3,000 Year of Interest Rates,Forbearance & Market Cycles, How an Economy Grows & Why It Crashes Patrick Donohoe

3,000 Year of Interest Rates,Forbearance & Market Cycles, How an Economy Grows & Why It Crashes Patrick Donohoe

Jason Hartman welcomes back Pat Donohoe as the episode centers around how the economy grows and why it crashes. They emphasize debt and how it is priced into everything. Government solutions to riots and civil unrest are more bailouts. Jason and Pat talk about how to protect yourself from the hidden tax, inflation.

Announcer 0:01
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.

Announcer 0:18
Welcome to the young wealth show where you’ll truly learn how to make, spend and invest money for an awesome life. Get the real life stuff that wasn’t part of your school curriculum. Young will gives you innovative new ways of dealing with your finances, as well as the skills and tools you’re going to need to survive and be successful out on the road. Let the young wealth show be your GPS to take you from clueless to clued in. here’s your host, Jason Hartman with gun well.

Jason Hartman 0:51

Hey, Patrick, it’s good to see you again.

Patrick Donohoe 0:53

Thanks. Same here, Jason,

Jason Hartman 0:54

one of those listener questions you sent over was about the economy growing and shrinking, and why that happens. So we could talk about the business cycle or a variety of things. And then we have to ask ourselves, have the rules changed in an era of pandemics and riots, civil unrest? What do you think?

Patrick Donohoe 1:20

Like first, I’d first say that It’s interesting that people are asking these questions. And I think it’s because they’re more aware of what’s going on in society than they have been in the past. And this is a this is a question that you can spend days on. I mean, there’s whole PhD programs on why this and why that as it relates to the economy, I think that the long and short of it is, you know, the economy is just the measurement of resources that are used for particular purposes. And when the economy grows, I think that indicates that there is an increase in production increase in value. And so in a nutshell, and really easy terms, that’s why an economy grows right in theory, but I think our economy is different than when those kind of first economists started to define economies and then start to measure it. So today our economy is in large part based on debt and consumption and And that’s where it gets really complicated in a sense, because most people think that money is value, but money is ultimately debt if you think about how money is created today, and it’s a different monetary system than past, the same time, the more you understand about that, the more questions I think you can ask because although our economy grows right GDP, obviously right now, but previous, you know, to, to COVID, you know, the economy was growing at a small percentage gain, but also it was growing was the expansion of credit and debt. Right. So that is what expanded, I would say, you know, overall economic growth.

Jason Hartman 3:00

So, yes, we live in an economy that’s built on a house of cards, essentially. And the money is created through debt and this crazy fractional reserve banking system we have, you know, both of us have studied that stuff a lot. If people don’t understand it, believe me, it’s really obscure, and it’s hard to get your head around. It’s just So weird. Read books like a creature from Jekyll Island, we both know G. Edward Griffin, of course, I’m sure you’ve interviewed him. I know I have on my podcast several times. And it’s just hard to get your head around this stuff. It’s, you know, even if you think you get it, it’s like there’s another layer, you can keep peeling back for young in a mess. But I do think we’d be remiss if we didn’t just talk for a moment about the good old fashioned business cycle. And that’s largely an Austrian economic type of thing. And if there’s any economic school of thought that I most subscribed to, and I think you too, it’s the Austrian school. And the Austrian School is, and by the way, this is by no means an academic definition. It’s just a sort of man on the street view of it is, you know, where they would say that the, the opposite of it would be john Maynard Keynes. The opposite would be Karl Marx, by the way, Karl Marx. As much as I don’t like him and don’t agree with him. I have to give him credit. He’s responsible for the deaths of hundreds of millions of people. I’m not getting giving him credit for that. I definitely do not like his ideas. But he is far and away the most influential economist in world history. He changed the world massively. The entire Soviet Union was based on his idea. And you know, it’s off hold so much the world adopted his his policy.

Patrick Donohoe 4:44

So sometimes you need contrast, Jason, you need contrast to understand the value of one system versus when it’s compared to something else.

Jason Hartman 4:51

I love it. That’s a great, I’m glad you pointed that out. That’s really good. So Austrian school would say the way to create wealth is through capital formation and production. That’s like reality, and it totally makes sense. But we don’t live in that world. As you were alluding to a moment ago. We don’t live in a world of reality. We live in a world of money being a super symbolic idea, and really literally an idea based on Fiat and We live in a world where Keynesianism has prevailed largely. And it is the way it is. But going back to that Austrian School business cycle concept, let’s just talk about that for an idea. So they would say that the economy always acts in cycles. And you know, if you’re looking at a chart, it goes like this. And there’s this cycle where it’s a boom time. And there’s expansion, and more inventory of products and services is created. And I even say inventory in the world of services. Because if we look at what happened during the shutdowns, nobody could get a haircut. Nobody could go to a nail salon, nobody could get a massage. Nobody could get a lot of stuff, right? Those are all services. So even services have an inventory in a sense because if those businesses go out of business, which many of them will or have already, there’s lower inventory. Okay, now we mostly think of inventory In terms of widgets, so this is an economic widget. And so inventories expand, because manufacturing expands, credit expands, and everything’s going well, and there’s a wealth effect and people feel good. And then it gets to a point where people start to wonder, they start to lose faith in the system, they think, gosh, this can’t go on forever. Maybe we better save a little money for a rainy day, maybe the sun won’t always be shining. Okay, and they start to rain in their horns a little bit. And then you see the stock market, pull back, right, and you see some bad days occur. And then you see the houses in your neighborhood are selling for those crazy prices they once for selling for. And you see, well, you know, maybe it’s not quite as easy to get a raise at my job or to get a new job or to get that promotion. Or maybe my company laid a few people off. People searched a little bearish, right. So that sets up for the next cycle which is the bus, so on Like you.

Patrick Donohoe 7:22

Yeah, those are great. Those are great thoughts. And if you think about it, like the growth and the crash of economies is in large part, the dance between the rational and the irrational, and I think from the rational side of things, right, it’s, I think people are naturally wired to to grow first and foremost. And then they’re, they’re wired to either get the same for less gain or get more for the same gain, meaning the phone right and the efficiency of phone and technology, right, you’re paying a little bit more, but look at how much more you’re getting compared to five years ago, 10 years ago, or you get the same you get the same for less price. I think the apple, the new c version of it, right is is much less at the same time. It’s still does a lot. So I look at you know, just in a nutshell, that’s kind of the rational side of things. But then like you alluded to Jason you have the irrational side of things which is which is emotion and I think emotion sometimes a lot Sometimes it drives behavior, a for one direction or or another. And when someone becomes afraid they behave a certain way, when somebody is excited, they behave a certain way. There’s like an investor curve, right, as far as risk levels are concerned. And the highest risk investment is when there’s like peak euphoria, right? The best time to invest is when there’s the the greatest fear and despondency of people.

Jason Hartman 8:47

Right? The bloody streets and metaphor, right? Yeah, buy when there’s blood in the streets and sell when everybody’s partying. Right,

Patrick Donohoe 8:55

exactly. So that’s, that’s kind of like I would say, a very awesome way of looking at things. But I would say that the thing that’s important to understand about the Austrian School of Economics is it’s based on freedom. There’s no government intervention. If somebody makes a bad choice, whether it’s starting a business or allocating capital to some no bailouts, and they fail, right. There’s no bailouts, they have to fail. They go bankrupt, they go out of business, and that’s necessary for the learning experience of helping To provide a service provider a good to make sure that what their ideas in their mind is actually in demand in the economy, right. That’s what I love about creative destruction, for sure. And Jupiter’s credit rating, you know, we’re so afraid of failure. But failure is one of the greatest teachers, especially in business. And you just continue to bandaid and bandaid and band aid and band aid, something, the bone is eventually going to break the wound is eventually going to get infected and a person is going to die.

Jason Hartman 9:52

That’s a very good point. And I wouldn’t put it maybe another way, though, because we all saw that with the bailouts right in the Great Recession, and a lot of people were very upset about the bailouts and the bailouts prevent they artificially prevent what needs to happen. And those those failures, those bankruptcies, those businesses going away, it needs to happen. And when you don’t let it happen when you interfere with the process, when The government comes in and bails them out. Then you get this situation where you’re encouraging bad behavior. There’s a moral hazard as they say. And these companies, and then the greater economy in general, they become like these zombie companies. And then the whole economy becomes like this zombie economy, where Think of it this way, when you wake up in the morning, the first thing millions of people do is they have a cup of coffee. I know it’s the first thing I do pretty much, okay. And you want to kind of jumpstart your system and your system will naturally wake up. I mean, Pat, you don’t drink coffee, but I do. And I didn’t used to, okay, I had this girlfriend got me into Starbucks years ago. And ever since then, I’ve been addicted right? Not to them, but just coffee in general. So now I need it, but you don’t need it and you still wake up, but I kind of need it as a crutch right? Because my system has become used to it. And so after a while, you you know like any form of addiction. And caffeine is an addictive substance like many other things, many behaviors, you know, drugs, alcohol, that’s what we think of as addictions, overeating, whatever. But there’s lots of little addictions, we all engage in all the time. Okay, little addictive behaviors here and there, little compulsions. And what the nature of it is, is you always need more to get the same result. And the same thing happens to zombie companies and zombie economies. The poster child of this would be Japan, in Japan has had, they first have the last decade, then they have the last two decades. And then going into the last three decades, where the economy just no matter what you do, it just kind of can’t really get to where it was. And they have the highest debt to GDP ratio about 230% of any developed country, because they basically keep spending into it. And after a while, it just doesn’t work anymore.

Patrick Donohoe 12:21

And those debt levels continue to grow and so forth. So right, yeah, it’s one of those things where you know, I love one of your 10 commandments of real estate investing because it alludes to using debt and using debt using leverage as part of purchasing an asset because these days people don’t use debt to purchase their assets and purchase their savings. And what it does, it kind of goes against our current economic system, which is fueled by by debt mean debt is essentially priced into everything, including real estate include, including cars. So you look at what exists today, whether it’s the Japan economy or whether it’s our economy. And the growth of the economy in large part is due to credit expansion, when there is stimulus, and that’s why the Federal Reserve in the United States has had to do constant quantitative easing, and continue to expand because they have to grow and the reason why they have to grow is because there’s interest that’s due on the debt fade and they need to pay the interest. Yeah. So it’s one of those things where they have to grow the economy so that there’s a great Greater output greater taxes, which then pays

Jason Hartman 13:24

it’s a treadmill treadmill is

Patrick Donohoe 13:27

and that’s where you know Richard Duncan, I’m not sure how much you studied him. I know.

Jason Hartman 13:30

He’s been on my show several times.

Patrick Donohoe 13:31

Yeah. And you know, he I think understands as well, not to say that it’s a good system. I think it’s an incredibly flawed system, but it’s the system that we have. And as credit expands, things are most likely going to grow as credit contracts, things are going to crash, but this is the thing. It’s like, debt is like an accelerator. It’s like, you know, gasoline or jet fuel. It’s an insider. Yeah, right. It just it makes everything go quicker, faster and worse.

Jason Hartman 14:00

Yeah, no, that’s that’s a great point. And the difference between using leverage to say buy real estate versus a country or, you know, bailing out companies that shouldn’t be bailed out, or, you know, spending on the welfare state that isn’t really a capital investment, whereas the property you’re buying as long as a sensible property is a capital investment. Look at the bottom line, maybe we can wrap up this little segment with that is that the idea is if you want to create real wealth, you’ve simply got to have capital formation, the capital can come in the form of savings, to invest, or in terms of assets that produce income. That’s it. Like, it’s really that simple. You know, you cannot spend on welfare programs, or bailing out zombie companies to grow your economy. That’s not the way to spend your way out of it. It just gets progressively more difficult requires more stimulus every time more caffeine every time, you know, that idea.

Patrick Donohoe 15:11

So I’m gonna, I’ll end with this Jason, which is, I think, really interesting when I realize this, but let’s say you know, you have a government worker that is renting a home that you own that you’ve purchased with leverage up Just the right way they’re paying. But the way in which they’re paid is based on the government being able to have debt and be able to provide capital in the form of debt so that that person can get paid. Same thing with if a person works for, you know, fortune 500 company that is fueled in large part by corporate bonds, which they use to capitalize their company and work their company grow their company, that money is then used to pay this person who then pays the rent on your property. Same thing with the suppliers of lumber, you know, builders, you know, in large part, a lot of that supply comes from being able to have access to debt which allows them to produce so it’s interesting to see dead is this is that kind of foundational thing, that Domino that’s required these days, in order for the economic machine to be working.

Jason Hartman 16:09

We live in a world of credit based assets, and when the credit dries up, things get tough and there’s another cycle right there. Good stuff, Pat. Thanks for having this talk with me.

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