11 December 2021

In today’s episode, Trey Lockerbie chats with the very fun, Joe Brown of Heresy Financial. Joe is most known for his youtube channel, providing entertaining videos on a wide range of financial topics. Joe is a wealth of knowledge and provides an amazing framework for thinking through the current economic landscape. Please enjoy this wide-ranging discussion with Joe Brown. 

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  • The history of money and how we’ve arrived at the monetary landscape we have today.
  • The playbook the FED might use in the event of a debt default.
  • A deep dive on Central Bank Digital Currencies. 
  • The current labor shortage.
  • The velocity of money and how it’s misunderstood.
  • Real estate, Jobs, Farmland exposure, and much, much more!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Trey Lockerbie (00:00:02):
On today’s episode, we have a very fun guest, and that is Joe Brown of Heresy Financial. Joe is most known for his YouTube channel, providing entertaining videos on a wide range of financial topics. In this episode, we discussed the history of money and how we’ve arrived at the monetary landscape that we have today, the playbook the Fed might use in the event of a debt default, a deep dive on central bank digital currencies, the current labor shortage, the velocity of money and how it’s misunderstood, real estate jobs, farmland exposure, and much, much more.

Trey Lockerbie (00:00:35):
Joe is a wealth of knowledge and provides an amazing framework for thinking through the current economic landscape. I know you’re going to get a lot out of this one. So, without further ado, please enjoy this wide ranging discussion with Joe Brown.

Intro (00:00:50):
You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Trey Lockerbie (00:01:10):
Welcome to The Investor’s Podcast Network. I’m your host, Trey Lockerbie. And today, we have a very fun guest for you, and it is Mr. Joe Brown from Heresy Financial. Joe, first time on the show. Welcome.

Joe Brown (00:01:22):
Hey, thank you so much. I’m excited to be here, Trey.

Trey Lockerbie (00:01:25):
I’d love to explore a little bit about your background here at the top, because I think a lot of our listeners might be able to relate to this. And if not, there might be a lot of learning to come from your journey. So, you are a stockbroker at Charles Schwab. Talk to us about that experience and what old ultimately led you to what you’re doing today.

Joe Brown (00:01:45):
I got into the industry, because I was very curious about the way money works and how investing works. And so, that was really the only path that I saw in front of me to learn about these things was going to the belly of the beast. And I’m just by nature, a very curious person, especially when something doesn’t make sense. And the more I dug in, the more licenses I stacked up, the more I realized, “Hey, a lot of this stuff isn’t making sense.” And I read a lot. I read a hundred books a year. And I started to notice the things I was learning from inside were not the same things that I was realizing were true from books that I was reading.

Joe Brown (00:02:25):
And a good example of that is bonds. If you go to your financial advisor and you say, “Hey, what’s the safest investment I can buy?” They’ll tell you government treasuries, and the reason for that is because, well, their broker tells them that they have to tell you that. The reason why they’re required to say that is because of their licensing. Where do those licenses come from? The SEC and FINRA. So, ultimately, from the top down, you’ve got the government whizzling its way down to your financial advisor, telling you that treasuries are the safest investment, when it’s the government that’s directly benefiting off of that by them being the ones that are loaning you the money.

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Joe Brown (00:03:01):
And so, after a while, I just realized the stuff that I was selling was so dis-aligned from what I believed to be true, that I had to go out on my own. And I’ve been trying to educate people about how the system works ever since.

Trey Lockerbie (00:03:16):
Well, I’ve been a huge fan of your content. I’m really enjoying it, especially around the history of money itself. So, I’d like to start there. Start as far back as you’d like, and give us the overview of how we’ve gotten ourselves into this monetary mess that we seem to be in today.

Joe Brown (00:03:30):
Even something as what you would think is as simple as the history of money is generally misunderstood. We typically think of, if you read your classic economics text book, it starts off with barter and says, “Hey, one person makes shoes. The other person has a lamb. They start to trade with each other. Well, one person has to then go trade for apples in order to get their shoes. And it’s just this whole mess. And when you study history, anthropological evidence shows that barter never existed as a monetary system ever any time ever in history.

Joe Brown (00:04:01):
There’s a great book, Debt: The First 5000 Years by David Graeber. And it talks about the earliest recorded monetary system that we had on earth was a credit based monetary system. And that was basically, if you think about rural communities who owe each other favors and very hospitable environments that are separated from technology, they still operate under a credit based monetary system, but it was complex. There were credit markets and they had innovative ways to keep track of things like tally sticks that were used as currency. And so, that was the first monetary system.

Joe Brown (00:04:36):
As nation states emerged, governments wanted a way to pay for keep standing militaries and gold and silver emerged as a great medium to be able to do that. And so, golden silver emerged as commodity money. Now, the reason why gold and silver specifically emerged is because they operated very well as money, specifically because you can’t just go out and make new gold or new silver without heavy, intensive labor. You have to dig it out of the ground. You have to refine it. And so, gold and silver merged as good money, because it preserved the pricing signal. Pricing is information. It’s everything in an economy.

Joe Brown (00:05:15):
And if the money supply stays relatively the same, that means all the price changes of everything are just pure information, and you can make accurate decisions off of those. And so, gold and silver allowed people to do that. The problem though, that arose, and this is a very slow centuries-long problem, is one of deflation. Deflation is a natural force of history that always happens everywhere, consistently, persistently from the beginning of humanity, until the end of humanity. Deflation is getting more for less. That’s where things and stuff and wealth gets more abundant.

Joe Brown (00:05:53):
Every time we figured out a way to offload human labor to something like fire, when we offloaded human labor of gathering so many roots, and nuts, and veggies, and berries to fire to cook them, to get more nutrients out of them, that was a growth. That was a leap forward in energy that we could then use our labor for other more productive purposes. Every single time we’ve been able to do that, that means wealth. Real wealth gets more abundant, but the money supply stayed relatively the same. Money supply of gold and silver throughout history kept pace with the growth of population at about one to one and a half percent every single year.

Joe Brown (00:06:28):
And so, what you inevitably have happen, especially as things like the industrial revolution come in, where you have technology and progress and growth expanding very rapidly, is that the money starts to get very valuable. Almost too valuable. And so, whereas before, a couple hundred years ago, you could slap a gold coin down on the counter for a beer, now you slap a gold coin down on the counter, and that’s going to pay for a horse or it’s going to pay for your month’s rent. It’s worth a lot more, because the money supply stayed the same, but the wealth in the world, the real stuff, the real goods and services have grown so much more.

Joe Brown (00:07:01):
And so, then you have this tendency towards centralization with gold moving from being the medium of exchange to more of a store of value, and then for larger purchases. And people are like, “Hey, I don’t want to store it in my house. I can’t use it for small purchases. So, I’m just going to leave it with the goldsmith.” These were the original bankers. And so, they’d say, “Goldsmith, here’s my gold. I’m going to get a receipt from you. And I can give you that receipt and get that gold back any time.” Eventually, those receipts started trading, because if I’m going to go get my gold to buy a horse from you, and then you’re going to go give that gold back to the goldsmith for a new receipt, I might as well just give you my receipt, because then you can go get my gold whenever you want.

Joe Brown (00:07:38):
And so, the goldsmiths caught onto this. And they realized, “We’ve got a lot of gold. Nobody’s redeeming it. We can lend it out and start to make bank here.” And so, what you had happen was a rapid expansion to the money supply in these local economies when the goldsmiths realized what they could do. And before, you have 10 pieces of gold, let’s say, that are all on deposit with the goldsmith. You’ve got 10 pieces of gold in circulation, but now the goldsmith loans one of those pieces of gold out. So, now you have one piece of gold trading twice, once as a piece of gold and once as a certificate of redemption.

Joe Brown (00:08:11):
So, you have an expansion of the money supply when the goldsmith starts lending that gold out. That’s the invention of fractional reserve banking. Well, eventually this causes bubbles and prices start to skyrocket. And then that debt has to start getting repaid. And then that whole system unwinds. Everybody goes to redeem their receipts, because they realize there’s not enough gold there. You have a run on the bank. This should have been outlawed. Wasn’t outlawed. By the way, this is very old, 800 years ago. We have records of this happening in Italy, the banking crisis that looks very similar to our financial crisis 12 years ago.

Joe Brown (00:08:41):
So, this should have been outlawed, but it wasn’t. Instead of that, it was nationalized. And so, now you have banks no longer have the risk of having a bank run, because you have the invention of the central bank, which operates as a bank to the banks. So, if one bank is at risk of a bank run where everybody tries to go get their gold, well, the central bank just gives them gold. They’re drawing from the rest of the system, but the problem is, you can’t eliminate risk. You can only transfer risk. That transferred risk from the individual banks up to the entire system. And I use the example of being next to a cliff a lot.

Joe Brown (00:09:15):
If you have 20 people next to a cliff, one person falls off, what are the rest of the 20 going to do? They’re going to back away from the edge, right? But if you give everybody a rope, well, if one person takes a step, well, the other people might be able to pull him back. But that means the individual risk has been transferred to the whole. So, nobody backs up anymore, because now one individual doesn’t have the risk of falling off. So, you get close enough 1, 2, 3 people fall, the entire system falls off. And so, you can’t eliminate risk. You can only transfer it.

Joe Brown (00:09:43):
And that’s exactly what happened at the invention of the central bank. That risk was transferred to the system, through the central bank. And to test that, you’d say, “Okay, well then, at the invention of the central bank, you should probably see an increase in large scale panics or busts or recessions or depressions.” Well, after the Federal Reserve was started in 1913, seven years later, you have the first recession that was called the Great Depression in 1921. There’s a great book about that called The Forgotten Depression by James Grant actually I think is his author name.

Joe Brown (00:10:18):
And so, that was called the Great Depression, because it was the worst one up to that time. And it was caused by an artificial expansion of the monetary supply. Free market reigned. They allowed it to just solve for itself. Fixed itself within 18 months. They repeated their mistake though. Artificial expansion of the money supply, easy credit caused the next one. Great Depression started in 1929. That one was so much worse, because they tried to ease the pain of that one. And that one then became known as the Great Depression going forward, because it was so much worse than the first one.

Joe Brown (00:10:48):
From 1913 to 1930, so you’ve got 18 years, you have two of the largest depressions that our country had ever seen after the invention or the implementation of the Federal Reserve in America. And then from there, what you had happen was one of the ways they tried to make it easy for the economy to ease the blow of the depression was confiscating everybody’s gold, because remember, this was a bank run. This was a run on gold, just like the goldsmiths. And so, they took all the gold from everybody, gave it to the Federal Reserve … This was FDR, and made it illegal to own gold, and then he repriced gold higher once the Federal Reserve had it all and allowed an artificial expansion of the money supply as a result of that.

Joe Brown (00:11:30):
And so, this was only able to be done through the monopoly on violence that the central government has, because a little individual, a bank goldsmith, wouldn’t have been able to get away with this. And turns out that the rest of the world was doing the same thing. World War II happen, everybody runs out of gold. So, they come to America, they say, “You’ve still got gold. Let’s just have you be the central bank to the entire world.” So, you went from the invention of banks, where people centralized their money with the banks, to the invention of the central bank, where all the banks centralized their money with the central bank.

Joe Brown (00:12:02):
Then in 1940 at Bretton Woods, you had the rest of the world centralize the money supply under one central bank, the Federal Reserve who said, “Trust us. We’ll hold all the gold. We’ll give you paper. And we promise that you can come get your gold at any time with that paper by the age old scheme.” And it only took 30 years from then for America to print so many more dollars. Same exact thing that the goldsmiths did. Same thing that the banks did. Federal Reserve printed so many extra dollars. The US spent all these dollars into existence that the rest of the world said, “Hey, we better go get our dollars, because if we’re not the first ones to go get our gold, then we’re not going to be able to get it.”

Joe Brown (00:12:38):
And turns out we were two weeks away from running out of gold. And so, Nixon did to the rest of the world what FDR did to American citizens. And he said, “We’re confiscating the gold,” and moved the world back onto a credit standard, which it hadn’t been on for thousands of years. And so, for the last 50 years, that’s where we’ve been at. And now, we’re facing the inevitable consequences of unprecedented levels of monetary expansion as a result of no ties on money creation. And that’s the history of what brought us to today.

Trey Lockerbie (00:13:12):
I love that. So fantastic. A key difference I’m noticing in that timeline is the 2008 Great Recession where Bernanke decided to forgo the game plan or the playbook, I should say, they used at the Great Depression. And he chose instead to lower interest rates, et cetera. In your mind, is that the right thing to have done at that time? Meaning, the alternative is entering potentially another Great Depression or creating something of a smoothness from then on to ultimately create the inequality gap we see today.

Trey Lockerbie (00:13:44):
But relatively speaking, we’ve endured a much easier economy than the Great Depression. So, I’m curious, what’s your opinion on that movement by Bernanke in general?

Joe Brown (00:13:54):
That’s a great question. Going back to what FDR did, in 1921 for the first Great Depression, they allowed that one to resolve itself naturally. There was no intervention. The government balanced their budgets. The Federal Reserve raised interest rates, and that depression, again, it was the worst one in us history up to that point. They called it the Great Depression at the time. It solved itself within 18 months. It was difficult, but it fixed itself. At that time, Hoover said, “If I’m ever in power when something like this happens, I will do everything in my power to make it easier. I will do all of these interventions, all of the stimulus, whatever.”

Joe Brown (00:14:29):
Well, he got his opportunity. And in 1929 when things started to fall apart, he embarked on, at that time, an unprecedented level of government intervention. Federal Reserve did not raise interest rates like they did the first time. And FDR actually ran on the platform of free markets, saying, “Hoover’s doing all of this wrong. He shouldn’t be intervening.” Yet when he got into office, he doubled down on everything and increased everything that Hoover had been doing. So, the idea that Hoover was a free market and then the FDR came in to try and fix it, completely false.

Joe Brown (00:14:59):
And what FDR did was … I mentioned what he did with the gold. He took everybody’s gold. He then repriced gold hire, now that he had it all for himself. Allowed a bunch of money to be printed as a result of that. Another thing that he did was, in an attempt to push prices up, he did crazy things like burning crops. Imagine that. During the Great Depression, the worst period of economic suffering in our history, and they’re burning food in an attempt to make it more scarce to push prices up.

Joe Brown (00:15:30):
And so, the idea that Bernanke was looking back and saying, “We’re not going to repeat the mistakes of the Great Depression by not intervening and not printing and not doing that,” is completely misguided. Because they did do that during the Great Depression. The only thing that you could say is they didn’t do it enough to cause prices to go up. Now, I would argue then that that’s a good thing. If they would have been able to, then they would’ve made things much worse. And Bernanke wasn’t the first one in this recent line of central bank intervention.

Joe Brown (00:16:00):
We have to start back at long-term capital management. It was a hedge fund that collapsed, and that was … I can’t remember the … I think it was ’98. And so, the Federal Reserve came and they forced wall street to basically bail out long-term capital management, so that it didn’t knock down the rest of the financial system. Long-term capital management, they were engaging in relative value trades where they would short one thing, use the proceeds to buy another thing that were almost identical. And they would do it when the prices diverged a little bit from each other in the expectation that the price would come back to each other.

Joe Brown (00:16:40):
And so, they just did it with so much leverage that eventually something happened. They entered the trade, because they expected prices to come back together. But prices didn’t come back together. Prices kept on diverging. And when that happened, they were so leveraged that they had to start closing out those trades. Well, if you buy a short to close and you sell a long to close, that’s going to push the prices of what you’re long down, the price of what you’re short higher, because you’re adding to the buying pressure and the selling pressure and make the problem worse.

Joe Brown (00:17:07):
So, they couldn’t get out without risking collapsing the financial system. So, the Federal Reserve stepped in and said, “All right, Wall Street, bail them out.” That led to the Greenspan put later when he lowered interest rates. They had already crossed the Rubicon. “Hey, we can bail out the system.” They lowered interest rates to soften the blow from the dotcom bubble bursting, which would’ve only hurt some people’s stock market brokerage accounts. Wouldn’t have bled over into any financial crisis. And that lowering of interest rates led to the housing boom.

Joe Brown (00:17:39):
All that artificial money flooded into housing, because everybody thought, “Hey, when the stock market falls, housing still goes up.” And so, all that money flowed into housing. We know how that turned out, but they had already crossed Rubicon before. So, that led them to, “Hey, we can do this. We can bail out the financial system, save the banks.” Well, we think that that was the end of it, but we have to remember that in 2018, when they had finally started tightening after saying for so many years that all that QE was temporary and that they’d eventually undo it, by the end of 2018, the markets were on the verge of collapse.

Joe Brown (00:18:11):
In 2018, they couldn’t handle it. At the end of 2018, they had to stop raising interest rates. And that was what started to push the market back up. Well, one year later in September, 2019, repo market blows up. And so, now they have to start QE infinity or not QE. And less than a year after that, they had to bail out the entire system when COVID hit. And so, all of these things, all of these levels of intervention plant the seeds for a much greater crisis next time. And they usually happen in greater and greater frequency as time moves on.

Trey Lockerbie (00:18:43):
And greater and greater magnitude as well. So, what’s your opinion on where the Fed is now, all this talk about tapering? You mentioned their non-QE efforts. Can they actually taper from here? What do you think the expectation or the playbook is? And Jerome Powell just got a second term as well. Does that add to the equation in any way?

Joe Brown (00:19:03):
It’s almost like a universal statement now that I hear from everybody. It’s like, “The Fed can’t taper. They can never taper. They can’t …” The reality is, if they want to, they can do anything they want. So, the question is not whether they can or not. The question is, how long will they do it for? And to what extent will they do it? And in my opinion, Jerome Powell getting in for a second term here solidify the taper, especially in light of the data that’s coming out of the last couple of months.

Joe Brown (00:19:28):
We’re seeing inflation records broken every single month that go back decades. And then just today, even though it was fake jobs numbers when you remove the seasonal adjustment, the jobs numbers’ jobless claims show the lowest jobless claims since 1969, when they’re seasonally adjusted. And so, when you look at the Fed’s dual mandate, they’ve got maximum employment and stable prices. They said, “We’re going to ignore prices in favor of employment.” Employment’s there from the data that they look at. And so, if they don’t try and at least look like they’re going to attack inflation, they’ll blow all credibility that they have. And they can’t do that.

Joe Brown (00:20:00):
They have to look like they’re going to start attacking inflation now. And the minutes from their FOMC Meeting from this month show that almost everybody now is saying, “Hey, we’re open to raising rates sooner, if inflation continues to increase.” And so, they are going to be reducing their balance sheet. The word “minimum” has been thrown around a lot, because they said, “We’re going to purchase …” They’ve always been purchasing a minimum of 120 billion per month. And now they said, “We’re going to reduce that by 15 billion,” but it’s still a minimum. So, it’s still unlimited.

Joe Brown (00:20:31):
But if you look at how much they’ve actually been purchasing since August of last year, August of last year, their balance sheet was at 6.9 trillion. Right now, it’s at 8.6 trillion. That means, in 15 months, their balance sheet increased by 1.7 trillion. That’s on average, 113 billion a month. So, that’s a lot, but it’s not above what they said they were going to be doing at 120. And so, they’re going to stick to what they’re going to say they’re going to do right now. And they’re actually going to taper and they’re going to reduce their purchases by 15 billion a month.

Joe Brown (00:20:57):
And if they get the chance, they will raise interest rates. But the problem is it will spark a crash. It’s inevitable. You cannot expand the money supply, especially at this scale, without it causing mal-investment and a misallocation of resources that leads to problems, rot lurking under the system. And so, you don’t notice it a lot of times until you start to tighten and pull back that easy money. And so, it’s not the tightening that’s going to cause the crash. It’s already there. They’re just going to reveal it. And then once it does, they’re going to have to reverse course. And they’re going to go full blown.

Joe Brown (00:21:36):
120 billion a month is going to look like child’s play compared to what they’re going to have to start purchasing. They’re going to have to start purchasing out on the yield curve to drop long term rates. They’re going to have to do all sorts of things that will make the last year and a half look tame in comparison to deal with the next crash.

Trey Lockerbie (00:21:54):
Now, that $120 billion a month, what exactly are they buying? Are they buying government bonds off the market? I’ve noticed that there’s a lot of mortgage-backed bonds being purchased, for example, whereas in 2008, that was an obvious solution was, “Okay. A lot of these mortgages are going bad. The Fed will buy them up.” When COVID hit, it was instant. It was like, “We’re going to start buying mortgage back to securities.” And they really haven’t stopped.

Trey Lockerbie (00:22:18):
So, is this underlying rot happening, say for example in the real estate market, that isn’t really talked about because the Fed is already smoothing it over by purchasing these things? Maybe just talk to us a little bit about what they’re buying and why.

Joe Brown (00:22:32):
What they’re buying has a lot to do with what they’re legally allowed to buy. So, in the aftermath of the great financial crisis, when they all suddenly were allowed to buy mortgage back securities, whereas before they were only allowed to buy treasuries, that’s partly why they buy those two things; mortgage-backed securities and treasuries. The other things that they’ve been buying, they haven’t actually been buying. There were accounts set up at the treasury called special purpose vehicles that purchased things like high yield bond funds. Junk bonds basically.

Joe Brown (00:23:02):
And so, they can’t buy those themselves. So, it’s like, an 18 year old who wants to get drunk can’t go into the liquor store and buy alcohol all for himself. He has to send in his 21-year-old cousin to go buy alcohol for him. Gives him the money. Same thing. The Fed can’t buy junk bonds for themselves. So, they give the money to the treasury to buy for them. And so, mortgage-backed securities were part of the whole apparatus that they were buying in order to smooth out the volatility that they were scared of happening in the financial markets. One other reason for the large level of mortgage-backed securities was to push mortgage rates down.

Joe Brown (00:23:37):
So, when mortgage rates go down, there is a huge amount of extra spending power that hits the American wallet. Everybody refinance their homes and either cash out refinance and you get a large chunk of change to go do whatever you want with, or now your mortgage rate is much lower, and now you have extra cash. And compared from what you were paying before, your expenses go down. And then anybody who wants to get into a house can do that, although that wasn’t the primary goal. And so, the increase in income for Americans through mortgage rates being lowered was a huge reason for mortgage-backed securities being purchased.

Joe Brown (00:24:16):
And so, that’s what they’ve been buying; the treasuries, mortgage-backed securities, and then the other things held at the treasury.

Trey Lockerbie (00:24:23):
Got it. All right. So, now that the government has created all this money and all this debt, there’s a lot of talk right now about a potential debt jubilee or some monetary reset. In your opinion, what does that look like exactly?

Joe Brown (00:24:36):
The debt jubilee, we look back at history, and they can seem very apparent when these things happen. But they actually take much longer for these things to unfold than it looks like when you’re just reading a history book. One thing that is true though, is that the de-leveraging always happens. Sometimes de-leveraging happens through inflation and sometimes it happens through deflation. But de-leveraging following leverage is it’s an iron law of economics that you cannot avoid the de-leveraging. It does happen. The only question is whether it’s through inflation or deflation.

Joe Brown (00:25:14):
And the reason that that happens is because leverage itself is simply borrowing purchasing power from the future into the present. And so, if you think about, let’s say you earn $10,000 a every single month, the only way for me to spend more than $10,000 is if last month I only spent eight. And so, I have a surplus of two now. This month I can spend 12. Or I can borrow from the future with debt and I can spend 12,000 by putting two of it on a credit card. On next month, I have to pay that back by only spending 8,000 of my income.

Joe Brown (00:25:47):
And so, leverage is simply taking, purchasing power from the future and bringing that forward into the present. There is no way around that. The only way that it’s dealt with is either deflation or inflation. And so, deflation would be the example of next month, austerity. I only spend 8,000 and use that leftover two, to pay back what I spent last month. Inflation is more insidious, because the effects of it are not understood or seen by most people, at least at first. And so, the reason why you can de-leverage through inflation is because either way, there’s the same amount of purchasing power in the system being transferred or being spent.

Joe Brown (00:26:31):
And I like to use the example of a pizza a lot. If you have a pizza, that represents the total wealth in the system. The number of slices in the pizza represent the number of currency units in the system. You got eight slices of pizza. That’s $8, let’s say, represent the entire economy. If you have another participant enter the economy then and say, “I would like a slice of pizza,” one person can give up their slice and give it to that new person. And then you still have eight slices of pizza, and each represents the same amount of pizza.

Joe Brown (00:27:05):
Or you can have every single person with a slice of pizza shave a tiny slice off of their slice, make an extra ninth slice. And then you have nine slices now, but they’re all smaller than they were before. And so, when you have the amount of leverage that we have right now, usually policy makers up for slicing off pieces of everybody’s purchasing power in order to repay that debt, because the debt has grown so large, and who are the biggest debtors? The governments, and the large corporations who usually have a large amount of influence on the government.

Joe Brown (00:27:39):
And so, when you are choosing between inflation or deflation, because you have to de-leverage somehow, the people with the power are going to choose the path that benefits them the most. And inflation benefits the borrowers, because they don’t have to pay it back in real purchasing power, in real wealth. They get to pay it back with newly created money that was purchasing power transferred to them as a result of everybody else, all the savers and lenders, losing it. And just in case you’re looking at this and thinking, “Okay, well, it’s a good thing I’m not a lender then,” if you have got a pension or a 401k with a target date fund or a balanced mutual fund, or if you have cash in a bank account, you are a lender.

Joe Brown (00:28:22):
And so, those are the ways. Those are the areas of purchasing power that purchasing power transferred away from them in order for that de-leveraging to happen.

Trey Lockerbie (00:28:32):
Not a lot of people may be aware of this, but the Fed has an actual plan for if the US defaults on its debts. I think a lot of people just realize or think that the US can’t default on their debt, because they can always print more money, but they do have a game plan. So, walk us through the playbook that the Fed has put together, just in case this happens.

Joe Brown (00:28:49):
This is one of the craziest things that I have stumbled upon recently. And a lot of people look at the Federal Government defaulting as like a black swan. Not even. Less than that, because they think that it’s just impossible, it’ll never, ever happen. And a black swan is not something that is unpredictable. A black swan, that is something that’s predictable, that’s just considered basically impossible. When people only thought white swans existed, you could have imagined, “Hey, we could find a black swan someday,” but clearly that’s impossible, because swans are white.

Joe Brown (00:29:26):
Well, we can imagine the government defaulting, but clearly that’s impossible, because all they have to do is come up with a vote to raise the debt ceiling. And given today’s level of political polarization, in my book, the odds aren’t 0% of defaulting. And clearly, the same line of thinking sits at the Federal Reserve, because they have a plan on what they will do if the United States does default. And just to be clear, defaulting on debt means, “Hey, we have a debt ceiling.” It’s all a legal thing, because it’s just numbers in a computer, and they run up debt ceiling. And cannot take on new debt to pay off the old debt, so their old debt, they can’t make the interest payments on.

Joe Brown (00:30:05):
And then if it’s bad enough, they can’t make payments to all the other things. They have to make payments to government salaries and military and Medicare, things like that. And so, the first thing that the Federal Reserve would likely do as part of their plan is making the interest payments on the defaulted debt. And so, right away, you have a defacto merger of monetary and fiscal policy. You lose all independents from the Federal Reserve. They’ve never been independent completely from the government. They’ve been independent based on partisanship, but this merges them completely.

Joe Brown (00:30:34):
You get a merger between the central bank and the central government. They make those payments, so that anybody who has debt owns a treasury that they would’ve stopped receiving those interest payments on, they keep on receiving those interest payments. So, you have a transition immediately where the Federal Reserve enters into a position of fiscal authority over Congress, because that was Congress’s domain through the treasury. And now the Federal Reserve steps in, in that place.

Joe Brown (00:31:01):
What might also do, which Jerome Powell has stated that it would be unthinkable to do this, but he wouldn’t rule it out in case of a bad enough crisis, which means, if the United States defaults … That’s a bad enough crisis, they would take on other payments as well, like military, social security, Medicare or whatever. Now the final thing that they would do is at least for US banks, they would change the reserve requirements, so that a defaulted treasury would count Board’s reserve requirements.

Joe Brown (00:31:27):
Because the last thing you want is a repeat of the financial crisis when all the banks are trying to dump worthless securities, mortgage-backed securities. They were basically a Board that wasn’t making payments anymore, because all the mortgages inside weren’t making payments. Everybody’s trying to dump them. Nobody has a collateral they thought they had. And you bring down the system. So, the first thing they would do or the second thing would be, “Hey, if you’ve got one of these treasuries, it still counts as full collateral. Do not sell it.”

Joe Brown (00:31:53):
And then finally, what they would probably do is open up swap lines and emergency channels in order to buy treasuries at full price from anybody who is trying to sell them. Because another thing that they would not want happen is treasury prices to just collapse. Because the entire global financial system sits on treasuries, and you can’t have treasury prices collapse. So, this looks very … If you study history, none of this should be surprising. It’s all happened before. 300 years ago in France, John Law was a guy who was in charge of the central bank in France.

Joe Brown (00:32:25):
And he got the entire country to give up their gold and silver. He issued paper currency that was backed by gold, silver and shares of his Mississippi company. So, land in the United States. He used that paper currency to inflate the money supplies, so that he could pay for economic agendas. Well, pretty soon, problems cropped up. And what happened was, people were selling Mississippi shares, because they were, “Hey, this might not be worth what the price of these shares are at.” He had to print more dollars to buy shares of the Mississippi company.

Joe Brown (00:32:55):
Well, what’s backing up the money? Well, shares of the Mississippi company. So, you have this strange turn of events where you’re printing money to buy something to keep the price up, but that price being up is what’s backing up the value of the currency that you’re printing. But what are we doing today? We’re printing money, to buy treasuries, to keep the price of treasuries up, because they back up the financial system. And so, pretty soon, people realize, “Hey, if they’re buying these things at full price, that means that I can sell them at a premium. They’re worthless, but I can sell them higher than they’re actually worth, because somebody’s printing money to buy them.”

Joe Brown (00:33:27):
It would be like if apple right now said, “I will buy any iPhone for $3,000.” Everybody with an old iPhone would turn it in for $3,000, because they’re worth way less than that. They would soak a up the entire market. So, when you buy things with a money printer at an elevated price, compared to what the natural price would be, you incentivize selling. And so, a couple years ago, they soaked up so much of the treasury market that the Federal Reserve now owns more treasuries than all central banks combined.

Joe Brown (00:33:57):
This happens, Federal Reserve will own all treasuries, besides the US banking system. Nobody’s going to hold onto them anymore, because they’re worthless, but somebody’s paying full pop for them. And that’s exactly what happened 300 years ago in France. The people like Richard Cantillon, who we know of through because of the Cantillon effect, he sold everything bought gold and silver, and became fantastically wealthy from it. And that’s exactly what would happen today if something like this happens.

Trey Lockerbie (00:34:22):
So, you brought up the jobless claims earlier and mentioned the seasonality effect. What does it look like with the seasonality adjusted, and why do you think so many people are quitting their jobs or not returning?

Joe Brown (00:34:32):
So right now, we have the tightest labor marketing history. And today, as of the day of this recording, jobs numbers came out. The jobless claims data shows that we have the lowest jobless claims since 1969, over 50 years. And everybody running victory laps on this trending on Twitter and things like that. When you look at the data, the real number, the number is only that low … It’s 199,000 jobless claims. It’s only that low, because of seasonal adjustment. So, that’s them trying to smooth out the numbers. They’ve got a built-in method to smooth out the numbers.

Joe Brown (00:35:07):
While they’re smoothing out the numbers, made it appear like it’s the lowest jobless claims in 50 years, when you remove the adjustment, jobless claims actually increased. Went up to 260,000. They went up by 7.6%. And so, the seasonal adjustment, trying to smooth out data here clearly failed. The real jobless claims actually went up. So, complete false data. We still have a massive labor shortage. And so, that is something that is consistent and persistent to today. And this is something that I probably have more of a contrarian view on than others. Unlike some of the other things going on right now, I view this personally as a very good sign, and a very good thing.

Joe Brown (00:35:49):
Now, we obviously have an elephant in the room, the reason why some people are getting fired or quitting, because there are legal things coming out about who can work at certain jobs based on recent history and medical stuff. But that doesn’t account for everything, because when you look at new hires, it’s also exploding. And so, if you get pushed out of one job because of a specific reason, you wouldn’t be able to then go get a new job. And so, one of the trends that we’re seeing right now is people quitting, because they hate their jobs, because most jobs, it is astonishing how many jobs, for decades now, have been absolute trash.

Joe Brown (00:36:26):
I say that sympathetically. I’ve had jobs before where on my way home, I feel like crying. You know what? It’s just absolute garbage. And Malcolm Gladwell talks about this. There are three components necessary to have a job feel meaningful. One of them is complexity. One of them is autonomy. And the third one is a short connection between seeing your work and seeing the results, the fruit of that labor. Many jobs today have no complexity. They’re monotonous. You have one repeated task over and over and over again. Zero complexity. A lot of jobs that can be just done by a well written computer program. And so, complexity is out the window for many, many, many jobs.

Joe Brown (00:37:11):
The second one is autonomy. The number one reason people quit their job is because they hate their boss. They have no autonomy. They’re told exactly what to do, when to do it, when to clock in, when to clock out, when to take their lunch break, when they can go take a bathroom break, like they’re still kids in school. And so, autonomy is out the window for most jobs. And then finally, seeing the fruit of your labor. This is something that, especially in today’s day and age, a lot of people are missing out on. If you build something with your hands, you do you the work, and then you see the result if you’re a mechanic or something like that.

Joe Brown (00:37:42):
But for a lot of jobs, all you have is a specific task. There’s no visible connection between the results, the good that’s being done as a result of your labor. And so, you have this massive turn of events where, because of the stimulus checks, and because of the universal basic income them through the child tax credits, because of stock prices going up, because of crypto just exploding, because of all the new money you had a trigger come in where suddenly everybody’s like, “I can quit. I’ve got two months, three months, four months saved up. I can quit and I can go look for something better.”

Joe Brown (00:38:14):
And it put employers back on their … It took them off guard. And suddenly, you’re hearing stories everywhere of people like, “Hey, I got offered a job, and I told them I couldn’t take it, and they said, ‘Okay, well what do you need to take it?'” And they said, “Okay, I want this, this and this.” And the employer’s like, “Done. We need labor, because everybody’s quitting. And if you come here and you don’t like it, you’re going to quit. I’m going to have to hire somebody else. And every time I have to hire somebody, I have to retrain.”

Joe Brown (00:38:37):
And so, employers are caught off guard. And it’s turned into a dynamic that’s been putting a lot of power in the employees’ hands. Very different trend from the last couple of decades. And a lot of people are just saying, “I can move now …” Another result of COVID was remote work. Everybody gets to work from home. I don’t have to live in the city. I don’t have to keep up these high expenses. I can go somewhere else. I can even get a job that’s better for me that pays less and say, “Screw it to the system,” and go live somewhere for much cheaper.

Joe Brown (00:39:04):
A lot of people going into small businesses, becoming contractors, doing online things. And so, we’re seeing a huge shift, a huge trend that I view as absolutely fantastic for most people to escape the system that people have been trapped in for so long. And so, this is one of those things that at least from what I can tell is a very good sign and very good trend going forward.

Trey Lockerbie (00:39:26):
Now, does inflation play a role in that moving forward? Meaning, as the cost of living continues to go up, people are going to demand higher and higher wages and that could ultimately affect net-out in this positive work environment where wages are more aligned with where they should have been for a long time?

Joe Brown (00:39:43):
Well, probably not, unfortunately. So, at least in the short term. When you look at the way that new money works its way throughout an economy, typically that new money, it’s asset prices first, then it goods and services, and then it hits wages. And that’s just simply a result of who gets their hands on the new money first. And so, theoretically, if you could press a button and have complete control over the system, and you could have all the new money created go straight into the hands of poor or low class, middle class individuals, then theoretically, you could say, “Okay, you get the money first.”

Joe Brown (00:40:18):
But the problem is, even if you were able to do that, which you can’t … It doesn’t flow that way. But even if you could make it flow that way, what happens is, the goods and services stays the same. The amount of stuff in the economy stays the same. Then the money explodes. So, if before you had all the money was needed to buy all the stuff, now you double the money. Well, now to buy all the stuff, you need double the money. So, if you want to buy some of the stuff, you need a lot more money than you did before.

Joe Brown (00:40:44):
And so, when you have a lot of individuals who barely were making ends meet before get their hands on new money, they’re not investing it. They’re spending it. And that’s backed empirically by every data point we have out there. When you put money into the hands of individuals that are not already wealthy, they have to spend it on the stuff that they are buying like rent and food and clothes and energy. And that bids up the prices, because there’s not a corresponding increase of goods and services.

Joe Brown (00:41:11):
And that corresponding increase of goods and services doesn’t happen until much later after prices have gone up to signal to the producers, it’s time to create more of it.

Trey Lockerbie (00:41:21):
Right. And you mentioned the Cantillon effect, speaking to that lack of it, flowing through to the common man. A lot of people were following that, saying inflation wouldn’t happen while the velocity of money continues to decline. What are we missing as it relates to the velocity of money? Because inflation has obviously risen as velocity has been low.

Joe Brown (00:41:40):
Well, I think you hit the nail on the head there that we’ve seen record-breaking inflation for months now, decades long records being broken, and velocity hasn’t budged. Velocity is one of those … It is just complete absolute trash. It is worthless. And part of it is because, empirically speaking, we’re living through it right now. Anybody who still thinks you need velocity to have inflation has been living under a rock for the last eight months. It does not work.

Joe Brown (00:42:07):
But secondly, the actual math is wrong. If you look at how velocity is calculated, it assumes you can quantify the money supply. Now, there are ways to estimate money supply like M2 and M1. But it is impossible to accurately and in total quantify the money supply. Let’s say you can even do that. The velocity of money equation is built on the GDP formula. Well, GDP is another one that’s complete trash and garbage and worthless, because it assumes an evenly rotating economy, which is not true. It’s not reality.

Joe Brown (00:42:42):
It works in a textbook on a page, but when you actually apply it in reality, all you have to do to have an increase in GDP is increase the money supply. And so, there is no validity to the velocity of money, both empirically speaking and when you look at the math. But finally, let’s say even ignore all that. Velocity is not at a record low. We’ve been this low before in the early ’40s. What happened after velocity hit this low? It skyrocketed, because people were dumping money. They were spending money fast. And what happened as a result? Inflation spiked.

Joe Brown (00:43:19):
And so, velocity tends to spike when people start dumping currency, especially in cases like Weimar Germany, when you have hyperinflation. And that’s something we don’t want to see. When you start seeing velocity spike, that’s not regular inflation around the corner. That is people dumping the money. That’s people dumping the currency, and we’re nearing the end when velocity starts to spike like that.

Trey Lockerbie (00:43:41):
Fantastic. Super interesting. So, talking more about currency, the Fed has obviously been considering a CBDC or central bank digital currency, and they’re becoming more and more popular around the world. Very often, I’m only hearing about why that is a bad thing, but funny enough, you’ve mentioned that there could be some major benefits to CBDC. So, talk to us a little bit about what those potential benefits might be.

Joe Brown (00:44:05):
So, this is an area where my sarcasm might need some work, because there are huge benefits to a CBDC. The question is, for who? Because there are big downsides and big benefits. The question that has to be asked is, for who? Because in reality, a central bank digital currency is a tyrant’s wet drain. It is absolutely terrifying for a population that has to use it. In a nutshell, here’s why. And I’m going to go to the extreme here. If you want totalitarianism to work, if you want complete … I’ll just say central planning. If you want to be able to centrally plan an economy and have that be effective, you need three things.

Joe Brown (00:44:47):
You need perfect and complete knowledge, you need absolute control and you need pure morality. And so, here’s why you need those three things. You need perfect knowledge, because the reason the pricing system works, the pricing system exists is, because of information. If you have the production of wheat this year drop in half, that means half of the wheat will have to be consumed this year. You cannot consume more wheat than what is produced. And so, that information has to be sent out into the economy, and that’s sent out simply by prices.

Joe Brown (00:45:21):
So, I might buy one less loaf of bread, because the price doubled. A bakery might continue to buy everything they bought before. But some people will consume less, and on net, it will be half, because that’s all that was produced. So, that’s what pricing does. It sends information out, because nobody can know everything about everything. And so, you have to look at prices to make a decision and say, “I’m going to buy less bread, because I still need water,” or “I still need gas,” or “I still need something else.” And so, prices are how we make that decision. And prices are decentralized perfect knowledge in absence of price manipulation.

Joe Brown (00:45:54):
And so, that’s the first thing you need. You need perfect knowledge. You need every intention and decision and price information of everything in existence all to be consolidated under one roof. The second thing you need is absolute control, because just because you know what needs to be done to plan the economy, it does no good if you don’t have the power to make that decision. And so, there are a lot of legal loopholes right now or legal fences, I should say, that prevent the Federal Reserve from doing things that they would want to do to control the economy.

Joe Brown (00:46:26):
Because all they’re able to do is buy mortgage-backed securities and treasuries and lower interest rates. There are a lot of other things that they could, I sic, “fine tune” in order to manipulate the economy, if they had control over those things. That second thing that you need is absolute control, so that you can actually do something with that perfect knowledge that you have. And then the third thing that you need is pure morality. Because if you have all of the knowledge and you have all of the power, but you have the wrong motives, then you’re going to use that and abuse it in a way that’s not going to be good for the system, but it’s going to be good for your buddies.

Joe Brown (00:47:00):
And so, this is, philosophically speaking, the idea for Jesus as the king of kings, somebody who’s omniscient, has all the knowledge, somebody who’s omnipotent, who has all the power and who is sinless, somebody who’s perfect in morality. And that’s because it’s an ideal that is impossible for a human to attain. And so, we decentralize that. But a CBDC attempts to centralize that, and basically become God over the economy in a way that a central bank digital currency can only do. And so, in order to understand why, we have to define that.

Joe Brown (00:47:32):
Well, right now you have a bank account with Chase or Bank of America or Wells Fargo or wherever you have it. A CBDC is simply bypassing the banking system. It’s an abolition of the banks, and everybody then, merchants and individuals, have an account with the central bank instead. What that does is it consolidates all of the information about every single transaction that takes place under one roof. So, instead of that being decentralized through the banking system, now you have it in the possession of the central bankers. You can run software programs, artificial intelligence or machine learning, I should say, in order to try and understand that data.

Joe Brown (00:48:12):
The second thing it does is it allows control, because if you, as a central planner, see that there is a certain segment of the population, based on whatever criteria you want … Let’s just say a wealth level, you can see, “Hey, this certain population has too low of a wealth level and that could destabilize the system. So, we are going to just credit some money into their accounts.” Or if you want to stimulate … Let’s say there’s not enough money flowing into something with an economic or political agenda. Let’s say solar panels. Good example. We will credit everybody a thousand dollar dollars, $10,000, whatever it is.

Joe Brown (00:48:52):
And it can only be spent at a merchant that is licensed as a green energy company. And so, you can fine tune the economy or you can attempt to fine tune the economy, because you have all the information and the control to credit people’s accounts for very specific purchases. And this is something … I can’t remember her name. I think it’s Omarova. She was Biden’s nominee for the head of the Office of the Comptroller of the Currency. She wrote a paper that was recently published on the people’s ledger on how to implement a CBDC. And she said that it would be essential to have the ability for the Federal Reserve to debit people’s accounts.

Joe Brown (00:49:29):
Well, number one, then you do waive the need for the IRS, because you can automatically tax the economy, fine tune taxes. You don’t need to wait for Congress. You don’t need to wait for a new president to roll out a new tax cuts and jobs act or anything like that. You can tax the economy, fine tune where you think it’s being overheated. Gas prices are going up, double the taxes. Whatever it is. You can debit people as accounts … This was in her words, if inflation is running too hot, in extreme circumstances. So, even at this level, they understand inflation is a result of monetary expansion. Deflation is a result of monetary contraction.

Joe Brown (00:50:03):
So, if inflation is running away from you, just take half of everybody’s money. Then you’ll get deflation. It’ll stop the inflation. And so, that’s why I say that CBDCs are a tyrant’s wet dream, because it allows fine tuning of the economy, but ultimately it will fail. It’s destined to collapse under its own weight, because just because you have the pricing information and the transaction information and the control, you can’t fix the problem of morality. And you also can’t fix the problem of perfect knowledge, because every pricing choice that’s made is an internal decision based on subjective value.

Joe Brown (00:50:37):
There’s no such thing as intrinsic value. We can talk about subjective value if you want. That’s probably a longer conversation, but you can’t understand the intentions behind it. And so, you end up with mal-investment, misallocation of resources that are so large, that you collapse the system under its own weight.

Trey Lockerbie (00:50:53):
So, it’s a little bit easy to understand how that would work or could be implemented in a communist country like China. But it’s hard to imagine that flying somewhere like the US. My question, I guess, is if the US did attempt to implement their own CBDC like that, what happens to cash? Would they ban all cash? Would you have to turn in your cash, like you did your gold? What happens to the USDs that we have in circulation now?

Joe Brown (00:51:17):
They would almost certainly be relegated to a black market. You have things like this happening again all throughout history. Even recently, I think it was probably about five years ago, India, overnight … It was their equivalent of the $20 bill. They just said, “Hey, this is no longer legal tender. And you have 48 hours …” It might have even been 24 hours, “to turn in all of those bills of that denomination. And we’re going to replace them with a higher denomination.” And the reason they stated for this was because, oh, they’re being counterfeited, oh, there’s money laundering, oh, there’s fraud.

Joe Brown (00:51:48):
But really, it was because they wanted more control and they wanted more taxation ability over their people. And so, you have things like this happen all the time, where they roll out a CBDC. At the beginning, it will be something like a trial program, but eventually, it’ll get to the point where they say, “All right. In order to do business in America, you must have an account, a wallet, at the Federal Reserve. So, every business, every merchant cannot legally do business, unless it goes through their account at the Fed. And as an individual, if you want to do transact, if you want to buy from any business, you will need a wallet to do so.”

Joe Brown (00:52:24):
“Because the only way to get money into a wallet is from another wallet. And so, you have a week to turn in all of your old dollars, all of your cash. And we will give you the equal number of those in the new central bank digital currency. There’s no loss to you. But if you wait too long, legally, those are not legal tender anymore.” And so, it would relegate everything like that; cash, Bitcoin, things like that barter to black market, or at least a parallel market. And you would not be able to buy or sell without an account like that.

Joe Brown (00:52:56):
And it seems unbelievable how we get into that, but it would be on the back of a dollar failure. And so, if we get to the point where the Federal Government defaults or they start unlimited QE up again, after an emerging markets crisis happens later next year as a result of the tightening, and then everybody in the world dumps treasuries and then dumps dollars, and we have hyperinflation here, and the dollar actually fails, what you’ll probably see happen is the Federal Government say, “The problem was counterfeiting and fraud. And the problem was cash. And the problem was we didn’t have enough control.”

Joe Brown (00:53:30):
Or “The problem was the Federal Reserve being part private, they didn’t have the legal ability to do what they should have been able to do to solve the problem. So, we’re going to absorb the Fed underneath the treasury. We’re going to issue new dollars that are digital,” like the green buck that we issue under the treasury during the civil war. And so, they will give it a new name. They’ll bring the Federal Reserve monetary policy under fiscal policy. I think that’s how it’ll be rolled out on the back of the failure of the current dollar.

Trey Lockerbie (00:53:58):
I just had Brent Johnson on the show, and he’s obviously famous for his Dollar Milkshake Theory of the dollar potentially getting stronger over time. And it has been getting stronger. The DXY right now is almost at 97, which is getting into that danger range that he highlighted on our episode. Back in March of 2020, it shot up all the way to almost 103, 102.8. So, 97 isn’t too far off. And things really started to get squally once the US dollars essentially got to a hundred. What is causing the dollar to spike as of late? And what might be some of the effects from that that we should see or expect?

Joe Brown (00:54:35):
So, I always say that Brent Johnson, he’s probably one of the most misunderstood people and marker out there, essentially because when the dollar’s spiking, it’s just versus other currencies. And that’s what probably 90% of people don’t understand. They think, “Oh, the dollar’s going up. That means Gold’s going down, or stocks are going down, or real estate’s going down, or the dollar’s getting stronger relative to everything else where it’s gaining in purchasing power.” It means none of that. It’s measured against other currencies. And so, it just means it’s going up relative to other currencies.

Joe Brown (00:55:02):
So then you have to ask, “Well, why is it going up relative to the currencies that it’s measured against in that basket?” And the answer is because of the corner that the Federal Reserve is in right now, being pushed into tapering and tightening. So, with the unprecedented levels of inflation that we have been seeing recently, and now those fake jobs numbers that we talked about, we’re seeing the Federal Reserve saying that they’re going to continue the taper. They’re going to potentially even raise interest rates faster than they originally anticipated.

Joe Brown (00:55:33):
And this is tightening at a level that is faster than the rest of the world, greater. And so, relative to the rest of the world, that’s making the dollar appear stronger. And also, you have players just front-running that. And so, when you see inflation like this, and you see, “Okay, well, it’s going to take a long time for the Federal Reserve to react to this and even longer for the effects of their reaction to work its way out into the economy,” it’s ludicrous for me to hold on to a 10-year bond, paying 1.6%, when inflation is 4, 5, 6, 7, 8%. I’m not going to do that. So, I’m going to sell that.

Joe Brown (00:56:07):
Well, that puts downward pressure on bond prices, which is upward pressure on interest rates, and eventually an absence of manipulation, an absence of a buyer with a printer. Then you get equilibrium where eventually the interest rates will reach at least the price of inflation to have real interest rates not be negative anymore. But the problem with that is emerging markets. The problem with that is countries that have to get dollars in order for their economy to survive. Because as this happens, the dollar gets more expensive. Well, that puts a lot of pressure and emerging markets crises almost always happen as a result of unexpected to dollar spikes.

Joe Brown (00:56:43):
Because it just gets harder to get your hands on dollars, and you need dollars to do global international commerce. And so, I think it’s very likely that within the next year, as we see interest rates go up, especially short-term interest rates and the dollar go up, we’re going to see some crisis pop up in another country that’s going to bleed over into balance sheet of a Euro zone bank that’s completely over-leveraged right now and spill over into the financial system. And that could be a crisis that will cause them to turn tail and have to push that dollar back down and ease again.

Trey Lockerbie (00:57:15):
Got it. So, that begs the question of where to park your money. And a lot of people are talking about real estate right now, although that is even at all time highs in most cases. What are your thoughts on the US real estate and home prices? And is that the safe haven that once was?

Joe Brown (00:57:31):
Yeah, that’s a great question. It’s very easy to just look at the prices and the average prices, and you look at the Case-Shiller index, and you’re like, “Oh, prices. They have to come back down.” At this point in an economy, when you have this level of manipulation and expansion and financialization of everything, you have to start asking, “Compared to what?” Because comparing things to dollars eventually starts to break down. So, you have to start comparing things to other things. When you measure home prices in gold, they’re not at all time highs. When you measure home prices versus the stock market, it’s not at all time highs.

Joe Brown (00:58:02):
And the reality is that the current housing market is nothing like it was 12, 13 years ago. Well, right now, new supply is what to watch, because there’s nobody sitting with three or four empty homes, just watching the price go up, so they can sell it to the greater fool. The people are living in a house. When they sell it, they move somewhere else, and they buy another house. Investors and institutions are increasingly making up more and more of the buyers of these homes that are getting sold.

Joe Brown (00:58:33):
So, when one person sells their home, sometimes they’re selling it to another person that’s going to live there. But growing increasingly so, they’re selling it to a company that’s going to put a renter in there. And so, you can’t look at the supply of resales. You have to look at new homes that are being built. Because after a financial crisis, developers got destroyed. And we were probably optimistically five, but probably closer to 10 years, away from new supply catching up. And now, what are we seeing with supply chains? Well, you can’t get supplies. You can’t get steel. You can’t get labor.

Joe Brown (00:59:06):
And so, new homes aren’t being built. They keep on getting delayed. They keep on getting delayed and delayed and delayed. And we are not seeing new supply catch up with demand. And so, the tapering will likely put a break on prices going up, because mortgage rates are going to go up, and that’s it. The cost of servicing that debt is a huge, almost the sole influence on affordability of these homes. But that’s not going to last long, like we already covered. And when they have to slam interest rates back down to bail out the economy one last time, stimulate debt growth …

Joe Brown (00:59:36):
We already know how much a drop in mortgage rates influences the extra cash that people have if they peg mortgage rates to 2% or 1% or even lower, the refinancing that people are going to be able to do, the buying of greater price houses that people are going to be able to do, the cash out refinances when the prices go up as a result from that, the cash that they’re going to have as a result. These are all things that are going to make housing prices explode in dollar terms. Purchasing power is another question, but in dollar terms, especially when you’re using fixed rate mortgages to buy real estate, it’s by definition, shorting the dollar.

Joe Brown (01:00:14):
And so, it’s a play on profiting on inflation, when you can use fixed rate debt to buy an asset that makes up so much of an economy that the people in power are incentivized to keep those prices going up.

Trey Lockerbie (01:00:28):
There’s a lot of talk right now about buying farmland. Not everybody can afford farmland, but related to real estate in that same idea, would you advise someone buying up some farmland if they could afford it?

Joe Brown (01:00:39):
Yeah, that’s a great question. And the short answer is, yes. And there are very easy ways to even just get exposure to farmland, even if you only have a couple of bucks inside of a Robin Hood account or something like that through ETFs. But the reason why, it relies on understanding two things. The first thing is the trade deficit that America has right now. And then the second thing to understand is what happens during high inflation. And I like to look at Weimar Germany as a very good example. In America, we make very little of the things that we consume ourselves.

Joe Brown (01:01:11):
Most of what we consume comes from other countries. That’s the trade deficit. We buy more from other countries than we sell to other countries. What we have to do to get that stuff is give something. Well, what do we give right now? We give dollars, which are essentially worthless. Looks like we’re winning. We’re handing out these worthless pieces of paper, and we’re getting all sorts of goods, all sorts of consumable items in return for it. And we don’t have to make anything. We don’t have to do anything productive to make these dollars. We can print them as a country.

Joe Brown (01:01:41):
And so, just to put this in perspective, if you’re in a individual and you’re really good at counterfeiting, let’s say. You’re an artist. You can counterfeit dollars. You’re going to do that to pay your bills. You’re going to deposit those dollars into your account, pay your mortgage with it. You’re going to go to the store, buy stuff with it until you get caught. Once you get cut, then you’re going to have to provide something of real value to the world in order to get your hands on purchasing power. And so, you’re only able to exchange then, at that point once you’re caught, real wealth in exchange for other wealth that you want.

Joe Brown (01:02:08):
And so for now, you’re living high on the hog by printing up fake money, but once you get caught, you’re going to have to resort whatever skill you have in order to create value. One of the things that America does right now is farm. We’ve got a lot of farmland, pretty good at making food. And so, what you have right now is a situation where billionaires and institutions, lot of big money is scooping up farmland. So, when big money starts to do something, you have to ask yourself, “Why?” So, now we have to go to the inflation example. And I really like to use Weimar Germany as an example.

Joe Brown (01:02:45):
When hyperinflation set in, very few people were winners. Almost everybody was a loser. But there are two really good books on the hyperinflation in Weimar Germany. One of them is When Money Dies by Adam Fergusson. The other one is The Downfall of Money by Frederick Taylor. And I can’t remember in which one, but one of them details the day to day lives of people that are going through this. And farmers were getting rich.

Joe Brown (01:03:10):
Because it turns out, when luxuries got window, because you were living high on the hog, but it was fake wealth and everything starts to collapse, and everybody has an abundance of money, but nothing of real value, that people who still have the ability to create real value, especially necessities like food, they start to attract all of the capital. And they still can make pigs. They can still make eggs. They can still make cows, because they’re farmers. And so, they get to sell those at higher and higher and higher prices, because that’s what everybody wants more of.

Joe Brown (01:03:38):
And when ask what they were doing … Because everybody got mad. They’re like, “Hey, you’re taking advantage of us. You’re getting rich. You’re exploiting us in this poverty.” When asked what they were doing with all the riches they were accumulating, they said they were paying off their mortgages. So, that goes back to what I said earlier about shorting the dollar, taking out fixed rate debt to capitalize on inflation. But essentially, what you have to do when inflation starts to take off is you have to provide the world something of real world value in order to get your hands on the currency that somebody else wants in exchange for the goods they’re trying to buy.

Joe Brown (01:04:08):
And if everybody doesn’t want dollars anymore, we’ll have to get, let’s say, euros or yen or Bitcoin or gold or silver. Whatever it is, we have to provide something in order to get that. And farmland, farms, food, that’s one of the biggest things that we’ll still be doing, because almost everything else, we don’t make ourselves. And so, when something like this happens, if we loop back around to what I was saying about the trade deficit that we have right now, we think we’re taking advantage of the world. We’re sending out all these paper dollars, we’re getting real goods in return.

Joe Brown (01:04:41):
But when you look full circle, what is the rest of the world doing with those dollars, especially China? They’re buying land in America. They’re buying real estate. They’re buying stocks in America. They’re buying dollar-denominated assets. So, what we’re actually doing is trading ownership of our assets like land and stocks and real estate to the rest of the world in exchange for consumable goods, not assets, that we’re using up. And they’re buying real estate and land and farmland with it.

Joe Brown (01:05:12):
And so, when you look at the full circle, you’re seeing everybody who is in on what’s going on, realizing, “Hey, the best way to take advantage of a future drop in the value of a currency is by using that to buy an asset that will have to be repriced upwards in the face of that hyperinflation. And that data is backed up by the net international investment position, the NIIP. You can look at the charts. We have one of the lowest NIIPs in the developed world, and that’s just a result of, we hand dollars out, they buy our assets. We don’t buy their assets. We buy their goods.

Trey Lockerbie (01:05:47):
Fantastic. You’ve mentioned a number of amazing books during this podcast, but I’m curious, what is the best investing book that you’ve come across that really resonated the most, or maybe the one that you recommend to people who are just getting going?

Joe Brown (01:05:59):
So, I read a lot though. I can’t limit it just to once. So, I apologize. I’m going to have to take advantage here and recommend a few for different reasons. I would say the first place to start would be anything by Jack Schwager. He’s written the Market Wizards Series. He started back, I think it was the ’80s, with Market Wizards. He’s written five or six of them now; Unknown Market Wizards, Hedge Fund Market Wizards, The New Market Wizards all different books. And just absolutely fantastic, because he interviews the best investors in the world.

Joe Brown (01:06:29):
And when you read couple of those, you start to see parallels and you say, “Okay, every single successful investor for decades now have done the same things.” Pattern recognition sets in. You start to see, “Hey, these are the things that make you successful at investing.” The second group of books that I recommend probably more than any others actually is by Nassim Taleb. Not all of his books, but three of them; Black Swan, Antifragile, then Skin in the Game. In that order; Black Swan, Antifragile, Skin in the Game.

Joe Brown (01:07:00):
And applies to things outside of investing as well. But if I would have read those books early on, I would have been saved massive amounts of money that I lost when I couldn’t afford it if I would have understood things that he explains very, very clearly about risk management and some other things in those books. And then finally, this is a new book. Just came out a couple months ago is Safe Haven by Mark Spitznagel. Safe Haven: Investing for Harsh Times, I believe is the subtitle. Fantastic book about cost-effective risk mitigation. A little bit of math, so I would recommend getting the physical copy, not the audio copy. But all of those fantastic that I recommend a lot.

Trey Lockerbie (01:07:41):
Amazing. And actually, Jack Schwager was a guest on TIP early on. Preston and Stig interviewed him. It was Episode 85 years ago. We should have him back on, but I’m a big fan of those books as well. Last serious question I have for you, and the podcasters listening won’t understand this, but there’s a chart on your computer behind you. I love that you display these during your videos, but this particular stock pick seems to be going parabolic. So, I have to ask, which one is it?

Joe Brown (01:08:07):
That’s the 2-Year yield.

Trey Lockerbie (01:08:10):
Even better.

Joe Brown (01:08:10):
US treasuries. The yield of the 2-Year US treasuries. So, that’s an indication of what’s … It looks like a penny stock or a new crypto, a new token, Dogecoin, whatever, but it’s the yield on the 2-Year treasury. So, I take that for what it’s worth.

Trey Lockerbie (01:08:23):
Oh boy. All right. Great. Listen, before I let you go, Joe, I want to make sure I give you the opportunity to hand off to our audience where they can learn more about you, find Heresy Financial, follow along with anything else you want to share.

Joe Brown (01:08:36):
The number one place is on YouTube. My channel is called Heresy Financial there. And then the second place is on Twitter. Handle is heresyfinancial on Twitter as well.

Trey Lockerbie (01:08:47):
Joe, this was a blast. I would love to do this again sometime soon. You’re just a wealth of encyclopedic knowledge, and it’s really all awesome to … I learned a ton, and I know our audience will as well. So, would love to have you back on and do this again sometime soon.

Joe Brown (01:09:01):
Thank you. I appreciate it. I’d love to, anytime.

Trey Lockerbie (01:09:03):
All right, everybody. That’s all we had for you this time. If you’re loving the show, don’t forget to follow us on your favorite podcast app, so you can get the episodes automatically. Joe and I originally connected on Twitter, so you can always find me there, @TreyLockerbie. And check this out. We have this amazing new feature on theinvestorspodcast.com, but now you can actually follow along with your favorite billionaire. That’s right. We’ve listed the billionaires’ portfolios on the platform, so you can compare your own portfolio to what they have.

Trey Lockerbie (01:09:29):
Simply Google TIP Finance, and it should pop right up. And with that, we’ll see you again next time.

Outro (01:09:35):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network, and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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