2020 has been an insane year for the global economy and many people are unsure how to position themselves going forward to ensure that they not only survive this but thrive in the years to come. In the first of a two-part series; Jack Bosch discusses the current state of the economy, including how spending & saving habits have changed – taking into consideration lessons learned from the 2008 global recession. You’ll discover where we are headed as a country as well as getting a snapshot of the current state of the finances of our citizens.
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- Understand more about the economy
- Find out the lessons learned from the 2008 global recession
- Discover insights into people’s spending habits
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All right, so here we are. So today I’m going to talk about the subject of hyperinflation and what’s going on with the Coronavirus not really what’s going on with the Coronavirus. I don’t know what’s going on. I’m not a medical doctor. But in terms of what’s happening right now, from a point of view of the currency. Like there’s a lot of people that are probably rightfully concerned about the trajectory of the U.S. American dollar in terms of debt.
The debts we’re racking up, the government deficits we’re racking up, the extra money that’s being printed. I mean, Robert Kiyosaki the author of “Rich Dad Poor Dad,” which most people I’ve heard, they’re screaming from the rooftops, reading the book called “Fake,” talking about this is all conspiracy and etc., etc. Now, I’m not a conspiracy theorist. I’m not gonna talk about conspiracies. I’m just not gonna go into that. I don’t believe in it. It doesn’t matter. Point is, it doesn’t matter. What matters is what’s happening in the economy, what’s happening in the industry right now.
So here’s what’s happening. So a lot of people are concerned about with all this money that’s being put into the economy, we are going to see a spike in inflation. Well, they were also worried about that back in 2008, and it didn’t really happen. Now, it did happen, but you didn’t notice it. It did happen in form…what they called an asset bubble that blew up. So in other words, the government sucked out all the bad liquidity out of the system.
So let’s start in 2008, because that’s when it’s all kind of started up. Up till then the numbers were constantly like there’s always a deficit, there was always more money printed than really should be. And as a result, the dollar worldwide loses value inflation, always goes up a little bit, but the dollar doesn’t lose necessarily value compared with other currencies. It loses value to currencies like gold currencies like other things. Or in very simple dollar thing, as being a German by nature, a beer 50 years ago cost a quarter, a beer today costs six bucks, right?
So that’s the loss of currency, that’s the loss of value of the currency that the same asset now costs much more with beer perhaps not being an asset, I don’t know. But you understand my point. So now, what’s happening when the government all of a sudden saw in 2008, when the U.S. economy and the financial system almost collapsed. Most people didn’t notice. But it almost collapsed Lehman Brothers went down and several other banks were on the brink of collapsing if the government would have not rescued them. Again, good, bad, or ugly.
We don’t know I’m not commenting as a value judgment, many people say they should have just let them go. So that…the libertarians say they should just let them go so that all kind of works itself out. Other people say, “No, that would have cost millions of jobs and people would have jumped down bridges and all kinds of stuff.” I’m not here to judge. I’m not here to explain. I’m not here to say this is better than that. But the bottom line is, if the government would have not intervened, there would have actually been a good chance that there would have been a national or potentially down then over time, or global financial meltdown.
So bottom line is, though, they did that by doing two methods. By number one, injecting liquidity into the market by giving people like basically free money and stuff like that, send them a small check and so on, which they’ve done right now recently again, just a bigger check. You can see the impact, like the 2008 was small compared to what happened right now with the COVID thing. But at the same time, the Fed got the authority to actually buy what’s called bad assets all the time. So they basically went to all the banks and all the things and all the bad assets that was sitting on there, basically non-performing loans.
They had put up a mortgage against a big commercial building for 100 million dollars, and they were no longer paying. Well, they would take that and sell it off, they would have any kind of like these things that got 2008 happened as the swap, whatever they’re called, I forgot right now. But they would buy them up and basically either Fed would eat up the bad loans and pay instead, make the banks whole. Again, good, bad, or ugly. It’s not a value judgment. That’s just what happens.
So when that happened, the banks were able to survive, the…we were able to get through that phase but at a price. And the price was that now basically the bad money, like that money was paid and it’s not that money disappears in such a scenario. Like the bank had given somebody 100 million dollars, that person had their hundred million dollars they wouldn’t pay anymore. And now the Fed gave the bank back the $100 million. So now the bank has the $100 million back, the other hundred million dollars are still floating around in the economy and the Fed sitting on a note that will never be paid off because it’s a bad note. And they’re eating debt.
So in other words, the Fed basically effectively injected almost $100 million into the marketplace by doing that. Now you think that happens, you think you’re spitting in trillions of dollars into the market and that would lead to inflation. The answer is yes, it does lead to inflation unless at the same time the value that is being destroyed in the marketplace is the same or more than what was being injected in the marketplace.
And here’s what happens, up to 2007 and 2008 we were in a big bubble, that bubble was deflating very quickly, right? It was deflating very quickly. So the money that the Fed put into the market actually helped kept the bubble re-inflated, but it didn’t explode the bottle. It didn’t take a solid system and blow it up with $100 billion or $100 trillion into oblivion, it took a shrinking thing and basically make the shrinkage more bearable until the economy could pick back up and then run it from there. So that’s more like the basics of what happened.
So because of that, we did not see inflation. But then once they picked it back up, and the Fed kept buying these bad assets, which they basically did all from 2008 all through 2015 or so then they stopped for a little bit and that you can actually see exactly what happens when they stopped. Is that in that seven years that they bought this like crazy, the economy was able…two to three years until it kind of settled itself again. But then it went roaring back because all this liquidity is now in the market. The banks were kept whole, the investors still had the money because they got refinanced by the bank and $100 million in this example or half-a-million, or a million, or 10 million there’s still people that have money and the economy would now come back. And that led to the real estate market rocketing right back up and catching up with the rest of the market.
Now that’s not so…with where it was before basically. Now that’s not so overall bad because if you look at markets like Phoenix where the market went like this, and it crashed like crazy, and then it came back up, roaring back up. If you take like about a two or a two and half percent appreciation for all the way from 1999 to 2020, or from 2000 to 2020, we would get at real estate prices that are approximately where they are today. So we’re not really at the super bubble, but it helped that deflate.
And in many other states, though, like Seattle and so on, the prices went crazy in LA, the prices were crazy. And there’s another somewhat of a bubble in place. So bottom line is, if government’s putting in cash, it helped buffer the peace. Again good, bad, or ugly, whether that’s a good thing or not, that’s enough for another story. But then because the bunch of liquidity was in the system and was just sitting on the side-lines, the moment that liquidity came in, it just blew back up and prices of the assets, particularly real estate and the stock market went through the roof. Like there’s really if you look at price to earnings ratios on the stock market, many experts say the stock market was, when it was like…when it’s crashed right now in March. It was severely overvalued it was at the record price to earnings ratios. So in other words, that money that was coming into the market from the liquidity that the Fed put into the market needed to go somewhere.
So where does it go? It goes into the stock market and it goes into the real estate market. That’s the two biggest asset bubbles. So the asset places, markets where it goes into. So those were bid up right now. So no wonder when it crashed, when the market crashed, when the real estate market…no, the real estate market did not crash. But when the stock market crashed right now, it’s the first thing that took it down.
So now what happens in this crisis? In this crisis, the government is doing the exact same thing because it’s actually a crisis 10x crisis compared to what happened 12 years ago. This is a 10x crisis in the sense that you have to send 30 or 40 million people home from work, right? Within a matter of five weeks, 35 to 40 million Americans were let go from their jobs. Now some only temporarily and they got right back in and so on, but 40 million people, which is really, if you look at it, 20% of the unemployment rate, I don’t know how they got the unemployment rate to be only 15%. That really, that number should be at 20%, 25%. But anyway, so they got let go.
And now all of a sudden and on top of it people that had jobs were told to stay home. So the economy really was completely put on ice. Like everything on ice. Now you can’t do that because the store owners need to pay rent, the store owners need to pay electricity. The store owners and the factory owners and the business owners have loans that they need to pay, the employees don’t have to worry about the loans, right? The owner has to worry alone because they signed their name on that $10 million loan to build that new building, or to buy that new printing machine, or to buy that new industrial whatever it is.
And all of a sudden that thing sits there unused because everyone is at home everyone is on quarantine. And they have to pay and yes, you can do forbearance that’s what they did and so on, but it just delays the process of a big meltdown happening. So what the government did first of all, they said, “We got to start this again. Let’s give everyone money.” So everyone got their…what is it? $1,250 or so for their COVID thing, the stimulus package and for 500 bucks for kids. Now they’re talking about more things because even though the country’s opening again in Arizona where I live, it’s been one of the places where it’s opened the quickest again, even there, guess what? The restaurants are still half full, the restaurants are only half capacity, they’re not even full because a lot of people are afraid. The stores are still not full.
Right, the parking lots of the offices are still empty. So people still operating very cautiously, which hurts the economy. And so now it’s for health reasons and I understand, and again, I’m not talking about this good, bad or ugly or so. It’s just I keep saying that because I wanna stress the point that this is not a value judgment. It’s just a description of what’s going on. So now the government says, “Okay, we have to do a $3 trillion stimulus or $4 trillion. We got to put another one in there.” And at the same time the Fed came back out and is buying all kinds of assets again. Because last time when they stopped paying they’re buying the assets, you could tell that the economy was really not yet fully self-sustainable, because the moment the Fed stopped the asset, the stock market’s coming back down, some real estate prices coming back down.
So they went right away in 2016 or ’17 and kept buying again. So they have inflated their balance sheet quite a lot with all these bad assets, but for which they have for which paid money. And so there’s again, more liquidity than ever in there. And for example, there’s you can tell the liquidity in the system by looking at three money factors, one of them…or three measurements of money. One of them is called M1, the other one is M2 and the other one is M3.
M1 as far as I know, is the amount of money that all the Americans hold in cash, as well as in their checking account. So it’s the instant liquidity of a market. So typically, that amount has actually not gone up like crazy. That amount has been to about $3.5 trillion have been floating around in the hands and checking accounts of the American people. So this amount has gone up right now in the COVID crisis because the government is pumping money, increasing unemployment or unemployment payments and all this stuff, has gone up all the way to about five and a half trillion dollars.
So it has gone up by about two thirds, what is that? 60%, 70% which is a lot. But it’s not enough to actually make the currency blow up. The next thing is M2 has gone up to I think nine or so trillion dollars. And M2 is basically cash in the bank…or it’s M1 plus deposits and savings accounts, or a safe deposit, or longer-term deposits, up to $100,000. And M3 is M1 plus M2, so it’s the cash, the checking account, the safety deposits up to $100,000. And also larger sum safety deposits. So the 1% the really wealthy that might have a few million dollars sitting in these accounts their money is counted to.
Now I think if you wanna count the impact on inflation, you wanna take M1 and M2 first because the super-rich are not gonna go have to liquidate a $20 million safety deposit thing that they’re getting a few percent from the bank on, or bonds or things like that, that is invested for the long term. Because they can just take their few hundred thousand dollars out and they can make a living until something like that passes through. So this money might not be touched very quickly. But M1 and M2 is definitely going to be touched because that’s what’s in circulation by then. What you hand off to the butcher right? The baker to the baker, at the grocery store, to the grocery store, at the hair salon to the hair salon. That’s the stuff that you pay off your credit cards with and so on, so forth. So that has gone up by about 60% to 70%, compared to pre-COVID.
But at the same time what else has happened? What else has happened, that the economic activity has gone down by a massive amount right now. So again, it’s the same as 2008, that while the asset bubble, the asset values were going way down, and people would spend less and there was unemployment higher, and so on. The government was pumping money into counteract that not to create inflation, but to actually avoid a depression. And a similar thing is actually happening right now. So the government is putting in all that money in order to not cause a complete meltdown of the economic function of the United States of America.
And by the way, Europe is doing the same thing. The European Union is doing the same thing. So the balance sheets and the money in circulation of all these countries is going up. And there is therefore a one risk and that risk is that if they keep pumping money into the system, that at some point of time, it does get over a certain hurdle and it blows itself out into oblivion. But let’s talk about this in a second. So for now, right now, there’s really not an inflationary pressure on the United States or in Europe, because right now because the stores are not full, the restaurants are not full, and whatever else and the entertainment places are not full and people are not consuming a whole lot. There is actually…prices are not going up because demand has gone down.
At the same time, the money supply has been given, people have more money in their bank account right now. A lot people too, are obviously, if you’re unemployed and you don’t get the benefit of high unemployment payments, then you might not get that benefit. Or if you had $150,000 income, and now you get a $3,500 unemployment check. That is obviously not gonna equate.
But there’s a lot of people who made $25,000 a year in income that are now getting $2,500 in unemployment. So therefore they’re making $30,000 while not working versus making $25,000 while working, they’re actually financially a little bit better off. So overall again, throughout the COVID the stuff to the stimulus package to the unemployment thing, there’s actually the amount of M1 is actually bigger than it was before. There’s more cash in the system right now than it actually was even like half a year ago.
Now that cash right now as always happens in those things is sitting on the side-lines, because it’s driven by fear, right? People are afraid, they’re saving, and what does it mean for land actually, it’s actually the only thing that they’re not saving in is they’re actually buying stuff that is important to them. And we actually see the benefit of that right now in the land flipping business because actually 39% of Americans living in bigger cities have expressed an interest in moving out of the city, having a piece of land outside, having a cabin or so, a place to escape because they’re sick and tired of being in the city.
They’re afraid of being in the city and getting COVID. They’re afraid of contracting the illness and so they wanna get out. So we see our business actually skyrocketed. But for most other things like groceries, shopping, clothing, all these kind of things, their consumption is actually down. And if consumption is down what happens? The stores are throwing out specials, right? You get… Michelle went to Nordstrom the other day and she bought like 8 or 10 blouses where the blouses where they used to cost like $300 a blouse and she was getting them for 60 bucks because they were set down, put down to $118. And then she got another 40% off that. So she paid like what is that? Like 70 bucks for a blouse that is like some kind of crazy designer blouse that would otherwise cost $300 which is, even as well as we’re doing, we don’t like to pay 300 bucks for a blouse. I’m just not, right? And neither does Michelle, she’s very frugal. But in that case, she was able to buy this one. She did buy like eight or so blouses because of the discount.
So we’re not in inflationary pressure right now but that can change and here’s how it can change. It can change in a matter as soon as we are out of the woods with the Coronavirus. So if we’re out of the woods with the Coronavirus let’s say who knows, right? Let’s say there’s a phase two, like in a…there’s a second increase getting into the fall and there’s some shutdowns again and we go through the winter and then they finally get the vaccine done. And whether the vaccine is gonna help or not, what it’s gonna do is, it’s gonna take the masses…because I personally am not really afraid off the other Coronavirus. I’ve looked at the statistics and I know it’s a horrible virus and a lot of people even die from it.
But it seems to be affecting certain demographics that I don’t belong to. So therefore, personally, I’m not worried about contracting it or if I’m contracting it and getting severely ill and knock on wood that won’t happen. But I…of course, as a society it’s a horrible thing that a lot of people get sick of and die, and we don’t want that. But so when we are discovering or when we’re putting out the vaccine, I think that’s going to be a pivotal moment. Even if the vaccine only works a quarter of the time, who cares. For the fear factor, it’s a psychological point where all the people who are truly afraid right now… And we have lots of friends, also medical doctors, non-medical doctors, they’re actually still now are in the fourth month of not letting their kids go see other friends. To me, that’s a bit extreme, but everyone makes their own choices with their families.
So the point is that the moment a vaccine is out, everyone’s gonna rush like crazy, get the vaccine and everyone is going to feel safe again. And everyone is going to go out again and consume and partake in life and partake in things. So at that moment, when the economy gets a big boost again with all of this and the stores start filling up again, and the restrictions are being eased, and the restaurants can open again, I mean, again friends of ours they opened they close their restaurant, they did only delivery and taking out, then they opened it again. And as of last week, Friday, they closed it again, because in Arizona again, COVID is spiking. And even though the number of people in the hotel is going up…not in the hotel, in the hospital is going up very very little, the numbers are spiking.
So it sounds like the younger people are now getting affected and it’s not as serious, they don’t have to visit the hospital as much. So that might be in my book that is actually fairly good news. It’s of course bad news that the numbers are spiking, but the fact that less people are going to the hospital is a good news. Or not less but percentage wise there’s more in the hospital. But instead of being 1000 people there are now 1,050 people in the hospital, but we have twice as many people that have COVID. So really instead of not 2000 are in the hospital but there’s just a little bit up, notching up so most people don’t have to use hospital which is great. But having said that, once this is all over, and…which I think is going to be somewhere next year. It’s probably going to drag out to the rest of 2020, kind of drag it to spring of 2021.
And then as of summer of 2021, it’s the vaccines are out everyone is fine, this virus is going away, hopefully knock on wood. I just have a feeling that might be the timeline. And let’s just think that that’s it. If that’s what it is, let’s assume it is whatever, even if I turn out to be completely wrong. Obviously, I have no evidence for it. Nobody can see in the future. Then let’s assume it takes another year. And as of summer 2021 all of a sudden, everyone’s feel safe again. Everyone goes out again, everyone takes care of life again. In that case, if they’re at that point, the M1 and M2 are still 60%, 70%, 80%, 100% higher than it has been now, that’s going to affect inflation. Because all of a sudden, you’ve got a lot of people with a lot of cash flowing around from saving because…so, many people make less money but also, they shrank their expenses massively.
So whenever that happens now all of a sudden, the world opens up again and they’re all going to go spend money plus there might be another stimulus coming in, perhaps this fall or as it drags on. I heard that the politicians want to give us a free vacation, right? They want us to spend $4,000 in tax take $4,000 off our taxes. I’ll be happy to do that, I’ll spend more than a year in vacation and that. But again, all these different things are designed…or perhaps another payment to people, and so. So if that’s just overall puts more money into rotation and people are now eager to spend that money, they’re gonna go…then the rotation goes up.
And it’s not only…this is an important concept, it’s complex, it’s not only the amount of money of M1 that’s in circulation, it’s also the speed in which it circulates that plays a big role, right? The speed in which it circulates. So for example, we can do a game, where I sell you something for 10 bucks, and you sell me something for 10 bucks, great. So I buy something from you for 10 bucks, I give you my 10 bucks, and then you buy something from me for 10 bucks, right? So that works one time and then we both have bought something from each other. However, if we add 10 people into this game, and then we make this go once around that everyone has bought one thing and the money has gone around one time. Or we can go at this, what if we accelerate this process, we can get to have that money go around once every five minutes.
We just like I buy something for 10 bucks. You buy it from the other person, the other person, the other person, boom and it goes around, around, around, around. Within a matter of an hour, I got 50 new items. I sold 50 new items, business looks fantastic because now I have bought different kind of things that I need. And I’ve sold different kind of things that I need. There’s not more money in circulation, but the money has changed hands 100 times right now, right, 10 times 10 has changed 100 hands. And has behaved as if there was just instead of 10 months, they’ve behaved as if there was $1,000 in the market. So the speed of turnover of the money plays a big role for that scenario.