumped into the GDP numbers. And it makes it look like the economy’s humming along. But when you go back to fundamentals, do we really have a healthy economy based on jobs and labor and whatever else, do you have any comments about the GDP numbers and why they’re not reliable?
Well I mean, I I’ve very much think GDP is a useless number and here’s why first of all, GDP is basically a retail figure. It represents only final end products and services and the dollar, the nominal dollar amount associated with them. So there’s all there are stages of production, the manufacturing and wholesale level, which are in no way reflected and a lot of those by the way, take place in different states. And then the oftentimes blue state where the final product is, is, or services sold, gets the GDP credit. So to speak. The other problem with GDP is of course, that it includes government spending that’s part of GDP. So the nation of Turkey, the Republic of Turkey, for example, after the 2008 crash went out and borrowed, borrowed, borrowed, but it didn’t borrow in Turkish li which it could print to repay it borrowed in dollar in Europe, that’s a disaster.
And so the Turks built all these huge infrastructure projects, you know, and auto bond, huge airports. And so everyone was looking at Turkey as this economic miracle. Oh my gosh, they eight or 10% GDP growth. They’re gonna join the European union. Well, it was all borrowed. Okay. The other problem with GDP is that it nets out exports over imports. So I, I don’t care about that. I care about consumer preferences, right? If consumers prefer to buy their automobiles or their toothpaste or their shirts or whatever from China, you know that’s their demonstrated preference, regardless of what’s they say, so I don’t believe in fetishizing exports over imports. And finally, there’s no such thing as an aggregate wellbeing. I mean, look China and India have much higher GDP than Lichtenstein, but GDP per capita is what matters, right? I, no offense, I’d rather live in Lichtenstein yeah.
Than in the, of China, because it’s much wealthier on per capita. So the idea of aggregating wellbeing or aggregating the economic power of society, you know, it, it doesn’t really hold water. It doesn’t make a whole lot of sense. We ought to be looking at, at all the various stages of production, we ought be forgetting about government spending, which is actually takes money out the legitimate private economy. Doesn’t add to it as an add to output or productivity. It detracts from it that ought be a minus in the GDP column. And so I think it’s very easy to juice GDP. I mean, like have a war, for example, produce a bunch of bombs and missiles and tanks and pay a bunch of soldiers and you’ll radically increased GDP, but you won’t actually be providing the goods and services that a marketplace wants that make a society richer.
So it’s pretty clear that you do need consumption in an economy in order to move the economy forward and, and have a healthy economy. However, I think what you’re saying is that you need production first per production has to precede consumption because you can only juice consumption for so long. But if the production’s not there, you’re not going to have a sustainable economy. Is that a fair, fair statement?
Yes. <laugh> that is called SAS law. The famous French economist named John Baptist say came up with this a few hundred years ago. And that is that production creates its own demand. And what he meant by that is that, you know, all of us hopefully produce things in our jobs and that job, or, you know, may, maybe you’re self-employed, maybe you invest how however you earn money that job produces an income for you. So it’s your productive effort that gives you the ability to then go out and consume, right? That’s how you get the money, unless I suppose, inheritance or something like that. So that’s how we have money to consume. So the idea that all we have to do is stimulate demand, which is something that really comes out of John Maynard Canes and his revolution in the 1930s, which is still very much with us in economics and politics.
Oh yeah. Very much.
This Keynesian, Keynesian notions that has become a mythology where that, you know, you stimulate the economy, you grow in economy by stimulating demand. But the problem is, is that we all have demand. All of us want goods and services. Naturally. The question is whether we can pay for it. And so those are two very separate questions. And, and so yes, absolutely production greater productivity at lower cost, thanks to capital investment, which comes from profits. Mm-Hmm <affirmative>, you know, this isn’t rocket science. That’s how you build a healthier economy, not through a bunch of crazy new money in debt.
Yeah, I’ll say sadly, every administration seems to continue at different speeds. The Keynesian model. Now you have to give John Maynard Keynes some credit for the model he’s created. But I say sadly, because I think a lot of the modern day administrations have taken that to an extreme where it’s money printing on steroids. I don’t know how else to say it. And this is why I asked you before if we painted ourselves into a corner, because we’ve created so much emphasis on consumption and stimulus, or, you know, quantitative easing call it whatever you want. That there’s no point of return. What’s interesting is I saw a statistic just maybe three, four weeks ago that when a country’s GDP surpasses the 77% point, I forgot how they were denominating that, but when your GDP exceeds 77% of your country’s debt, there is no point of return. You’re basically on a path of no return. Have you heard this before? Or does that ring a bell?
Yes. There’s, there’s a lot of comparisons out there between GDP and debt and back in the nineties. And two thousands, people were talking about the Japanese economy a lot with that regard. So there are still countries out there that who are worse off than us. In other words, there debt to GDP is worse ratio than ours. Yes. I think it’s absolutely troubling. And we haven’t seen anything like this since really world war II in America.
Wow. Okay. So let’s bring this back to interest rates. You were talking a little bit about it earlier, and then you mentioned a couple things before we started recording here today, but you know, everybody always thinks about the direction of interest rates. Is it gonna go up this year? How’s it gonna affect me? Is how’s it gonna affect my lines, credit, mortgage rates and whatnot. What is your prediction for interest rates short term and long term?
Well, I think they’re definitely going up. There’s no question that I think the fed is gonna be unable to keep a lid on this. And so when they announce as J Powell recently did that, they, you know, they might even consider 500 basis points, half a percent. What they’re trying to do is get out in front of the story as a PR matter, because it’s something they can’t control anyway. So they wanna make it look like it’s, they’re doing so again, <laugh>, I’m a skeptic. I’m very joist when it comes to central bank. So maybe you should listen to somebody a little more objective <laugh> on that score. Well, we’ll listen to both sides of the equation. Yeah. And listen to both sides. But, but here’s the thing. If we just think about interest rates, conceptually, right? We make too much of this. We tend to think of interest rates are somehow these policy tools by these technocratic central bankers who turn these dials and fine tune the economy to figure out the right rate of interest.
Well, that’s nonsense interest rates are just, they’re just exchange ratios like anything else. And they ought to reflect supply and demand supply of and demand for loanable funds. So if lots of people are doing well in a society, they’re making money, they’re making profits above and beyond what they’re spending in their business. They have extra money. So they want to put that into investment or savings with a bank or something. So that means that there’s more loanable capital available. So as that increases, we would expect interest rates to fall because there’s more, more savings available. And as the economy got worse, we would expect people to have less fewer profits and capital loans. So interest rates to go up same on the demand side. So the idea that interest rates should be set is exceedingly anti-free market. Mm-Hmm <affirmative>. And as you mentioned earlier in the show, that’s why we cannot consider ourselves as really living in a market economy.
Because half of every equation, half of every transaction in America, we you’ve got the gooder service being sold on the one side on the others side, you have the money being paid for it. So half of that equation, the money is I think, losing quality every day. I mean, you know, people don’t think too much, they don’t examine the money and whether the money they’re getting is any good. They just sort of bake that into the price. Whereas if you let’s say you wanna buy a new car, you probably go out and do some research. Oh, you know, know the new accord has this and that. Or how about the new Camry? You know, I, I mean, before you spend, I, I what’s sec, what’s an accord, 35, $40,000 now. Sure. Before you drop that kind of money, you know, you probably wanna think about it a little bit, do a little research, but yet how much research does Honda do into the dollar you’re giving them, I guess they, they’re smart enough to figure out, Hey, we gotta bake can some, you know, money here, some price for inflation, but it really is a, a sad state of affairs. I mean, we can understand interest conceptually, right? We all want stuff. Now. That’s why you’d rather have your dream house at age 40 than age 90, right? Yeah. Because life is uncertain and you might die, right? Heck you might die at 30 and you might get hit by a bus. God forbid. But nonetheless, we can understand the concept of time preference, all things given. We’d rather have stuff now, rather than later, however, there’s scarcity in this world and to have a beautiful house or to have all these things you might want, you gotta work hard and build up some savings or invest money. And you know, it takes some time to build up to where you can get that. So that’s why we’re willing to pay interest, to get something now, purchase something today and make payments on it over time.
That’s why, because we prefer to have it now and enjoy it now rather than having to wait till we save up the, the entire sum for it. And so we’re willing to pay interest on top of the purchase price. On the flip side, somebody who has a bunch of money says, Hey, I’m doing okay. I’ve got my house, I’ve got my car. I’ve got my life. I’m, I’m pretty good. I’d like to take some of this extra money I’ve got and put it into savings or investment vehicles. So they’re making that money available to other people. They’re putting it at risk. There’s a risk of loss there. It could go to zero, that investment or that bank could go, could put. And they’re also not using that money today to go out and buy a third car or a bigger house or a fancier vacation, whatever they might do instead, they’re choosing not to spend that money <affirmative> and they’re putting it in play at risk in exchange for getting paid some interest for it. So, you know, this is all you need to know to understand interest rates is time preference. Some people would rather buy stuff now and pay interest. Some people would rather not buy stuff now and get paid interest. Time is the element and all that. But instead, we’ve worked ourself up in this tizzy where we have to listen to these central bankers, like they’re sitting on a mountaintop with Moses coming down with some tablet and, and it’s just absurd. The whole circus, just I find nauseating.
Yeah. I love everything. You said. The whole concept of having something now from a consumption perspective can actually to be applied to an investment perspective because, you know, there’s a concept for saying that it’s better to have a dollar today than paid that same dollar a year or 10 years from now because of inflation. I mean that dollar will be worth less as more time goes on. So it’s the time value of money, but you know, everything you just said, spot on and very interesting. And the whole reason why we actually don’t have true free-market economy, because if we did interest rates would adjust themselves based on supply and demand the demand for that capital to be borrowed at a particular rate. But unfortunately for us, the fed has a lever that they can’t play with and they do, and that is called interest rates.
And so they set the rates up and down in an effort to try and pool or heat up the economy. And unfortunately we just have to follow suit and follow along with whatever they decide to do. And you can actually see the markets react like even without the rate adjustment, all they have to do is just hint towards it or mention it. And the markets react. In fact, they did this morning, the inflation numbers that were just announced. And we were talking about this for a few seconds before. So, you know, kind of leads me to a question as transition to inflation. And this is kind of where I wanna finish the show up with is our economy, is our economy really being driven by the fed or is it being driven by the economy itself? Like what is the biggest driver of inflation today?
Well, there’s, it’s complex. There’s a lot going on. And I mean, you know, seven, 8 billion people get up every day around the world in an interconnected dynamic market. And so I think the COVID lockdowns clearly had a lot to do with it because when you send people home and shut down vast quads of the economy and they’re not producing whatever good or service they normally produce for many weeks or months or even years, yes, obviously that is gonna reduce supply. And if demand stays the same or higher, you’d expect prices to rise for that stuff. And of course we’ve seen that, especially with autos these chips that a lot of the newer cars require are very, it much backed up. A lot of them are sourced solely from Taiwan. So there’s kind of a bottleneck there. And so some of this is, is transitory.
In other words, it’s just a inflation kind of a one time thing. And it affects certain goods or services more than others like autos. But the other side of this is of course, all the monetary and fiscal stimulus that Western countries and Western central banks have engaged since COVID. And so something like 25% of all us dollars ever created in the history of the United States have been created in the last year and a half last well, almost two years now. So obviously when you’ve got lots more money and credit in circulation mm-hmm, <affirmative> chasing fewer goods because of COVID lockdowns, that’s a bit of a perfect storm. So it doesn’t, again, it, this isn’t rocket science. It’s just, the whole thing is obscured. When you read the financial media, it’s almost like we’re trying to suss out animal spirits or something.
No, it’s, it’s pretty simple. It’s supply and demand, but you have to look at inflation the, in three different ways, there’s a, a financial person on Twitter. She’s very active there. Her name is Lyn Alden. Mm-Hmm, <affirmative>, she’s great – L Y N A L D E N, whom I really enjoy. She has a lot of free content. I think she has some paywall content as well, but she wrote a fantastic article on the three kinds of inflation. One of them was a consumer price inflation. That’s what most of us think of as rising prices at the grocery or whatever. It might be, asset price inflation, which is more what we think of in terms of equity markets, especially in the last, since that green span era, right. We mentioned, and also housing real estate in, you know, this overheated markets like San Francisco and Seattle and Los Angeles and New York for most of the past 20 or 30 years.
And then finally monetary inflation, which is where the actual money supply is being manipulated, increased, normally increased, but sometimes reduced by the machinations of central banks and treasuries of countries. So those three things are very different. They’re very interconnected. It’s a little more complicated than we like to think. And sometimes those three things operate somewhat independently of one another. In other words, since the crash of oh eight, we saw a lot of asset price inflation, again in certain housing markets and in the stock markets. But we didn’t see a lot of consumer price inflation with respect to let’s say food. So to understand why prices don’t just rise uniformly across all goods and services, I’ll recommend her article to you, but all three of ’em are happening. And at the same time, and I will say this, I hate to make predictions, but I don’t think there’s any way that the 2020s, the powers that be will be able to keep price inflation, mostly suppressed. They, the way they were able to in the 2010s following the, you know, the oh eight crash, I think consumer price inflation is here to stay. I think it’s gonna run pretty hot for a while. And I don’t think it’s transitory. Yeah.
Consumer price inflation has been a big problem here for a few years, or maybe a long time. Depends on how you measure that. The whole thing about price inflation with food. I think what we are seeing more of there is shrink inflation where, you know, boxes and packaging are actually giving you less of the same stuff. Even though you’re paying the same amount and the box size is the same, but you’re actually getting less product. And this has been going on for decades. It’s nothing new, but you know, where we’re seeing the highest rates of inflation is in the healthcare sector, education and insurance among other places. And this is just crippling to so many people. And I don’t think there’s any sign that that’s gonna slow down anytime soon. I don’t know what you think about that.
Yeah, and note that those three industries are all closely related to government. Yeah. And enormously regulated by government. There there’s are hardly market institutions take health insurance. For example, the Obamacare bill says, you have to have it <laugh> well, you know, a, a service you’re required to have is not a free market service in my opinion, right? And of course education’s dominated by government and government school rules. And so is healthcare. Healthcare is dominated by Medicare and PPOs and HMOs, which have a very incestuous relationship with government. So if you do look at the cost per pupil in private schools, of course you’ll find that it’s far less. And generally the educational outcomes are, are better than public schools. If you look at the cash base medical services, if you look at offshore medical tourism, if you know, people will go to Mexico for dental and vision care.
If you look at plastic surgery and botox, that sort of thing, which is generally cash, those prices have been coming down and down while the quality’s been going up. If you look at LASIK eye surgery, you know, way back in the seventies and eighties, they used that with a scalpel rather than a laser. And it costs something like $10,000. Now they do it with a laser. It costs maybe $2,000 in, in 2020, $2. So you know, we, we understand that wherever government gets heavily involved, banking, insurance, medicine, education prices go up and quality goes down wherever the market is allowed to operate. Most freely quality goes up and prices go down. Yeah. It’s a pretty simple lesson.
Yeah. I like your example of LASIK, because that’s a great example of where technology can not only be disruptive, but deflationary. And it’s just to the consumer’s benefit where it’s just driving prices down and it’s making it more productive and efficient for everybody throughout that whole supply chain. So that’s a great example. Having said all that, do you think this can be contained? We talked about this briefly before. I mean, we’ve got 30 trillion of us treasury debt at sub 2% interest rates, you know, inflation is here. I believe it’s here day for a very long time. Is there anything we can do? I mean, can we get outta this count? Is it even a possibility to get outta this?
I think so because America is still relative to the most of the world, both in terms of personal or individual freedom and taxes and regulations, but also in terms of capital attracting capital a again, America is in many ways the least shirt in the laundry, other central banks and other governments and other countries have been, especially since COVID working overtime to make America look good, frankly. And so if we sort of step back a little bit and I’m, I’m as guilty myself of this as anyone of, you know, thinking, oh my gosh, all this doing gloom, but if you step back a little bit and take a look at the United States, we still have a vast continent in here in north America with oil and natural gas wildly beyond what we thought we had, even in 2013, when they discovered the Bach and shale up in Montana and up there, the Obama administration said us, I think we have a hundred years more oil than we thought.
We have a huge amounts of natural, old timber in forestry in north America. We have vast amounts of airable farmland in this country. We have more farmland than we need to feed ourselves. So we can be an exporter of agricultural products. We still have a, you know despite the problems with our schools, we have a fairly educated workforce and our universities are still sought after, by your national students. These, you know, the Ivy league Stanfords of the world. And more importantly, I think, you know, and I, I fear we’re losing this because this is the most important element beyond any natural resource. The most important element is that sort of optimistic American mindset that, you know, Hey, things are gonna be okay, this idea where if you’re standing in line at the grocery and there’s two or three lanes open, and they’re backing up that someone comes and opens another lane that says, oh, come over here.
Because people start to grumble a little bit. Well, in a lot of countries, they would just accept that there’d be a more of a fatalistic outlook, and America’s never had a fatalistic outlook. And, and I hope that the, the zoom, you know, the 20 somethings and under today are not getting that from COVID and everything else that’s going on with you know, it’s hard for them to buy houses. It’s hard for them to pay for college. It’s hard for them to get married, failure to launch all this stuff, which I don’t blame them. I mean, those, these are real economic concerns. So if we lose that sort of American sense of optimism, then we’re in big trouble, but there’s no reason on paper that we couldn’t easily walk away from the rest of the world. I mean, we could deal with a 30 trillion debt by selling federal land.
I mean, that’s the obvious solution to that. There’s vast portions of the west, which are owned. Idiotically owned by Uncle Sam. And there’s no reason we couldn’t contain our dollar. There’s no reason on paper. It’s more about our will to do so, you know, are we gonna let the political class continue to snow us with a fake economy? Or are we going to, you know, demand that we have a, an actual economy built on fundamentals? I think that’s up to us because we tend to think of politics as intractable, but they, they only do what they can get away with at the end of the day. So, yeah, I think I don’t wanna expatriate. I’m not sure where I would go on earth that would have any better prospects than the United States and even five or 10 yrs ago. I might have been more interested in a second passport, but today I don’t think that’s the case. I think COVID proved it. I mean, my God look at Canada and Australia who would’ve thought that they would become what they have in just the past two years. So, and no place. I’d rather be right now.
I would tend to agree. I mean, you just, for a brief moment, Ronald Reagan’s quote, just flashed in my mind so that the United States is kind of the last free, forgot how you said it, state in the world where you can have rights and freedoms something to that effect, and you could lose it within one generation <laugh> you can. So there’s a lot of truth to that. So clearly we need to be concerned about inflation. So let’s kind of wind this down with a couple questions, just from an investment perspective. When we see inflationary and environments like this, especially when we’re above the historic average or norm, where are you seeing investors move towards? Where do they migrate to in higher inflationary times?
Well, we’ve clearly seen this in the equity markets because people have to chase yields my great grandmother. I remember her, she lived until I was five or six, you know, she was able to literally just save cash, money cash in, in the household, in physical form, whenever they had a little extra in cigar boxes or cookie jars or whatever, you know, she was able to save cash money and have that be a wise thing to do. Whereas today I hate to say it savings is for chunks, right? If you’re getting 1% or, or less and inflation seven <laugh>, you know, you have to go out there and try to figure out how to mitigate that. And the last five or 10 years, people have tried to mitigate it by buying fang stocks, basically buying Bitcoin. Yep. Basically in some cases, real estate and an awful lot of people, especially older people who once you stop working to be shifting to very safe investments, to just have their money.
Last them are forced into stocks and, you know, other things just to, again, to chase yield. So the fact that interest rates are so low has had a hugely distortive effect on the equity markets, cuz it’s pushed a lot of money into them cuz who wants to sit there and, and you know, with 500 a grand in your Vanguard account and make 1%, I mean, that’s, that’s obviously a crazy thing to do in cash. So I think that’s been a big distortion. I think, you know what the scary thing about real estate now is of course, this rent moratorium that we recently experienced. I mean, once that precedent is set and by the CDC of all agencies, not the fair housing authority or something like that, I mean, by the CDC of all agencies, I mean, what does that mean? Next time? There’s an economic crash like, oh eight or next time there’s a terrorist incident like 911 or next time there’s a new virus, you know, that’s gotta be pretty sobering for landlords.
And so what we’ve seen is a lot of consolidation where big private equity players and others are buying up old UAS of real estate and becoming landlords because the economies of scale work in their favor. Yeah. So I think people need to have, have stuff rather than dollars. I mean there’s no other rational play and what that stuff is. If, you know, if I knew with any degree of certainty, I’d be out buying it, I’d be on my E-Trade account or whatever. But you know, you can understand that a lot of speculative money probably went into Bitcoin. A lot of speculative money probably went into real estate, especially with the great migration we’ve seen thanks to, and really hot markets like Idaho and Phoenix and Florida and Texas. So yeah, you know, it’s too bad, but cash is not king right now. And if we ever find ourselves in a deflationary type spiral or a collapse, like the great depression in the late 1920s, early 1930s, then cash is gonna be king once again. But for now it, it certainly isn’t.
Yeah. I like to say that cash is trash. Robert Kiyosaki’s been saying that for a long time as well, but the problem is, is that, you know, the final nail in the coffin just seems to have been in 1971 when we completely separated ourself from gold as a tether to the us dollar. I mean, then it was just a four X free floating currency. And it all, you know, was all relative to the value of other currencies in the world. And so, you know, that really is when the currency was not money anymore, it was just fiat and it was just worth whatever it was worth and it could easily be printed and inflated away. But in my opinion, I think the four places that people can go for, not just an inflation hedge, but to beat the real rate of inflation that we’re seeing today, I’ve always said is businesses productive, growing businesses that are able to scale and grow and exceed the real rate of inflation, which is very doable.
We see it all over the place. And that’s very, very true in the e-commerce space, real estate equities, which has been but scary for many people and crypto like Bitcoin, which is even more scary and far less understood by the majority of the population. One of the reasons I love real estate so much is because we can attach 30-year fixed rate mortgage debt to it, which by definition it won’t change, but inflation will continually erode the about of that debt year after year after year. So my $500 mortgage payment today is gonna be more palatable next year. Certainly much more palatable 10 years from now. And it’s gonna be a Starbucks coffee in 30 years from now. So that’s what I love about real estate is sticks, bricks, concrete and copper, which are all tied to inflation in terms of its price adjustment. But on top of those commodities that makes up the house, you know, the land is deflationary, it’s limited in supply, and then you can attach debt to it, which is eroded by inflation. It’s a beautiful investment. You know, I argue that it’s the best investment last, you know, out there that you can park your investment capital into. So I dunno if you have any comments about that, but I’m gonna leave you with one last question. And then that is this, you know, speaking of real estate and housing, what do you think all of this means the inflation and you know, the direction of our economy? What does that mean for housing in the us for, let’s say the next few years or decade.
Yeah. Housing is very difficult to understand and I don’t think you can look at it nationally. I think it’s absolutely, it’s an exceedingly local investment or an exceedingly local market. I mean, I live in a, the college town of Auburn, Alabama, which is about 75 or 80,000 people. So very, very unique niche place, growing, booming, lots of new condos, cetera. So I, I might have a sense for my local real estate market and understand it and be able to, to invest rationally or something like that. But boy, you know, when I’m looking at REITs or something shopping malls or something that’s national, I don’t know that I have the time or the inclination to understand that investment. I would be inclined to do individual proper or something like that rather than trying to get into a fund or I agree, you know, something like that, but you know, it’s tough, but if the fed or the powers that be, wanna give you two and a half percent fixed money for 30 years, that’s awfully hard to say no.
Yeah, my question is how much of it can I get <laugh>
Right. You know, exactly.
It’s on sale stock up on it. Jeff, it’s been an honor having you on the show. Is there anything you’d like to share with our listeners before we wrap up and then we’ll just, have you share, you know, what you can about finding you on social media and the Mises Institute?
No, I appreciate you having me Marco and I hope that people can go to mises.org and find some to get interest them.
Yeah. It’s a treasure trove of content. It there’s so much good stuff there. And you’ve got, you know, links to all kinds of books that you guys have based, you know, your entire organization on, correct me if I’m wrong. You’ve got some books on there as well.
Yeah. We’ve got hundreds <laugh> oh yeah. So, you know, be careful, hopefully you have a long weekend. If you ever, if you’re interested in [inaudible] and you ever find yourself on mises.org, you might, you might end up at [spp-timestamp time=”3:00″] AM down the rabbit hole.
So mises.org, M I S E S.org. And where can they find you Twitter? Where are your handles?
Yeah, Twitter’s probably the best place. Just one word at JeffDeist – D E I S T generally keep up with everything I’m doing. I do a weekly radio show, do a weekly podcast, occasional article as well. So generally all that stuff is you can find via Twitter. Cool. Well,
Cool, well, we’ll put those links in the show notes as well as in the transcription on the website. So people will be quick to find it, but thank you for coming on the show. It’s been a wonderful interview. All right.
Thank you, Marco.
Well, that was all really powerful stuff. And I guess I can’t overemphasize how important it is to understand inflation and the impact it has on your daily life, on what you buy and spend money on. And particularly your investments, you know, in terms of assets, asset, price, up appreciation, cost of goods and services. It really impacts you in every part of your life and the only way to protect yourself and defend against it or to get it and beat it is to actually invest in assets that outpace the rate of inflation that will at least compete with or worst-case scenario defer or minimize the impact of that inflation to lessen the damage or lessen the harm in terms of your purchasing power of your equity and capital.
Because think about it. Anything denominated in dollars is going to be affected by inflation. So it’s important that you educate yourself. And like I said, I’m thinking of having a couple of more episodes here over the course of upcoming weeks and months about inflation. So we can help educate you further on inflation, what it is and how it’s impacting you.
So, anyway, with that, I hope you enjoyed today’s episode download our free report, The Ultimate Guide to Passive Real Estate Investing. If you are looking to in invest in real estate, as one of those asset classes I was talking about earlier, just schedule a free strategy session with my team here of investment counselors. And they can certainly talk to you about real estate as an investment class and how to get started or how to grow your existing portfolio. Love answering questions about real estate. So just click Ask Marco at the top of the Passive Real Estate Investing website and submit your question. I’ll do my best to get to all of them. And if you’re listening to this for the first time, or you have been listening for a while and you haven’t subscribed, just click that button to subscribe. It only takes a couple of seconds. That is it for today. Thank you for listening and we will see you all on our next episode.
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