Joe Brown (03:30):

Initially, everybody has a surge in purchasing power. And so, what do you do when you get to the next property? Well, clearly, you’re going to buy it because you can afford it. You’re also going to put a hotel. You’re also going to put a house. And so, you are going to be able to spend a lot more money than you would have otherwise. What that does though, very quickly, it increases the cost of living around the monopoly board.

Joe Brown (03:54):

Because now when you land on somebody else’s property, they’ve purchased houses or hotels. So, now, the rent is more. Now, if a property comes up for auction, there’s more money floating around in the game to be used that will bid up the prices of these properties. And very quickly, it gets to the point where the cost of living in the monopoly game, outpaces that additional initial surge in purchasing power.

Joe Brown (04:16):

And just for comparison, if you were to do the opposite, if the banker was to suddenly slash everybody’s money in half, very quickly, people would not be able to afford things. You land on a property you wouldn’t be able to afford. You land on rent you wouldn’t be able to afford it. And in the game of monopoly, let’s say it changes so it matches the game just like regular life, you’re going to have to negotiate those prices down.

Joe Brown (04:38):

So, the game doesn’t end in life you, you just go for the cheaper things. And so, you’ll work out a deal with the person you land on their property, get lower rent. And very quickly, the prices on the board will have to move down to respond, and react to the lower amount of money that’s floating around in the system. And prices will come down as a result.

Joe Brown (04:56):

And so, what this demonstrates is that prices are just information, and they relationship, or the relationship between prices and how prices are measured. And so, if you take a measuring tape, and you cut each inch and a half, and you make something that was 100 inches, 200 inches, but each inch is half the size than it was before, you didn’t change the size of what you’re measuring, you just changed how you’re measuring it.

Joe Brown (05:19):

And that’s exactly what the money supply does. And when they expand the money supply, especially rapidly, like they’ve done recently, that’s going to show up in prices going up. And everything else that you’re pointing to that anybody points to is a symptom, not a cause.

Clay Finck (05:35):

You mentioned that they are expanding the money supply. Could you talk about why that’s happening?

Joe Brown (05:42):

The number one reason is they wanted to stimulate inflation. And so, that sounds preposterous, given what we’ve been experiencing recently, but inflation isn’t just goods and services, it’s also assets. And so, when you have a fixed quantity of money where the money supply doesn’t change, prices moving up or down are pure signal. There’s no noise.

Joe Brown (06:01):

They’re just a signal about the supply and demand about the relative scarcity or abundance of something versus everything else. And so, when you have a fixed quantity of money, and let’s say 2020 starts, suddenly people value purchasing other over the things that they’re trying to sell. And so, you’re going to have prices of some things start to collapse.

Joe Brown (06:22):

One result of that is recession, unemployment, bankruptcy, and solvency. And for the most part, that will show up into things that should be going bankrupt, that should be going insolvent. That would allow a transfer of ownership of assets from the incompetent to the competent. And so, what they do is they print a bunch of money. They give that new money to actors, especially the government.

Joe Brown (06:46):

And then, that government is able to spend that money into existence on things that it thinks will be beneficial for the economy. And so, it spends a lot of that money on buying assets, on awarding contracts, or on just handing that money out, and letting people decide how to spend it. And inevitably, then what happens is you get inflation in asset prices beyond what it would be otherwise.

Joe Brown (07:06):

So, you would’ve had a massive crash of assets way more than we did, but instead, you have those asset prices react up because all that money was used to go buy those assets, and push those asset prices up, preserves, subsidizes supports the incompetence, and it’s not allowing the deadwood to get burnt off. And you subsidize and support the wealth destruction, and the malinvestments, the misallocation of resources.

Joe Brown (07:31):

And so, the express purpose is inflation, even though they don’t call it that when they’re bailing out the economy. And what inevitably happens then is all that money eventually works its way throughout the economy. And then, you get the inflation, and the things that nobody likes, which is inflation of goods and services, things like food, rent, used cars.

Joe Brown (07:47):

And ultimately, it’s all a result of the expansion, the massive expansion of the money supply. And even though they don’t say that was their purpose, that was their purpose from the beginning. Now, that people are recognizing it, and waking up to it, they’re saying they’re going to go the other way.

Clay Finck (08:02):

So, essentially, the federal reserve is able to print money to help prevent the overall economy from entering a recession. While they’re able to help prevent a recession, such as what happened in March 2020, there are also unintended consequences with them printing so much money. Could you talk about the effects that inflation has on different market participants in the economy? Who gets hurt the most from inflation, and who is positioned to potentially benefit?

Joe Brown (08:29):

Absolutely. So, I think about when I was young, first married, I had newborn baby at home, we were on one income. I was making $19 an hour, and things were very tight, especially because of my wife. We weren’t struggling. She’s very frugal, good at budgeting, things like that. And so, it really helped us to have our finances in order.

Joe Brown (08:47):

But I think about what would’ve happened if diapers would’ve doubled? What would’ve happened if the cost of formula had doubled? What if our rent had gone up 10%, 20%, 30%, like many people’s rents are going up right now? We would’ve been struggling hard. It would’ve been very, very difficult to survive, and to make ends meet, especially because I didn’t own any assets.

Joe Brown (09:05):

I didn’t have a brokerage account with stocks, and I didn’t have an IRA. I didn’t have any rental properties. I didn’t have any source of income that was benefited by inflation. I couldn’t go to my employer and say, “Hey, my grocery bill went up by 600 bucks. Can you give me a $2 raise?” That’s just not a thing that happens.

Joe Brown (09:21):

And so, the people that are negatively impacted the most by inflation are exactly in that same exact situation. And there are so many people in that situation right now. And so, it’s the people who are basically have no saving, no assets, and were hourly jobs that are negatively impacted the most by inflation.

Joe Brown (09:40):

On the flip side, in contrast the position that I’m in right now, where my income increases along with inflation, I have assets that their price and value increase along with inflation, that more than compensates for the rise in the cost of living. I’m not experiencing seeing an increase in pain from inflation right now. I’m benefiting from it.

Joe Brown (09:59):

When you look at society and see, there are two groups of people, and there’s a policy of printing money, expanding the money supply. And the result of that is the poor people are getting hurt. And the rich people are benefiting from that in a very real sense. Inflation is a wealth transfer from the poor to the rich. And that’s essentially what it is in the groups of people who are benefiting or disadvantaged by it. And the mainstream media right now is all that effort to try and convince everybody that it’s the exact opposite.

Clay Finck (10:29):

So, when the federal reserve prints money, asset prices generally increase. So, the rich that own those assets see an increase in the wealth that they hold. While on the other hand, when money is being printed, the currency that people are using loses value.

Clay Finck (10:44):

So, a person who makes a fixed wage, and doesn’t own too many assets is hurt in this scenario because the real purchasing power of their wage goes down with inflation, assuming their hourly wage stays the same or is less than the rate of inflation. Now that we have a good idea of what inflation is, let’s talk about the term that is being thrown around the news headlines, and that’s CPI inflation. Could you help our audience understand the term CPI inflation?

Joe Brown (11:11):

So, CPI stands for consumer price index. It was developed decades ago in order to try and come up with some effect measure of what the inflation rate is. The problem is that you can look at this from an incompetence standpoint or a malevolent standpoint. I don’t really care. The results are the same. The index has been changed over time to try more accurately measure what inflation really is.

Joe Brown (11:35):

So, we have 7% inflation. That’s the newest number from December of 2020 through December of 2021. The CPI rose by 7%. The problem is there are a lot of adjustments that are made to how this is measured that many people think that is severely understating what real inflation is. So, a couple of these, one of them is called hedonics. Hedonics tries to measure quality changes.

Joe Brown (12:00):

I get a new iPhone every year, and every year the chip gets a lot more powerful, right? Well, the cost of my iPhone increases pretty much every year. And so, what’s happening is that the iPhone is showing up in inflation as a price decrease because it’s trying to account for the fact the chip in the iPhone gets more powerful. In reality, the iPhone’s costing me more.

Joe Brown (12:20):

And it’s not just computers, it’s things like clothes, and washers, and dryers, and refrigerators, and stupid stuff like that that you have in the index. It’s measuring, it’s trying to take into account better quality. When in reality, things are still costing people more. And so, that’s one thing that looks sneaky, although there is probably a little bit of truth to it because the iPhone today, you buy an iPhone, you don’t have to buy camcorders anymore.

Joe Brown (12:42):

You don’t have to buy calculators. You don’t have to buy Atlases and maps. And there’s all sorts of things that go into that. Still, it looks like it might be understated by things like this. Other things that are in the CPI that make it look sneaky are the substitution method, where if steak gets too expensive and people start buying chicken, the index will measure chicken instead of steak.

Joe Brown (13:00):

Well, now you’re not measuring a broad, general, average level of price increases. You’re measuring the cost of survival. When you go back and you look at the way that inflation was measured in 1980 or 1990, you can look at a website called ShadowStats, does this.

Joe Brown (13:16):

It looks like inflation based on the way it used to be measured is either in between 11% to maybe 16% right now, instead of the 7% that they’re saying. And so, it’s probably somewhere in between because there’s probably some truth to the changes that they made along the way. But 7% is probably low.

Clay Finck (13:33):

It’s pretty crazy to me that they are able to try and bring their inflation number down to make people think that inflation isn’t actually as high as it is, especially due to the reasons you just mentioned with the product improvements, hedonic effect, or the substitutions. If I want to buy a steak, and they’re able to substitute ground beef for steak, well, in my eyes, that really isn’t a fair substitution because they’re different products.

Clay Finck (13:57):

This really made a lot of sense to me when I realized that the government is actually incentivized to keep inflation low. Could you talk about why the government is incentivized to understate the true inflation rate?

Joe Brown (14:10):

Just from the standpoint of all the money that they would have to pay out if inflation was showing up as higher, because they have a lot of expenses that adjust according to the cost of living, mainly social security. The lower that they can get these inflation numbers to show up, the more they can save money on that, especially considering how big of a haul.

Joe Brown (14:31):

I think social security has 12 years left right now. At the current calculation, the current forecast, it’s got about 12 years left before that trust fund is empty, and then they can only pay out what comes into it. So, there’s money coming into the social security fund, but there’s more money that’s leaving the social security fund.

Joe Brown (14:47):

And so, at the rate that money is leaving and coming in with all their projections, it’s got about 12 years left. And if inflation keeps on growing, the official inflation will keep on growing, that will drain even faster. Now, at the end of the day, they’re going to change the laws, and they’re just going to print the money to pay for it. They’re not going to actually make their largest constituents take a pay cut, but that’s what’s going on right now. And ultimately, that would lead to even more or inflation, ironically.

Clay Finck (15:12):

Since we know that CPI inflation isn’t an accurate measure of the true inflation rate, how do you go about measuring the true inflation rate, if at all?

Joe Brown (15:22):

When you’re dealing with complex systems, there are some things that cannot be done. That’s just the reality. That’s just the truth. And central planners do not ever want to believe that because their job depends on the ability to do things when intervening in complex systems. But the reality is when you’re dealing with something as complex as an economy, and as prices on average, it’s just not something that’s possible to accurately measure because every state is different.

Joe Brown (15:49):

Within every state, every city is different. Within every city, every family’s bills look different. Within every family, the decisions that you make from year to year, from month to month, from week to week because of your subjective values, and wants, and desires, and income, everything is constantly changing. And so, the only way to get a handle on it basically is to treat it as an individual thing.

Joe Brown (16:12):

And you have to budget, and you have to look, and you have to say, “Where did I spend my money? And yes, I spent more money this year than I did last year. Was that because I lost control of my budget, or is that because I bought the exact same stuff, and it cost a lot more?” That’s really the only way to have the most accurate measure of inflation is to just watch it yourself.

Joe Brown (16:31):

That you can come up with some guidelines, some things that are semi accurate on a city, state, national scale, but they’re never going to match up because it’s just so complex. And it’s so different at every individual level.

Clay Finck (16:44):

I think it’s important that you mentioned that, and important for investors to understand that there is no one inflation rate. Even if the government tells you there’s inflations 7%, anyone could come up with an average inflation rate based on what most people purchase. But the reality is that we’re all purchasing different things, and each good is changing in price at a different rate.

Clay Finck (17:05):

As you just mentioned, real estate in each city is moving in price at a different rate. Different stock indices are all moving at different rates, and food in the grocery store, your milk might be changing in price at a different rate than your eggs, and your bread, and so on, and so forth. So, I think it’s important for people to realize that there is no one inflation rate since it’s a vector, really.

Joe Brown (17:27):

100%. So, Nassim Taleb is an author that has written a bunch of great books, and an example that he uses about average that highlights this really well is if somebody says, “Hey, I’d like you to go on vacation.” And the average temperature there is going to be 75 degrees, you’d think, “Fantastic, 75 degrees, that’s great.” And then, they say, “But wait, that’s an average of 75. The low is going to be zero, and the high is going to be 150. No, that’s not great then.” Right? So, averages are very deceiving when the extremes have no bounds.

Clay Finck (18:00):

You’ve mentioned the expansion of the money supply leading to inflation, but people are really talking about all these other factors, such supply chains and labor shortages. What do you think are the biggest drivers of inflation today?

Joe Brown (18:15):

Pretty much everything that people are pointing their fingers at are source or the cause of inflation are symptoms, not causes. So, the way that this works out in general is that first, you had a giant expansion of the money supply. So, the money supply is 40% larger today measured by M2, 40% larger today than it was pre-2020. So, you have a massive surge in the supply of money.

Joe Brown (18:39):

What happens after that is that money gets pushed out into people’s bank accounts, into people’s hands. All that money gets spent. We didn’t see a corresponding and sustained increase in savings. We didn’t see debt, a corresponding amount of debt fall. Debt is at all-time highs right now, actually, corporate and government debt.

Joe Brown (18:58):

What happened was all that money was spent. So, there’s a surge in demand that came out of nowhere without any corresponding increase in supply to match. And so, you have the same amount of stuff in existence. And then, suddenly, every goes on a buying splurge. What happens to toilet paper when everybody went to go buy toilet paper far more than they ever had?

Joe Brown (19:21):

There was a shortage, it was gone. And so, when everybody took all this new money, and went out and bought everything, there are shortages. There wasn’t a preceding increase in the production of stuff to match the coming demand. Now, on top of that, you have additional problems that are not from the money printer. There were lockdowns, especially on jobs that were essential to getting stuff sent out around the world.

Joe Brown (19:46):

Those jobs became a lot harder because of new regulations, and made people quit because the money printer has something to do with that. Because a lot of people had the cushion to quit their jobs that were especially painful jobs that didn’t have the increased pay because they got the additional influx of purchasing power from some of this inflation.

Joe Brown (20:03):

And so, it gave them the cushion to quit. So, all these things compound on each other to make the supply chains, and the shortages worse. Ultimately though, none of it would’ve ever started without that massive expansion of the money supply.

Clay Finck (20:16):

It’s pretty funny that anyone that’s in the public eye points to the supply chain issues, and labor shortages for the inflation issues, but don’t ever mention the fact that the M2 money supply increased by 40%. Just crazy stuff to think about. And it makes when money is added to the system, the supply side is going to be strained because of the increased demand. So, it’s the central bank that has the authority to print money. What exactly can they do with the dollars that they print to try and support the financial system?

Joe Brown (20:47):

That’s a great question because it’s not as if the trillions of dollars that they created all just went into people’s bank accounts. A very small amount of it, at least initially did. So, what are they doing with all of this money that they’re creating out of thin air? Well, central banks all around the world have different rules. So, I’ll talk about the federal reserve here.

Joe Brown (21:06):

For years, the only thing that they were able to do for decades, they could buy government debt. And for anybody who’s not aware of what that means is that they’re basically loaning the federal government money to spend. Now, they have to do it indirectly. They can’t do it directly, but their end result is the same. The federal reserve is printing money to loan to the government.

Joe Brown (21:24):

After the great financial crisis, instead of just treasuries, government debt, they were also able to start buying mortgage-backed securities in order to take all of those fat assets off of the balance sheets banks. And so, those are the two things that they are legally allowed to buy. When they buy an asset, they give money to somebody in exchange for that asset that increases the money supply.

Joe Brown (21:48):

And that money then is able to be spent on other things. And so, if they buy a treasury from a bank, then that bank is able to take those new dollars, and turn around, and do something else with it. Usually, that’s loaned to the government again, create a new treasury, and then they turn back around, and sell it to the fed. All of the money that the federal reserve is printing and using to buy assets, that money then, it goes and gets spent on other things.

Joe Brown (22:09):

Well, in 2020, they needed to buy more things than just mortgage-backed securities and treasuries, they weren’t allowed to. They’re not legally allowed to. So, they had the treasury department set up special accounts called special purpose vehicles. And inside these special purpose vehicles, the treasury purchased things like corporate debt, like ETFs that hold corporate bonds.

Joe Brown (22:33):

And some of them were high-yield bonds, which are junk bonds from companies that should be paying very high interest rate on their debt because their garbage. And the federal reserve funded all of this. So, they didn’t hold it on their own balance sheet. They were holding them at the special purpose vehicles held at the treasury, which is basically like a 19-year-old who is not old enough to buy alcohol, has a 21-year-old buddy, gives his own money to his 21-year-old buddy and says, “Hey, go buy some alcohol for me.” And he does.

Joe Brown (23:00):

Same thing, same result, it’s just getting around the letter of the law, and you’re not abiding by the spirit of the law. And so, these are all the things that the federal reserve does when they print money. They basically buy assets, and that injects money into the economy in exchange for whatever asset was just purchased.

Clay Finck (23:18):

I’m curious, I know that the federal reserve is a separate entity from the US government. Is there ever a point where the federal reserve says that we’re not going to lend to the US government anymore, because the debt has just gone too far for them?

Joe Brown (23:33):

That’s a good question. I think the opposite is more likely. So, the federal reserve is a quasi-public, quasi-private entity. And so, when people say that it’s independent politically, what they mean is that they’re not controlled by a single party. But they exist at the sole discretion of Congress. The Federal Reserve Act is what allows them to exist, and gives them their mandates of stable prices and full employment.

Joe Brown (23:56):

And so, they operate only under the allowance of Congress. And anytime they step outside their legal boundaries, because they know that Congress will for forgive them. They don’t ask permission, they ask forgiveness, and everything is okay, like the special purpose vehicles at the treasury. So, let’s say they did find religion. And they said, “Okay, we’re going to take the short-term consequences of doing the painful option right now that’s healthier long term,” that would cause so much economic pain.

Joe Brown (24:20):

That my guess is that Congress would fold the federal reserve fully underneath the treasury department and take control. And they would have zero independence left, and they would do the opposite. Because when you have an entity that both has the power to make decisions to benefit somebody, and they have extreme incentives one way, and against another, they’re likely, and most times through history, going to take that.

Joe Brown (24:44):

And so, the government has more debt than they can handle, especially if deflation sets in. The only way to continue this game is to debase the dollar, get more dollars, and use that to service the debt until basically, the debt is meaningless. It’s not getting paid back. We’re just printing money to pay all the bills. If it got to the point where the federal reserve said, “Hey, we’re independent. We’re going to do the right thing,” that would make the federal government insolvent.

Joe Brown (25:06):

They would not be able to pay their bills. They would default on their national debt, and they would not be able to tax near enough. You would have many problems. And so, the federal government would have the power to just say, “No, you’re not going to do that. We’re going to fold you under the treasury, and we’re going to take over the printer, and we’re just going to monetize our own debt. We’re going to print the money.”

Joe Brown (25:23):

So, that’s what I think is more likely. And that’s what you see throughout history. When you get to this point of debt to GDP, this point of inflation, this point of problems financially, you tend to see a full nationalization of the banking system underneath, central bank gets folded into the federal government. You have merging there of monetary and fiscal policy. So, I anticipate that at some point, that will happen.

Clay Finck (25:43):

Very interesting. Now that we know what inflation is, let’s talk about what investors can do to protect themselves from inflation. What asset classes should investors look to or avoid when wanting to protect themselves from inflation?

Joe Brown (26:00):

That’s a great question. I’d say the first investment that has a highest ROI is going to be reading books, especially history books. For hundreds of years, people have been documenting, what happens when there’s financial crisis that they’re living through at the start, at the end, when there’s a rise and fall of great powers, when there’s transition periods throughout history, people go back and study these.

Joe Brown (26:19):

There’s more documentation on every time this has happened throughout history than anybody will be able to read in their entire life. And so, that’s the first thing. And the book behind you, Principles by Ray Dalio. I recommend books by him all the time, especially his recent one, the principles for dealing with the collapse of… or the rise and fall of great powers.

Joe Brown (26:39):

It’s a long title. I always forget the name of the book, but that’s the first thing that I say is start reading books because you start pattern recognition. You start to be able to realize, “Hey, these things that you’re talking about that happened a hundred years ago, that sounds like what I’m reading in the news today.” And so, that sets in.

Joe Brown (26:55):

And one thing that you notice is that when you have periods of time where the debt is unmanageable high, and you start to have a monetization of the debt, and you start to have inflation take over, things like gold, things like silver, things like real estate, things like land, things like real assets, real estate, mining stocks, energy, commodities, all typically do very well.

Joe Brown (27:15):

And then, things like owning cash, especially the cash that is being debased, and things like owning debt, and fixed income instruments do it extremely poorly. And so, you start to notice trends like that. And then, I’d say increasingly today, Bitcoin might fall into that category extremely well. It’s still very new, but Bitcoin might fall into that category very well.

Clay Finck (27:36):

Now that you bring up gold and silver, I’m curious, why do you believe that these two assets haven’t performed as well as maybe some might have anticipated in this era of high monetary expansion?

Joe Brown (27:49):

Yeah, absolutely. It’s kind of funny to me because they haven’t performed nearly as badly as many people think they have. So, gold and silver, they anticipate the results of monetary policy. So, if you look at where gold was at the end of 2019 through the top of its peak in August of 2020, it ran up 40%. And since then, from the end of 2019 to now, it’s up about 25%.

Joe Brown (28:15):

And so, what you saw was that initial run, where it went up 40%, it was the anticipating the inflation that had not happened yet as a result of the massive increase in the money supply. After that run up, when it hit the top of that bubble in August of 2020, what were the fears then at that point? Everybody was talking about the possibility that the fed would taper, that they’d start tightening, that at some point, they’re going to raise interest rates.

Joe Brown (28:40):

So, gold and silver then at that point have to start pricing in the fear of deflation. Because now, they saying we’ve already run up, but now we’re pricing in the fear that tapering will start, that tightening, that interest rates will rise. And so, what are they going to do? They’re going to fall. Well, right during that time, that’s when the inflation actually starts to take off.

Joe Brown (28:56):

So, you see other commodities really respond, because other commodities just respond to what prices are. So, you’re going to see that real time corresponding to inflation. But gold and silver already had their run up. They anticipated that inflation, and now, they’re anticipating the deflation. Well, fast forward to November of 2021, just two months ago, gold bottomed.

Joe Brown (29:15):

What date did it bottom on? It bottomed on the day that the federal reserve started the taper. And then, briefly, a couple weeks later on December 13th, I think, it briefly for like a couple hours, dip below that bottom and closed higher when the federal reserve announced they were accelerating the taper. And gold bottomed and has been moving up since then in anticipation of this taper is going to end, and they’re going to have to reverse course.

Joe Brown (29:40):

And so, it’s anticipating the future inflation, the future monetary policy. It’s already priced in the deflation. The price is coming down as a result of the taper. So, gold and silver are highly anticipatory, and this isn’t just something that’s happening right now. This happened before. Gold hit the bubble in 2011 on fears of massive inflation, and then fears of fed tightening started to set in, and gold entered a bear market.

Joe Brown (30:04):

And when did gold bottom? 2015, on the day the federal reserve actually started to raise interest rates. Now at that point, it’s already priced in. Gold only went up from there. Once the federal reserve kept on raising interest rates, raising interest rates, and tightening, gold continued to make higher and higher highs. And so, gold and silver are highly anticipatory, and it looks to me like the bottom is in, and they’re pricing in at the next round of QE.

Clay Finck (30:28):

One thing I can’t help but ask is, what your thoughts are on a so-called run on the bank in relation to gold and silver? I always hear that the gold and silver markets is highly manipulated due to the amount of paper markets that are riding on top of the physical gold and physical silver. And a lot of these paper markets aren’t actually backed by physical gold and silver because there’s only so much to go around. What are your thoughts on a potential run on the bank, so to speak, in the gold market?

Joe Brown (30:57):

Yes, 100%. Most gold ownership is actually gold owership. And that is unallocated gold is the technical term of what this is. And when you own unallocated gold, you do not own it. You are owed it. And so, anytime you can buy gold, and pay spot, and it’s in storage for you, and you’re paying spot, and you’re not paying a premium on top of that, you have unallocated gold.

Joe Brown (31:22):

That means that you don’t own. There’s no physical bar or coin in the world that you can point to and say, “I own that legally.” What it means is that at any time you can exercise your right with that company and say, give me gold, they will have to go out to the market, and buy that gold, and give it to you at whatever price gold is currently trading at. Most gold is owned that way.

Joe Brown (31:45):

That means people are owed gold. They don’t own gold. So, it’s paper. There’s not enough gold. It’s many times more gold ownership through unallocated gold than there actually exists. Which means if you start to have a short squeeze happen, you start to have the price of gold, this is silver as well. I’m saying gold, but it’s for both. You start to have the prices rise quickly.

Joe Brown (32:06):

You have a bunch of short start closing out. You have some people ask to take delivery. You can get into a point very quickly, where nobody can source the physical metal because nobody has it. You ask from me, but I don’t have it. So, I have to turn around and ask for it from somebody else. They don’t have it. They have to turn around and ask for it from somebody else.

Joe Brown (32:23):

It’s all been rehypothecated this way, and there’s no way to track how deep this goes. There are estimates, but it’s a very opaque market. And so, if you don’t have it in your hand, there’s counterparty risk. There are certain storage services where it’s allocated, they’re insured, it’s audited independently. There’re actual coins on a shelf and it’s costly. You have to pay for that.

Joe Brown (32:43):

That’s the safest way to own it outside of holding it in your hand, most people don’t own gold that way or silver. And there’s a very real possibility that we get a squeeze, and you see a big bubble occur because nobody can source the physical.

Clay Finck (32:56):

For investors that are more of these, like sound money advocates that are huge fans of gold and silver, how do they go about owning it? You mentioned how they’re able to own the gold, and have people own it, and store it for them. And there are fees associated with that. How can investors go about doing that?

Joe Brown (33:13):

Yeah, absolutely. There are plenty of services available. There’s a checklist of things that I always say that if you’re going to, well, number one, buy it and physically hold it. That’s the number one way to do it because you eliminate counterparty risk. You can’t eliminate all risk because if they know about it, they could break in your house, and they could steal it.

Joe Brown (33:31):

You could lose it. You could bury it in your backyard, and forget where you buried it. So, you don’t eliminate risk by holding it, but you eliminate counterparty risk. So, the way to reduce counterparty risk as much as possible is number one, look for allocated. That means that there’s an actual physical bar that you legally own or coin that you legally own, it’s not that you’re owed.

Joe Brown (33:51):

The second thing to look for is segregated. Segregated means that instead of they’re just being a bar and they say, okay, well, based on how much you own, you own one-10th of this bar. Segregated means that you own a whole piece of something that’s actually there on a shelf that’s moved into a little pile that’s just yours. So, you’ve got a stack of 10 coins on a shelf, in a vault somewhere.

Joe Brown (34:11):

So, that’s segregated. The next thing is independently audited. So, companies, many times, they’ll hire independent auditors to come in, and make sure that everything they say is actually there. The fourth thing is insured, and pretty much, everybody is insured. The fifth thing is that I usually prefer is private vault, instead of a government vault.

Joe Brown (34:30):

Because there are governments around the world who have a history of just saying, “No, we’re confiscating this.” And private vault storage has another layer of protection against that. The last thing I look for is in a country with zero history of confiscation of gold. So, Bank of England, whether you agree or disagree with it, recently confiscated Venezuela’s gold, or at least said, we’re not going to give it back to you because they disagree with the politics.

Joe Brown (34:54):

And you can say that’s good or bad because Venezuela dictator, whatever your views are on that, I’m not making a political statement here. I’m saying Bank of England has retained, and shown, and demonstrated the power to say, we’re not going to give you your gold. And other countries have been repatriating their gold from the Bank of England because of this, or maybe not because of it, but they’ve been taking their gold back.

Joe Brown (35:14):

America confiscated every single American’s gold, FDR did. And then, 30 years later, in 1971, America confiscated all of the world’s gold and said, “No, we’re not giving any of you your gold.” That was what closing the gold window was. If I’m looking for storage, I’m going to use a private vault in a country with no history of doing that. So, that’s my checklist. There are plenty of services that meet all of those requirements.

Clay Finck (35:37):

You also mentioned Bitcoin, potentially being a good inflation hedge. And it’s funny to think about all of the labels that people put on Bitcoin. Do you see Bitcoin more as an inflation hedge or a risk on asset? Because it seems to perform well with low interest rates, and high levels of monetary easing and money printing as well.

Joe Brown (35:59):

Yeah, that’s a great question. When a new asset, when a new technology, when something new comes onto the scene, the story about it has to change. And the story about Bitcoin has changed so many times, medium of exchange, store of value, uncorrelated asset, inflation hedge, whatever you want to call it, it’s changed because the way that it reacts has changed, because it’s new.

Joe Brown (36:18):

And so, the world is trying to figure out what this new thing is. Mathematically speaking, Bitcoin is not a hedge. It doesn’t perform inversely to any asset that people are trying to hedge. Now, that doesn’t mean you can’t make money from it. It doesn’t mean it’s not the best performing asset in the world since its inception or maybe even over the last couple of years, but it is not a hedge.

Joe Brown (36:38):

A hedge is something that performs inversely correlated to the asset you’re trying to protect. A hedge is something like fire insurance. Fire insurance goes up to the exact same amount that your house went down in a fire. That’s a hedge. And so, Bitcoin is not a hedge against inflation. Bitcoin is a bet that the world will opt out of an inflationary system in the future.

Joe Brown (36:59):

And if the world does opt out of an inflationary system in the future and chooses Bitcoin instead, the returns for anybody who buys Bitcoin ahead of time are going to be astronomical. Because for Bitcoin to serve as base money, the market cap must be many times larger than it is right now.

Joe Brown (37:18):

And so, that makes Bitcoin into a very attractive asymmetric bet for even a portion of a portfolio so that if it goes down, it can only go to zero, but it can go up many times higher than its current price, current market cap. And so, that’s the way that I view Bitcoin. It’s a bet that the world will opt out of an inflationary monetary system in the future. And if that pays off, it pays off extremely well.

Clay Finck (37:45):

That makes sense. I wanted to mention the stock market as well. I think many listeners are very much interested in the stock market, especially listeners of this show. Because that’s what they know, and understand, and it’s what’s done well for them over the years. Do you believe that owning mostly stocks in a portfolio is a sensible strategy in this environment, or would you rather have some exposure to other asset classes as well?

Joe Brown (38:11):

So, part of it is personal preference. There’s a lot of wisdom in investing in what you know. And so, there are some people that are extremely proficient at picking in stocks, timing them. They’re very disciplined in getting in, getting out, being able to analyze. There are other people where it’s like, “Hey, a little bit of diversification goes a long way, especially if you’re diversifying into assets that are uncorrelated.”

Joe Brown (38:33):

And so, it depends on your area of expertise and your preference. There are many stocks that will perform extremely well over the coming decades, regardless of inflation, regardless of deflation, potentially, regardless of changes in monetary systems, collapses of Fiat currencies. Because let’s say hypothetically, the dollar fails tomorrow, Apple will still exist.

Joe Brown (38:55):

Apple will be priced in whatever currency replaces the dollar. You can price Apple today in euros. You can price apple today and yen. So, that’s all that would be going on there if a currency fails, and it’s re-priced in a new currency, it’s just what’s the exchange rate from the old currency to the new one, and that’s what the price is. So, there’s nothing magical or mysterious, or terrifying going on there.

Joe Brown (39:16):

And when you look at how stocks perform in high inflationary periods, like look at Venezuela’s stock market over the last five years, it looks like up and to the right, just a penny stock, parabolic, it’s a hockey stick. And so, anybody who looked at stocks in Venezuela and said, “Hey, stocks are overvalued right now, multiples are at all-time highs, prices are crazy. I’m going to sell my stocks, and hold the cash, and wait for the stock market to crash.”

Joe Brown (39:40):

Well, guess what? They lost big time because the cash crashed, and the stocks were just responding to that. And so, it depends on what you’re going to hold other than the stocks, because a lot of people are selling assets right now going into cash, not realizing that the assets are simply responding to the inflation that the basement of the currency, and they’re going up, not because they’re worth more in purchasing power, but they are worth more than the dollar, or the currency that they’re trying to sell it for.

Joe Brown (40:05):

Stocks are maybe not the best hedge against inflation, but they are a hedge against inflation. And even in a collapse of a currency, the companies stick around. And so, if you know how to analyze, and pick good companies that will stick around, and do well, especially ones that do well during inflation, like miners, and commodities, and energy, and real estate and others, they’re going to at least do better than dollars.

Clay Finck (40:29):

That makes sense. I’d like to talk about what is potentially next for inflation going forward, which I know might feel like a total shot in the dark for many. What is the federal reserve’s next move to try and bring inflation down to normal levels, say the 2% to 3% range for CPI?

Joe Brown (40:45):

If we look back at history, even just the last 20 years or so, we can see a very repeatable pattern. Economic pain, intervention to soften the blow of the pain, a little bit of a lull, and then a rebound resulting in a larger amount of economic pain that happened last time with a larger amount of intervention, and you repeat the cycle over, and over, and over again.

Joe Brown (41:09):

This is an exponential process, and that’s why a trillion dollars as a bailout for the financial crisis was preposterous. Nobody could believe that the word trillion was being tossed around. And now, that it’s not a trillion, it’s not even worth talking about. And so, it is a very predictable pattern. And right now, the part we are at in the cycle is where they are trying to back off from the intervention.

Joe Brown (41:33):

And so, they’re very verbal about the fact that they’re committed to stopping purchasing their assets, more assets by March. By the end of March, they want to not be buying any assets anymore, the fed. They also then want to start raising interest rates after that, and potentially even start selling assets. The problem is this is classic business cycle. This is what happens.

Joe Brown (41:51):

The boom cycle, the debt, booms, and busts. When you have growth that is founded that the foundation is debt caused by easy money, artificially low interest rates, credit expansion. When you start to pull a rug out from underneath that, by raising interest rates, and contracting the money supply, things crash very quickly, and very severely.

Joe Brown (42:14):

And so, what they are doing is seeing the final stages of this blow off top from all of the monetary expansion. Meanwhile, they’re pulling the rug out from underneath it by stopping their asset purchases, maybe selling assets and raising interest rates. That’s going to cause there, bubbles forming underneath a gap of air, I should say, and it’s going to start crashing very quickly.

Joe Brown (42:34):

Somebody is going to become insolvent. Somebody is not going to be able to handle this. When that takes place, which I think will happen within the next year, I could be wrong. I think it’ll happen within the next year. A crash starting from this, they’ll have to reverse course. They’ll have to start blowing up their balance sheet again, they’ll drop interest rates to zero.

Joe Brown (42:50):

But they’re only going to have maybe three interest hikes in, which are quarter of percent each time. So, they’re not going to be able to drop short-term interest rates enough to have any meaningful impact. And remember, every time they intervene, they have to intervene more than they did before. Otherwise, it does nothing to stop the crash.

Joe Brown (43:05):

And so, they’re going to have to do other things that they’ve never done before. Outright yield curve control, they’re going to have to buy 30-year treasuries enough to keep interest rates low. They’re going to have to peg mortgage rates to 2% or 1%. They’re going to have to do all sorts of other things. Universal basic income, things that they’ve tested, and tried out a little bit, and gotten close to.

Joe Brown (43:25):

It’s all going to come in full force to deal with this next crash because the seeds that they’ve sewn from the unprecedented intervention are going to cause a crash like we haven’t seen before if they let it go. So, they’re going to step in, and it could potentially be the last time they say, “How far can you kick the can down the road?” This might be the one that causes the economy to overdose on stimulus.

Clay Finck (43:46):

As you know, there’s a lot of talk that the federal reserve can’t afford to materially raise rates. It makes me look back to the ’70s and early ’80s, where the 10-year treasury rose all the way to 15%, which is pretty insane to think about. Is it just the high debt levels that we have today that prevent them from raising raise materially, or what makes this period so much different than that time period?

Joe Brown (44:12):

Yeah, and it’s not even just the total debt amount in turn of dollars. It’s the total debt amount in terms of percent, however you want to measure it, compared to anything else. And so, whether you’re looking at total corporate debt, whether you’re looking at debt to GDP, whether you’re looking at the total national debt, whether you’re looking at the cost of the federal government, servicing its debt load as a percent of what it brings in from tax income.

Joe Brown (44:37):

We are nowhere near where we were in the ’70s. It is not even close. When you look at the fact that the federal funds rate got up to 19% in ’79 or ’80, we probably couldn’t even get the federal funds rate up to 4% or 5% before the government is insolvent. That would be if the average interest rate of government debt got up to 4% or 5%, that it would cost more to service that debt than the government brings in, in taxes.

Joe Brown (45:03):

That’s insolvent. Now, far before we get to that point, I think will be other problems that will cause them to reverse course. But the fact of the matter is we have no capability to fix this through austerity or raising interest rates. The crash is baked into the cake already.

Clay Finck (45:21):

I wanted to talk about another potential consequence of high inflation, and might not be in the US. It might potentially be in other developed nations around the world, and that’s price controls. This means that the government essentially sets a limit on the prices of goods and services to ensure that people can afford them. Could you talk about the negative effects that this could potentially have?

Joe Brown (45:43):

Yeah, 100%. Price controls always make a problem worse. And the reason why is because prices are just information about the relative scarcity of a good or a service compared to everything else that people want. So, say for example, this year, they make half the bread that they made last year. Bread is not something that goes into storage.

Joe Brown (46:02):

And so, all the bread that is consumed this year is also produced this year. So, if half of that bread is produced by necessity, half the bread will be consumed. So, information has to be sent out to economic actors about consuming less bread. You can do that a number of ways. You could have a central committee that says, “Hey, we’re going to fairly, and in a very just way, we’re going to tell everybody who can consume more bread, less bread, the same amount of bread.

Joe Brown (46:29):

And there would be no corruption and no bribery. And it would be done in a very, a fair and equitable way.” Now, the other way you could do it is what the free-market solution is, which is just prices. Because the reality is prices are information about scarcity. And so, when half the bread is produced, prices will respond by going up. And those higher prices are information signals that are sent out to economic actors to consume less bread.

Joe Brown (46:53):

And there will be some people that if the price of bread doubles, they’ll say, “I’m going to consume zero bread.” There will be some people, let’s say bakeries that say, “I’m going to consume the same amount of bread because I need it no matter what. It doesn’t matter if the price doubles, I’m going to buy the same amount of bread.”

Joe Brown (47:07):

But overall, the prices will respond accordingly to give economic actors the right information they need, without knowing anything about why there’s a bread shortage, why there’s less bread being produced. You don’t have to know anything about that. It’s just one simple thing, price, which is your way of measuring how much you want that, versus everything else that you might be able to buy.

Joe Brown (47:27):

Further, let’s say it’s something more important than bread. Let’s say it’s water during a disaster. This is something that’s probably highly controversial because even people oppose to price controls say that price controls during a disaster are necessary. So, let’s say water, there’s a disaster, and water bottles go from $1 to $15. So, that’s, let’s say, what the free market would price them at.

Joe Brown (47:49):

That would be looked at as extortionary, and taking advantage of people who are in desperate need of water. What’s going on that drove the prices up? Well, the first thing is that demand for water increased above everything else because everybody wants and needs water more than anything. So, they’re willing to divert a lot more resources than they used to be.

Joe Brown (48:07):

And they’re doing that above and on diverting resources to things like Netflix, let’s say, or consuming food. So, the reality is that that water is not scarce everywhere. Let’s say the disaster is in Texas. Florida has plenty of bottled water. Now, maybe Florida doesn’t have the capability to deliver water to Texas if the price of water is $1. Maybe Florida would lose money on that.

Joe Brown (48:31):

But maybe if the price of water is $15 a bottle, suddenly, the people with water in Florida look at that and say, “Now, I can deliver water to Texas. There’s enough of a profit incentive to make it worth my resources to do everything I can to get as much water as possible to Texas because the profit opportunity is there.” That means everybody with the capability devotes all their resources for the small window of opportunity to go make those massive profits.

Joe Brown (48:57):

The incentive is there. And guess what? Enough water then gets delivered to the people who need it until there’s so much water being delivered, that it floods the demand, overwhelms the demand, and now people don’t need as much water. Those prices come back down. So, high prices are the cure for high prices if there’s a free market, and no price controls allows the free-market incentives to work, to deliver the resources where they are needed the most.

Joe Brown (49:21):

And if you input price controls on that, what you do is you increase demand because suddenly, if somebody needs water and it’s $1, when it should be $15, they’re far more likely to store it, and buy more of it than they need. Whereas, if prices go up, that means they’re only going to buy what they need, or maybe they’ll buy less than they would before.

Joe Brown (49:43):

So, there’s a lot less hoarding when prices go up. So, price controls incentivize over demand. And then, what they also do is they disincentivize increasing the supply because now, nobody with the resources will come in, and deliver what it’s needed. And so, price controls always make things worse by increasing demand in decreasing supply.

Clay Finck (50:03):

It almost feels like the federal reserve has hit the end of the road with interest rates having hit 0%. How do you believe that this will all end? I sense that something big is coming at some point in our lives, since we’re fairly young, after learning about the macroeconomy from people like yourself. But I really don’t know what’s going to happen, exactly. How do you see this all potentially playing out?

Joe Brown (50:28):

Yeah, absolutely. I go back to studying history a lot because a lot of the things that we see happening right now have happened before. Especially, when you look at the rise and fall of powers on earth, and financial systems, and the age and reserve currencies, and debt loads, and things like that. You see a lot of patterns repeat themselves, maybe not exactly, but you see a lot of similarities.

Joe Brown (50:50):

And so, right now, the way that it looks is that this financial system is near the end of its road. You have the debasement of currency. You have inflation start to take over as the predominant method to funding the government whose expenses have become a burden on the economy rather than a help to it.

Joe Brown (51:09):

And that’s the reason why you have to resort to money printing because you can’t tax the economy any more than you can, or any more than you already are because it’s taxed to its max. Any additional taxes have decreasing or diminishing returns because it’s imposing a larger burden on the economy. So, it can’t grow much, and you are increasing rates, and changing behaviors.

Joe Brown (51:32):

And so, tax wise, you’re almost tapped out. Borrowing wise, you’re almost tapped out. And so, you’re borrowing from the federal reserve, which is just printing money. And so, when they get to this place where they have to resort to the money printer to fund their expenses, you have pretty quickly, historically, although it takes a long time when you’re living through it, you have an eventual collapse of the currency, and people start using different currencies.

Joe Brown (51:55):

And so, that’s long term, what it looks like is happening right now, and that corresponds, and happens at the same time as powers shifting around the world. And you have allegiances changing around the world, and you have a swing from ultra-centralization to more decentralization. So, you’ve got more small businesses coming up now.

Joe Brown (52:17):

You’ve got less people wanting to work for a couple giant corporations. You have smaller nation states rather than super powers. And so, that financial systems, you’ll have competing monetary systems instead of one dominant one like the dollar today. And so, it does look like we’re going through a transition period. Ultimately, I think even though there’s some short-term pain, there is a lot more upside, and improvement, and growth to look forward to.

Clay Finck (52:43):

I 100% agree. And I think it’s just so important to get a good understanding of what’s going on in the world to ensure that you are protected as an investor. And I looked up Ray Dalio’s book that Joe mentioned earlier, it’s the Changing World Order. William Green on We Study Billionaires show recently had Ray on to talk about his new book. And I recommend listeners check out that episode.

Clay Finck (53:06):

Now, Joe, thank you so much for coming on to the Millennial Investing Podcast. I learned a lot from your insights, and really enjoy listening to your YouTube channel, Heresy Financial. Joe, where can the audience go to get connected with you before we close out the episode?

Joe Brown (53:21):

Yeah, absolutely. The main place would be my YouTube channel, Heresy Financial, and then my Twitter account is also @heresyfinancial. So, those two places, if you want more.

Clay Finck (53:32):

Awesome. Thank you again for coming on, Joe. I really appreciate it.

Joe Brown (53:36):

Thank you for having me.

Clay Finck (53:37):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these delivered automatically. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There, you’ll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we’ll see you again. Next time.

Outro (54:01):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcaster Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires, and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcaster.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.