Dan Amerman: Will Our Private Savings Be Sacrificed To Pay Down The Public Debt?

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Recently, an article by Daniel Amerman caught our attention. Titled Is There A “Back Door” Method For The Government To Pay Down The Federal Debt Using Private Savings?, it details the process known as financial repression, where sovereign debts are slowly paid off by syphoning private savings from an unaware populace.

In this week's podcast, Chris discusses the mechanics of the process, as well as its probability, with Dan: 

To understand financial repression, we have to understand that we've been there before. Many nations have gone through periods in the past where they've had very high levels of government debt. And there are four traditional ways of dealing with that.

One of them is austerity. Everyone understands that. You raise the tax rates. You lower the government spending. This is a painful choice. It can last for decades. And what do you think the voters think about that?

There is another option and this we can call this the Argentina option. And that's defaulting on government debts. It’s radical. Everybody understands it. How do the voters feel about it?

There is a third option is rapidly destroying the value of currency. Creating high rates of inflation that very quickly wipe out the true value of a national debt. But that also wipes out the true value of everyone else’s savings and salaries and so forth. It is such an obvious process you can’t really hide it. So how do the voters feel about that?

Those first three – they all work. They've all been done before. But they're all very painful and make the voters very angry.

Now there is a fourth way of doing this. There's nothing controversial about its existence; it's not the slightest bit controversial for professional economists or people who have studied economics extensively. It's financial repression. And it works. It's what the advanced western nations did after World War II. It was a process that took 25 to 30 years, depending on the country. The West went from an average debt as a percentage of national economy from over 90% to under 30%. So we know it works in practice.

To understand what this fourth alternative is where governments like to go is that there are no political repercussions. It's actually just as painful for the population as a whole. You've got to get the money one way or another. But financial repression is, for most people, just complex enough that the average voter never gets it. And because they don’t get it, they're paying the penalty, but they don’t realize it. And they don't see anyone to blame. That's really good if you want to stay in office.

The key is a concept called negative real interest rates. If the rate of inflation is higher than the interest payments you are taking in, savers are losing purchasing power every year. Remember, this is a zero sum game between the borrower and the saver -- with the saver funding the borrower. Every dollar in purchasing power that the savers, which are you and I, are losing every year -- that goes to the benefit of the borrower, which in this case is the Federal government. 

 

 

 

Click the play button below to listen to Chris' interview with Daniel Amerman (56m:04s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/dan-amerman-will-our-private-savings-be-sacrificed-to-pay-down-the-public-debt/

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In a nutshell, the Federal Reserve prints money to buy U.S. Treasuries:
1.That keeps savings account interest rates artificially low. It means savers get almost nothing for their savings - often far less than real inflation eats away at it.

  1. At the same time, the government's cost of borrowing money is low. It can borrow a lot more money because interest is so low and it can just borrow to pay the interest.

The days of 4% interest or even 5% interest in a Certificate of Deposit at a U.S. bank are long gone.

At least it helps keep mortgage interest low and helps keep home prices from collapsing. And it helps push money into junk bonds and stocks, artificially reducing junk bond rates to as low as 5%, while increasing stock prices through:

  1. A push to equities from savers seeking to avoid low interest.

  2. Companies borrowing money to fund stock buy-backs.

Poet

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After looking over the "Five Ways", I am pretty sure the key revealed in the DVD set for ~$500 is lever up.  So given that Dan asked a great question: where is the money going to come from?   And that is just it.   This is a zero sum game and leverage can kill you in a collapsing economy.   PP's advice is to get out of debt and I concur because that is sensible and because I don't want to play a liar's game.

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And then the FED offers the banks a guaranteed interest rate to put the money in reserves!   This is blatant evidence that the FED's concern is to bailout the banks and government at the expense of Main Street.  The only hopeful things I see is a move to organic foods and local sourcing where doable. 

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[quote=KugsCheese]After looking over the "Five Ways", I am pretty sure the key revealed in the DVD set for ~$500 is lever up.  So given that Dan asked a great question: where is the money going to come from?   And that is just it.   This is a zero sum game and leverage can kill you in a collapsing economy.   PP's advice is to get out of debt and I concur because that is sensible and because I don't want to play a liar's game.
[/quote]
I agree that 'lever up' is probably Dan's answer although there could be some sophistication to how to go about doing that.
For myself, if I were sure that the Fed weren't going to simply lose their control at some point I might consider trying some creative things…
…but … I have this gnawing feeling that things will just go all 2008 on us again at some point which means I want things as simple as possible.
But that's me.  Some other people may want or need to try to side-step the Fed's enforced confiscation policy.  That's where at least knowing the dimensions of the situation comes in…and that's why the subject of this podcast is very importan.t

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Lever up?
Not this little puppy. He has been there, done that, got the scars to prove it. If I cannot follow the game I am not playing.

Perhaps the central bankers have a plan. I have another plan, and God has another. Everyone has a plan until they get punched in the face. Gotta roll with them punches. That is why I wont get into debt. Debt is the wages of slaves.

Anti-fragile is the word of the day. You have to have the metaphorical unstoppable boat.

Question: If the government is in debt to me, why aren't they my slaves? Tell my slaves to stop with the wars and get to work on alternative energy sources.

And then we can go sit under the tree, drink beer and discuss what to do with the population consumption curves. My son leads the way- he values code, not gold. Walmart converts resources into, (how-you-say?) landfill.

Creating landfill from precious resources is not an economy. So what is an economy? An economy produces something that everyone values. And my son and his peers value code and a small amount of food.

 

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The Lockhead fusion reactor might just work.   But five years out may be too late for WW3.   Maybe some distant race of whatever will find the device buried in sand.

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From what I recall, Dan advocates using debt as a way to go short USD interest rates during times of high inflation, using 30 year loans with fixed interest rates.
I recall reading that he advocated a timing strategy using various metrics that indicated when it was time to minimize leverage, and when it was time to maximize leverage - although since I didn't cough up the bucks, I didn't get chapter & verse.  He definitely wasn't advocating max leverage at all times.

If we imagine that Chris is right, and that inflation is likely to be the future outcome - and that the rate of inflation will be dramatically higher than it is now - the most effective way to handle this is by borrowing as much money as possible at a fixed rate immediately after the time the big inflation starts to manifest, but before the system has had time to really react, and using that borrowed money to buy assets that throw off enough cash to cover the loan payments.

This is the standard leveraged real estate play that anyone who had a home during the 1970s remembers - if inflation is 100% over 10 years, and you put 10% down, you end up with equity equal to 11x your initial down payment.  And assuming your income from the property stays up with inflation, it makes your property even easier to hold onto as time passes.

It wasn't the doubling of the property value that made people rich, it was the 11x their down payment that did so!

If you had bought gold during that same time, it would have just been a two-bagger - theoretically anyway.  And taxes - gold is taxed as a collectible, while property is taxed at long term cap gains rate.  And interest is deductible.  As is depreciation.  US tax policy is much, much kinder to property than it is to gold.  Tax issues are as much a part of Dan's education system as income.

So from his viewpoint, the question is: which do you like more, a 2x (gold) return taxed at 28%, or an 11x (OPM real estate) return taxed at LTCG rate?  What's more, the property keeps throwing off cash, and over time, the cash it throws off increases!

One more wrinkle - at least for me.  Loan should be non-recourse, so as not to result in destruction of your entire portfolio if you end up making a mistake.

That's the essence of Dan's message.

 

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Kugs wrote

The Lockhead fusion reactor might just work.   But five years out may be too late for WW3.   Maybe some distant race of whatever will find the device buried in sand.
I plead guilty to willful blindness your honour. I will not look over there.

Lockheed is not the only pony in the race though, Kugs. And what with the "dematerialism" (I just invented that term) of the economy into mostly code and virtual desire, I think we are in with more than a shot at survival.

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Chris, I suggest you get Dan back QUICKLY to go deeper into all this. Fascinatingly insightful.  Thanks for such CLARITY on how the process works.  The sooner, the better.  Ken

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DAVE STATES: "borrow as much money as possible at a fixed rate IMMEDIATELY AFTER the time the big inflation starts to manifest, but before the system has had time to really react, etc."
So Dave, help, please.  Can you spell out in detail HOW to KNOW that that point has arrived. What to look for, concrete signals, etc.  Is this the type of thing that PP.com will alert us to??  Like Mike Maloney's EXIT STRATEGY??

Of course, no guarantee that my income from properties will stay up with inflation. Nor that the cash thrown off will constantly increase (rents may HAVE to go down!, and even stores in my properties may need a lower rent situation–so many are closing now). And deductibility/depreciation rules can change drastically?

Just have to play/gamble all of this–as Alan Watts once said:  "The ONLY security we have is our INSECURITY (The Wisdom of Insecurity), or the only constant is change.

Ah, life, how interesting!!!

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The 1970's were very different: the USA still dominated in manufacturing.   Property prices could plunge today since the threat of depression is real.  How does Dan's model work in the from 1930 - 1942?

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Chris,
Daniel Amerman’s 4th method does not pass the smell test for me.  He implies that the 4 methods are to get out from under unsustainable government debt.  This is reinforced when he discusses the last period of time during which the government used financial repression post WW2.  During this time Federal debt to GDP fell.  
I agree they may be attempting financial repression, and successfully robbing savers, but if it was currently being successful wouldn’t the debt to GDP be falling?  In other words they are not robbing nearly enough to reach the stated goal of any of the 4 methods. 
It appears as if the debt is spinning so far out of control that for financial repression to work the the inflation rate would reach the 10-15% that would elicit a response from the electorate as in method #3.  I think the main reason financial repression can not work now as it did in the late 1940's-1950's is during that time the private sector was taking on huge debts to the point our monetary system did not require increasing debts from the federal government.  Currently the semi rational market participants of the private sector are not willing to take on any more debt, they are debt saturated.  Due to this the government has no choice but to continue creating debt or create a new monetary system.  
Thanks
 
Brandon

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Thanks for jumping in the fray here… your comment mirrors my feelings as well.  I don't think financial suppression can work at all here… other than as a delaying tactic.  I am not sure whether Dan really agrees that this is the case or not, even though I think Chris pushed pretty hard to try to bring this out… all we got was a recognition that some of our monetary leaders do see more of the, "new mediocre" ahead. As you suggest, either we keep creating more and more money, or the system we have fails.  To me, it's as simple as that.  I leave it to our monetary masters to surprise me once again with their next creative program against which this money will be created.  
    

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Jim, I actually posted too soon and Chris essentially pushed my point toward the end of the interview as you mentioned. 
If you want a surprise solution that I think will be the governments eventual solution here it is:
http://www.businessinsider.com/electronic-currency-2013-11
This is the only solution I have seen that fits the structure of past monetary solutions.  Most notably it maintains the unbreakable covenant of shifting monetary systems as a result of the stress brought on by a debt based monetary system, namely the government and banks get stronger.  
The list of ways this helps the government is long.  First, since eventually the old paper dollar would go extinct and all commerce would be electronic, it would be easy for the government to track money thus easier to tax.  This would certainly please tax and spend liberals who try and vilify anyone who attempts to avoid taxes, even though that is what this nation was founded on. 
Another benefit of being able to track the new e-dollars is black market transactions in dollars would disappear.   This would delight right of center.  Without cash, illegal drug trade would have a major barrier.  An even a bigger feather to the right is that it would be more difficult for people to hide secondary income thus take advantage of entitlements while working “under the table”.  Illegal immigrates would also have a much more difficult time living in the US, talk about a plus for the conservatives.  The government also wouldn’t need to spend money to create new bills and coinage.
Finally the biggest pro is the governmental debt will be priced in the “old” dollars, meaning the burden of the national debt would decrease by as much as the Fed decides to set the negative interest rate at annually.
So we’ve pleased both sides of the isle, now on to the banks.
Well the benefit to the banks is quite clear, not only are you forced to keep your savings with them to speculate with and collect their standard fees on, but they also will be able to charge you interest for the privilege. 
Some of the concerns that run a distant third, those of the people of the United States COULD also be addressed.  I emphasize COULD because they will only help a certain portion of the population and only if the powers in the government and banks feel as if they need more popular support for the E dollar.  As with the government debt, the new system COULD allow ALL old debt to be priced in the old dollars thus lessening the burden on anyone holding previous debts, and with a large portion of the population with underwater home mortgages and huge student loans I’m sure the relief would be welcome. 
The losers in this would be those who were prudent and didn’t take on large debts but since there are far more debtors then savers, politically the plan would still be a winner.  I have to admit before learning the truth about our system I racked up my fair share of debt and a little piece of me would be relieved.
Though I think the Government would allow all debt to be priced in the old dollars the only debt that must be would be the government debt.  It would certainly be fairer to price all old debt in the old dollars, but I would not be surprised if the banks were able to use their substantial influence to swap old debts into the gradually more valuable E Dollar.  This is historically what has taken place when there have been failed currencies, and even though the debt agreements may have been made in those currencies the banks attempted, and were often successful in demanding payment in gold.  Even the most powerful such as President Thomas Jefferson was subject to such a debt payment.  
Thoughts?

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http://www.businessinsider.com/electronic-currency-2013-11
 

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Jim, 
First thanks for your reply.  I actually think I made my comment a bit early, Chris ended up making my point toward the end of the interview.  

Ok now on to that surprise.  The only solution that I have seen or read about that fits the model of past monetary shifts is the E Dollar. The E Dollar not only addresses the debt and maintains the unbreakable convenant of historic shifts in US monetary systems.  Namely it allows the banks and government to get stronger.  I tried to respond to you a couple times with the link to the story but I guess the filter blocked it.  So if you would, type in There is an Electronic Currency that can save the Economy – but its not Bitcoin.  The business insider story on the E dollar will pop up.

The list of ways this helps the government is long.  First, since eventually the old paper dollar would go extinct and all commerce would be electronic, it would be easy for the government to track money thus easier to tax.  This would certainly please tax and spend liberals who try and vilify anyone who attempts to avoid taxes, even though that is what this nation was founded on. 

Another benefit of being able to track the new e-dollars is black market transactions in dollars would disappear.   This would delight right of center.  Without cash, illegal drug trade would have a major barrier.  An even a bigger feather to the right is that it would be more difficult for people to hide secondary income thus take advantage of entitlements while working “under the table”.  Illegal immigrates would also have a much more difficult time living in the US, talk about a plus for the conservatives.  The government also wouldn’t need to spend money to create new bills and coinage.

Finally the biggest pro is the governmental debt will be priced in the “old” dollars, meaning the burden of the national debt would decrease by as much as the Fed decides to set the negative interest rate at annually.

So we’ve pleased both sides of the isle, now on to the banks.

Well the benefit to the banks is quite clear, not only are you forced to keep your savings with them to speculate with and collect their standard fees on, but they also will be able to charge you interest for the privilege. 

Some of the concerns that run a distant third, those of the people of the United States COULD also be addressed.  I emphasize COULD because they will only help a certain portion of the population and only if the powers in the government and banks feel as if they need more popular support for the E dollar.  As with the government debt, the new system COULD allow ALL old debt to be priced in the old dollars thus lessening the burden on anyone holding previous debts, and with a large portion of the population with underwater home mortgages and huge student loans I’m sure the relief would be welcome. 

The losers in this would be those who were prudent and didn’t take on large debts but since there are far more debtors then savers, politically the plan would still be a winner.  I have to admit before learning the truth about our system I racked up my fair share of debt and a little piece of me would be relieved.

Though I think the Government would allow all debt to be priced in the old dollars the only debt that must be would be the government debt.  It would certainly be fairer to price all old debt in the old dollars, but I would not be surprised if the banks were able to use their substantial influence to swap old debts into the gradually more valuable E Dollar.  This is historically what has taken place when there have been failed currencies, and even though the debt agreements may have been made in those currencies the banks attempted, and were often successful in demanding payment in gold.  Even the most powerful such as President Thomas Jefferson was subject to such a debt payment.  

Let me know your thoughts

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Ken-Presumably, figuring out when to go "all in" on debt and how to structure your overall approach to "using inflation to get wealth" is Dan Amerman's secret sauce, not something he's likely to reveal for free in a podcast here at PP.  And (as I mentioned before) since I didn't cough up the dough to taste that secret sauce, I don't know the details either - I did take his free class though, and so I'm telling you my basic sense of his approach.
But rather than relying on me to provide the definitive answer, YOU might want to take his free course and see what YOU think of it.
Other posters here have mentioned some concerns: namely, we're at peak energy, peak resources, past Peak Manufacturing here in the US, and just after a debt bubble pop - how will that affect the type of inflation we will see, ability of property to cover payments, whether property will even keep up with inflation, how long will the deflation happen, will the inflation be instantaneous or 70s-style, etc.
But at the core of it all, I did find Dan's analysis to have merit.  Tax policy meets leverage meets inflation - if we project negative real rates thanks to the Fed, and inflation starts to take off, if you can cover payments with your newly-acquired property, levering up seems like it will work.
Several big "ifs" there.  But if you use a non-recourse loan - all you have to lose is your down payment.  And it would pay off like a loose slot machine, thanks to the leverage.  :slight_smile:
 

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Sure if the powers that be can maintain control levering up may be an answer to follow, but I don't believe the massive imbalances in the economy can be controlled by the Fed, Treasure, Banks et al.  I think there will be a black swan that will allow one of the forces of inflation or deflation to win out and everything will come tumbling down. I do think it will fall towards inflation/hyperinflation and then being levered up may be fine, but I will not discount the possibility that we could fall into massive deflation and not be able to recover.  In that case following his prescription of levering up would be catastrophic.  Its not like massive deflation hasn't happened, don't forget the Great Depression.

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bwh-
One of my caveats was a non-recourse loan.  If you only put 10-20% of your portfolio into the Amerman approach, you stand by until the magic moment arrives, then you drop that 10-20% into 5% or 10% down loans on properties with non-recourse loans, if everything then blows up into a massive deflation, you only lose 10-20%.  Non-recourse loans let you walk away with the lender taking the loss.

On the other hand, that 10-20% is enough to win the lottery for you during a heavy period of inflation.  Its probably the equal of putting all your money in gold just because of the leverage.  Maybe more.

It has a lot of moving parts, but it does have a big payoff for one particular outcome.

And it also requires that you wait for your moment.  You can't just do it now and hope for the best.  Well, you can, but that's a lot riskier.