Central Banks Need Inflation with Steve Saretsky - Ep. 020

Central Banks Need Inflation with Steve Saretsky - Ep. 020

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- It's much more difficult to explain the monetary mechanisms that are in place. And I think that if people really understood it, there probably would be pitchforks and riots in the streets. (illuminated music continues) - Welcome back to "The Empire's New Clothes." I'm your host, Bradford McArthur.

If you what we're doing here, just a reminder, rate and review if you're on podcast. And then if you're watching on YouTube, make sure to like, subscribe, hit the notification button. These things really help us get this out to more people. Don't forget to tell your friends. And, that way, we can keep doing what we're doing here every week. So we're about to speak with Steve Saretsky.

He's a Realtor in Vancouver, Canada. He also is incredibly knowledgeable and passionate about macroeconomics. And why that's a cool pairing is because we're able to dive into the micro of the Vancouver real estate market, but also the Canadian housing market and yet also speak about how are these things impacted by monetary and fiscal policy in the U.S. and in Canada, how are currencies working, and what's the potential future we have to look forward to not just in housing but currency and inflation/deflation. It's a great conversation.

I sure learned a ton. I hope you do too. Enjoy. Steve, welcome, really great to have you here today. - Yeah, thanks for having me on. Looking forward to it.

- For sure. So for folks that maybe are unfamiliar, you've got a YouTube channel where you speak about all your work with real estate in Vancouver in Canada and then also a bunch of macroeconomics. And I'm very excited to dive into some stuff with you because it's not usual we get to speak with someone who has such a good really in-depth understanding of a big component of the markets, real estate, but also a good macroeconomic framework. And so, for myself and for others, how'd you pair those two? Were you interested in real estate first and then macroeconomics? How did these things become one for you? - Yeah, no, it's a good question 'cause everybody goes, "Oh, you're selling real estate Vancouver. Well, oh, what does that have to do with macroeconomics? How come you're so fascinated or always talking about central bank policy and stuff like that?" For myself it was, like, in 2015 where the Vancouver housing market's taking off. Everybody's trying to justify what's happening in the markets.

And so, yeah, I just went down this rabbit hole. I'm a huge proponent of self-education always learning, always questioning, always trying to get better. And for me it was just, like, listen, if you wanna understand a real estate market, I think you have to understand capital flows and you have to understand how the world works, because, like what we saw here in Vancouver, we are a global city. And so we're impacted particularly by global events.

And so one those global events was obviously what was going on in China with the capital flight in 2015-2016. That pushed our housing market up tremendously. And, yeah, I think if you'd turn back the clock, the warning signs were there.

Anyway, so, yeah, it took me down this path. And I think now we're starting to see, anyone that's been following along with financial markets, you can clearly see that all these markets are moving now together particularly if you look at what's happened in this pandemic, right? Like, global property markets are all moving almost in tandem. Basically, yeah, I think you have to really understand the macro to help you understand the micro, so to speak. - Yeah, completely agree. So you've got just under 20,000 subscribers on your channel. In your view what are they there for? What answers are they looking for? (Steve laughs) - Yeah, it started on the micro maybe more just, like, hey, listen, I was doing deep-dive analysis on the Canadian housing market, right? If you're here in Canada, there's really not a whole lot of information about housing markets that isn't completely biased.

Obviously, the big banks push out their messages because it's in their best interest, the real estate brokerages, all that stuff. So for me I just try to look at it and say hey, here's what I'm seeing. Whether it's bullish or bearish, this is what I'm seeing. And you're free to make that call.

And then it morphed into trying to help explain people and provide financial education around helping people understand markets and why they're moving. One of the fascinating ones here, again during the pandemic, was everybody, including our own government agency, was saying, "Hey, listen, markets are gonna puke. Real estate prices are probably gonna fall somewhat significantly." Then we actually saw the complete opposite. And so a lot of that was just explaining the policies and saying, "Hey, listen.

Look what central banks are doing: we've come in with massive fiscal stimulus, basically handing, essentially, helicopter money to households and then the central banks essentially funding that government spending through, basically, these QE programs" so trying to explain that. So I think people will basically come, I guess, first and foremost for the Canadian housing picture but then also, I guess, the financial aspect of it, education as well. - Yeah, well, prepping for this actually was like, "Okay, when did Steve start?" It was like, "What are these first videos look like? How've they changed?" And I actually stumbled upon... You had a great mustache in the beginning there.

- Yeah, yeah, I think I might've must have started filming in Movember there. (Bradford laughs) - I was like, "Did this guy start this thing just to show off the mustache, or?" - Yeah, no, that thing was going strong at the time. But, yeah, no, it's really morphed into getting a little bit more away from... Like, I think the channel really started, obviously, just on Vancouver real estate 'cause that was what I really, really knew.

And then obviously, as your interests expand and as your knowledge base expands, wanted to just share some of that back, share a lotta the resources that I learnt from and help people in any way that I can because, yeah, I think everybody's working pretty hard in this life. And if I can help people understand the system so they can maybe protect some of that hard-earned capital, that's my ultimate end goal with the channel. - Well, let's go there a bit 'cause you say this things transitioning.

And we can see that with the work you've done, more macro-framework. So perhaps, walk me and the listeners through, at the most fundamental level, what is going on with the U.S. and Canada, what's that macro framework which you try to see this picture. - I look at it ultimately as what's happening, really, since the global financial crisis is the financial system as we know it is on life support, right? So you've got this situation where I think Ray Dalio explains it best, right? You've got monetary policy one, which is central banks lower interest rates. And that's the mechanism that's used to...

As you hit a recession, you lower interest rates to spur economic growth, to spur borrowing. And then you go into monetary policy two, which is what we've seen since 2008. It's when you basically cut interest rates to zero, ya can't really cut them much further, so then you start doing quantitative easing, which is, again, basically the central banks purchasing up massive amounts of government debt in hopes to lower yields and push people further out of the risk curve and inflate asset prices. So that's monetary policy two. And then Ray Dalio talks about monetary policy three, which is what I think we're in right now, which is that monetary policy one and two are reaching their limits. How much QE can you really do to actually stimulate? And what you're seeing now is that monetary policy three is essentially where the government comes in and does, basically, their own version of, essentially, monetary policy where they basically just essentially drop helicopter money, start cutting checks to people, forgiving various little bits of debt here and there.

And that essentially is all funded by the central bank. So they basically become one and the same entity. And so I think that's where we're at right now. So what you're seeing really is we're in an era where central banks and the governments are saying, "Well, there's no inflation, there's no inflation.

We can't hit 2%. We're trying to hit our 2% target. We can't hit it."

But meanwhile, you're seeing massive inflation in asset prices. And so that's your typical signs of currency devaluation. I look at it more of like, listen, I think the governments are basically trying to...

They are essentially devaluing the currency. And that's why we're seeing massive run-ups in house prices particularly where I am and in all financial markets, right? Look at the stock market. And so I think that's really where it's showing up. So that's my framework. And I think if we look at this pandemic in particular where we implemented monetary policy three, I think that Canada's money supply, I think, expanded by about 18% year over year, which is the fastest pace, I think, in 30 or 40 years. - It's crazy. - Yeah, and then you've got the U.S.

I think they're are around 22-23% money supply growth. - Always gotta be a little bigger, the U.S. - Yeah, (laughs) yeah, exactly.

So I may look at that and think, well, if you're expanding your monetary base by, say, 20%, that has to show up somewhere. There has to be a consequence or a reaction. And I think, hey, if you look at it, housing market here is up 20%. So I think that they're fairly correlated. It's a convenient coincidence. - Yeah, or an unfortunate coincidence, however you wanna look at it.

So Tiff Macklem... Pardon me, but I forget his official name. Chairman of the? - Tiff Macklem, head of the Bank of Canada. - Head of the Bank of Canada.

And then Jerome Powell, chairman of the Fed, these guys, as much as we wanna rag on them, they are intelligent. They must see what's going on. They dodge and they duke when asked questions, and they have this political speak, and they can dodge any kind of question about that and say whatever they wanna say, but they must see what's going on.

So we all wonder, well, what ultimately is keeping them from trying to fix the situation instead of just kicking the can down the road. And in your view what is that? Is it just some innate human thing of I don't wanna be that guy that it all falls apart on? Is it as simple as that, or? - Yeah, I think so. I think it's, like, you've got this big system, which is larger than any one individual. It's larger than any one country.

It's a global financial system. And everybody's trying to keep it, basically, on life support, trying to keep the existing system and keep it going because, like, what does a reset look like? Nobody really knows. But clearly, we know that we're on this unsustainable path. But what's the alternative? No one's just gonna say, "Okay, let's just blow it up."

I think they look at it and say, "Well, I don't wanna be the one." We're gonna try to keep this thing happens. If there's some crisis that comes along, and we can't fix it...

I think crises are ultimately what trigger change. And until that next crisis happens where you can't really repair that system, then you'll probably see, I think, some sort of overhaul. You can see we're almost slowly getting there. There's all this talk now about central bank digital currencies and what that's gonna look like. I think even Mark Carney, who was the former head of the Bank of England, basically said, listen, this system, this petrodollar system, as the US dollars are the world's reserve currency, this is not a sustainable path.

So it's out there in the open. Central banks have talked about and acknowledged it. But, yeah, I don't think anyone's willingly going to force change.

I think it's gonna come through some external event that will require change. - Yeah, and are you more concerned about that external event being... Well, let's just oversimplify it. And then you can tell me that's not possible. And we can break it down further.

But are you more concerned about markets breaking or society breaking? - Man, that's a tough one. Heh, I don't know which one goes first. I think you're seeing society... I think we really feel it here at least in Canada, where housing is the number-one issue.

People feel left behind. I think that the number-one thing is you're kinda taught when you're growing up that if you go to school, you get an education, you work hard, you can have a house, raise a family, and you'll be decently well off. You'll be okay. And I think what we're seeing now is, particularly here in Canada, that dream of home ownership for a huge chunk of the young cohort, millennials coming up, is just not realistic. And they've been sold this bill of goods. And it feels like the social contract is basically broken.

And so I think that is becoming a pressing issue, and obviously, I think there's a reason why the younger millennial generation tends to lean left politically, is looking for more government handouts, is looking for more social justice, is looking for more taxes on the rich. And there's a reason for that. And I think that's because they've been left behind.

That social contract has been voided. And so I think that's something that worries me. Like, if you keep on this existing track of higher and higher asset prices, it's going to come to a breaking point.

So it's hard to say whether or not markets will break on their own. Or will society break prior to that? It's hard to say. - Yeah, so tied. So Canadians are well-regarded as quite polite, hospitable, and generous, and an apologetic bunch. What would it take for Canadians to go to the streets and be protesting for something different? If the entire cohort of millennials in mass, of course not all of them are honestly struggling.

Let's just say they're not owning homes, they're gonna be renting, and they're having to swallow that pill. Would that cause them to go to the streets? Or are they gonna tough it out and they'll just be renters for rest of their lives? Like, what would cause Canadians to go to the streets and ask for some kinda change? - Yeah, I dunno. We're a polite bunch, right? - [Bradford] Yeah.

- I think we'll be the last to really have the pitchforks out. But, yeah, I think we're seeing it politically. I think Canada's going further and further left.

I think if we look just at housing, which is the number-one hot-button topic, the amount of policy changes over the last five years has been unbelievable. If you had gone back 10 years ago, you're like, "Oh," and I told you this was gonna happen, these changes were gonna come in, you would've said I was crazy. So some of those changes are in Vancouver and Toronto, you've now got a foreign-buyers tax 'cause the finger's been pointed at not monetary policy because the average person doesn't understand what a central bank is or who they are or what they do.

They just look at it and say- - It's easy to say, like, "Hey, those folks came and bought all my houses." - Yeah, "Hey, those people, they look they're from China. They came in. They bought our houses.

This is not fair. We need to put a tax on them." And so that was implemented in 2016. They then increased it again in 2018.

Then they brought in what's called a speculation tax, which is essentially, if you're not renting out the home, and it's not your primary residence, we're also going to apply an annual tax on top of that. Then we brought in empty-homes taxes here in the city of Vancouver as well. And a lot of these policies are also in Toronto. And now the federal government's coming out and saying this year that, nationally, they're bringing in, basically, a foreign-buyers tax where, again, if you're a foreigner, and you're not utilizing the real estate, renting out the house or actually living in it at least six months of the year, they're gonna tax you on an annual basis. And I'm not saying that's necessarily gonna be effective. But you can see that policymakers are reacting to society.

And these policies that I think would've been unimaginable 10 years ago are completely accepted and actually supported. And I think that we're probably not done. - Are policymakers reacting to the narrative that Chinese buyers are coming and inflating house prices? Or are they reacting to hard data that shows that's actually what's happening? - Yeah. To be honest...

So the data that they're using I don't really think captures the true extent, just the way that they use the data, the way that it's structured. It's kind of a longer conversation. But it's not really an accurate reflection of what's happening in the market.

So the government data, for example, say that foreign investment into the housing market is really just a tiny, tiny fraction. which shouldn't be moving the market. And so if you look at it from a data perspective, it doesn't actually really necessarily support a foreign-buyers tax. But I think people realistically, and I'm working here on the ground, it is a significant factor. But a lot of the problem is is that the government will look at it strictly and say, okay, foreign buyers purchasing, let's say, Vancouver real estate, well, they're just looking at what does your passport say. Oh, well, the reality is is, a lotta people that come here, they already have their permanent residency status or they've got some sort of family member that's already here that is a citizen.

And so they'll purchase real estate through them. So it's not they're coming here, like... That money is oftenly earned offshore, right? So you're earning it in a different jurisdiction. You're coming here and then purchasing real estate almost, essentially, as hedge, right? If you wanna get your money out of a communist country in China, what better place to put it into a great democracy, safe, stable country like Canada? - With polite people that don't go to the streets. - Yeah, you've got locals here that are basically earning low wages I would say.

And they're competing with a global investor base. It is a global property market. You're competing with people that are earning incomes globally. You're gonna earn a lot more in Hong Kong than you are in Vancouver. And locals are obviously struggling to keep up with that, so.

- It's very interesting. I'm just thinking of the global arbitrage of labor, of how we've outsourced so much manufacturing to Asian countries because labor's cheap. And then now they're almost arbitraging this light-regulation environment, low housing prices, the stable democracy.

It's like a very interesting swap when you start deregulating the entire globe through the globalization mechanisms we've had in place for few decades now. I almost wonder, more in line with that question about narrative, do you think the Canadian policymakers are not really that opposed to this narrative as well, because it deflects some of the attention that their policies are enacting? Super low rates, monetizing a lot of the government debt of course is gonna inflate housing. But do you think they're happy to have the attention on these foreign home buyers? Or is that getting a little too conspiratorial? - No, yeah, I mean, it's hard to say. It's an easy scapegoat, right? - Mm-hmm. - Yes, it's a problem. But, yeah, again, there's zero discussion or talk about what the central banks are doing, right? - [Bradford] Like, zero zero.

- There's basically, yeah, zero dialogue. And I think the problem is, if you really unpack it, let's be honest, okay, you've got major media outlets that comment on it, these reporters that are talking about it. Do these reporters really understand the financial system? Do they really understand what a central bank does? Quantitative easing, what is that? I don't think the average person understands it. I think if you take a poll of your family and friends and say, "Hey, do you know what QE is?" they're just gonna be, "No idea." I think a lotta people just don't really understand.

So what you see in the narrative to say, oh, housing is expected to continue to be hot or we're expecting price growth in the housing market because of, quote, unquote, low rates... They just say low rates. They never say, "Well, why do we have low rates?" It's just that, oh, people just justify it. Well, hey, housing's up 25% this year because of low interest rates. Nothing we can do about it. And it's, like, whoa, hold on a minute.

There is something we can do about it because the interest rates are actually being artificially manipulated by our own policymakers. So this is a policy decision that we're making to set these interest rates essentially. People say it's a free market. It's not a free market if you have your central bank owning 40% of the government's bond market, which is what we have today in Canada. So it's not a free market.

I think, since 2019, the Bank of Canada, for example, has funded 90% of new government debt issuance. - [Bradford] Wow. It's total manipulation of interest rates. But again, it's easier just to deflect and talk about. If you're writing an article now in CBC News that's going out to millions of readers, it's much easier just to say, "Hey, low rates and people coming from overseas into the market."

That's easy to explain to the average reader. It's much more difficult to explain the monetary mechanisms that are in place. And I think that if people really understood it, there probably would be pitchforks and riots in the street. I think it's almost for good reason that it's designed to be complicated. - Hmm, yeah, I often wonder that too because, oftentimes, it's quite simple mechanisms, but the wording is so complex you're like, "Well, what the heck does that mean? You look it up, and you're like, "Oh, Could have just said it a different way (laughs)." - Yeah, you can't- - It's almost (obscured) vernacular - Yeah, it's easier just to call it quantitative easing than money-printing, right? I mean, yes, I know QE is not technically money-printing.

I understand. People will try to get into those arguments. But it's basically a version of money-printing, right? Could you imagine if we say, "Hey, the Bank of Canada's printing this much money." So they just, "Hey, we're doing QE. Don't ask what that is."

People are lazy. They don't wanna look into it. Yeah, it's interesting, for sure. - Printing money, giving it to the government. (Steve laughs) It is disingenuous to say it.

And that's the problem. It's disingenuous to say it that simply because it's not exactly what's going on. But if you follow a dollar, most of the dollars, as you say, end up with the government because they're buying the bonds. - Right, and we can look at this even a little bit further, 'cause, I think, we talked at the beginning of your show, like, monetary policy one, monetary policy two, monetary policy three. Let's look at monetary policy three, for example.

- I'm guessing there's no four, huh? - Yeah, I don't know. Yeah, four is not yet written. - They're working on that. - Yeah, exactly.

Four is when they own everything. But monetary policy three is, again, where, basically, the federal government essentially does a version of helicopter money. It's all funded by the central banks.

In Canada here, could you imagine, like... Okay, this is one crisis. We had a crisis at the onset of the pandemic. Our financial markets were completely panicked. Prices were selling off.

There's no liquidity. What did they do? They came out and said, "Well, Canadians," for example, "you don't have to pay your mortgage. Don't pay your mortgage for the next six months.

Just raise your hand. You don't have to pay it." And that program turned out to be extremely successful.

At least in terms of arresting price declines and increasing household savings rates and all that stuff. And so to think, in the next crisis, that that policy won't be back, I think, is nonsensical. It will be back. And we can talk about, for example, the government here in Canada create a program called CERB, which was basically that if you got laid off during the pandemic, or if you saw a reduction in your usual working hours or your usual salary, you could basically apply very, very easily for a $2,000-per-month paycheck. Every month, $2,000 comes right into your bank account.

And there was a huge take-up of this program. It's still going on now. It's been over a year now.

So this program is still going. $2,000 per month and the government ironically came out and said, "Well, hey, there was a lotta people that took advantage of this system, that were maybe double-dipping." They didn't actually lose any income, but they still took the $2,000.

They actually came out and said, "Don't worry. You don't have to pay it back. And those that actually did say, "Hey, you know what? Oops, we over-dipped. My bad. Here's the $2,000," or, "Here's the $6,000 I collected during those three months," the people that actually sent it back, the government is actually saying, "No, no, actually, you know what? It's okay. We appreciate the honesty," and they're gonna mail you the check back so you can keep that money.

- That's so Canadian. - Yeah, it's the definition of helicopter money, right? - And again, that's all funded. Where's this money coming from? Well, it's basically just digits on a screen.

The government is gonna run massive deficits. And the central bank is going to come in and help with debt issuance and keep interest rates low. - Yeah, and I think that's a great point of these things will be back, because you look at the dot-com bust... I'm less familiar with the Canadian response to these. But in the U.S., lower the interest rates, and then you have the housing crisis, Lower interest rates and print money, and now it's all those and helicopter money, as you're saying, going through these three phases.

And we have these other programs. So, the next crisis, we're gonna have all of that. And probably some more things we don't even have today.

Why would you expect to have less? (laughs) Of course we're gonna have all these same policies but even more, which is wild to wrap your mind around. But it makes sense if you think about it in that arc as you just described. I'd like to ask you real fast about... 'Cause we're talking about Canada a lot.

And this question again is about Canada, but also it's about all the other economies that aren't the big three central bank base 'cause we've got the ECB, Europe. We got the BOJ of Japan. These are the central banks. And we've got the Fed at the U.S. who kind of are navigating global monetary policy. And so the question is, to you, why is Canada handcuffed and why must they follow what everyone else does? - Yeah, basically, they take their orders, essentially, from other central banks.

Cause Canada's such a small country on the global level in terms of global GDP, Canada basically doesn't matter. So we basically inherit our monetary policy. If we start deviating and say, "Hey, listen. We're gonna start hiking interest rates from zero. We're gonna normalize rates and get them up to 3%," well, your Canadian dollar, your currency, is gonna strengthen significantly, which is gonna destroy exports. - Hey, can you explain that process real fast of why would the Canadian dollar strengthen in that environment? - Basically, global capital markets look for rates of return, right? Like, stable economy's a higher rate.

So if I can get a strong yield in Canada, for example, obviously, you'd have the bond market doing the same, right? So maybe all of a sudden you're looking at, let's say... This is a very simplistic way of explaining, I'm trying to think what the Canada five-year bond is at. Let's say it's at... I think it's about 1% today.

But if that all of a sudden goes to, say, 3% or 4% versus, everywhere else, it's yielding basically zero- - [Bradford] Or negative. - Yeah, it's a much more attractive investment. So you'd have capital flowing in, into the country, which would ultimately strengthen your currency and then weaken your exports 'cause your Canadian...

You know what I mean? So if you're an export economy, all of a sudden it becomes much more expensive for other countries to buy Canadian goods, right? - So, in a nutshell, having responsible monetary policy, you're penalized. - Yeah, essentially. It's almost this race to the bottom.

Jim Rickards wrote a good book about it calling it "Currency Wars." It's funny enough 'cause I think Ray Dalio at Bridgewater said that it was mandatory reading for everybody at their firm. And I think that book was written in- - [Bradford] Oh, interesting. - Yeah, it was in 2013 or 2014. So he's a little bit ahead of the game in terms of calling it for what it is and what it was, which is that, in a world of globalization, everybody's trying to get a competitive advantage. Basically, everyone's trying to weaken their currency to try to get a one-up in terms of exporting and to remain essentially competitive on that globalization scale.

So everyone's trying to subtly devalue their currency. And so it's kind of a race to the bottom, right? Every central bank is basically trying to, almost, one-up each other. Yeah, we can just see it everywhere you go, right? Anyway, it's a fascinating topic, but. - Are you concerned, looking forward, about capital controls? And, like, Steve Saretsky, are you concerned in the next 10 years? Do you think about this? - Yeah, it might be a little bit out of my realm of expertise.

But certainly, smarter people than I, that I've read and follow and listen to, they're certainly of that viewpoint, that it's inevitable. I think one of the guys that I really like is Russell Napier. He's done a lot of great commentary on this.

He believes that's going to be an issue. All I know is that you've got global debt to GDP at about 350%. So it's never been higher.

You've got too much debt, and you've got really low economic growth. So basically the goal is from policymakers and central banks, basically, their entire goal is... "Listen. We've got global debt to GDP at 350%. How do we either increase GDP or lower the debt ratio?" Basically by doing that, there's three outcomes. Number one is you can default. I think it's pretty clear through all the policy decisions that we've made over the last 12 months that that's not an option.

That's not the option that they're going for. - They're not looking at that one. - Yeah, they're not looking at that one. So they're not looking for a Great Depression 2.0 where, hey, let's let asset markets fall by 50%.

And let's just erase all these debts. Let's get mass defaults. They're not looking at that. So that's number one.

Number two is you can try to grow your way out. I think that's extremely difficult to do when you've got, again, aging demographics and you've also got a mountain of debt, because debt is basically deflationary. It weighs down society. So that's number two.

It's really hard to grow your way out. Number three is to basically inflate your way out. And I think that's what we're doing right now.

Now, the government will tell you that there's no inflation that, oh, it's still below 2%. But what you can see right now is they're trying to let inflation run hot. So the central banks are coming out and saying, "Hey, listen. We have a 2% inflation target. But we're willing to let it run hot 'cause we've been missing our target for the last 10 years," whatever. So they are trying to basically inflate their way out. So their goal basically is...

Listen. We're gonna buy as much government debt as we need to that will basically... Their hope is, anyways, that nothing will break. So their hope is that we will keep government bond yields in this really tight range.

Let's call it 1, 1.5%, whatever. And let's try to keep GDP growth at 2-2.5% while we pin yields at 1% or 1.5%. That's what the goal is. And so I think that in order to achieve that is, number one, they're gonna let the economy run hot.

Number two, they're gonna buy as much debt as they need to to basically make sure that yields remain suppressed. Number three is basically you have to have... What that means is basically it's a version of financial repression where they essentially remove that free market. And it's the central banks that are basically dictating.

So they come out. This is not a conspiracy theory, right? Central banks have come out and said, "Hey, listen. We're gonna do yield curve control. It's in our toolbox." The bank of Japan's already doing yield curve control.

But the Fed and Bank of Canada, for example, officially aren't, but they can come out and say, "Listen. We're gonna do yield curve control. If the 10-year bond eclipses 1.5%, we're gonna buy.

We're gonna target at 1.5%. Again, if inflation is running at, let's say, 2.5%, and your yield is 1.5%, well, it's a real loss of...

It's a -1% interest rate. And so I think that's the goal. That's my view anyways. And I think we could be in a scenario like that, where maybe it's for the next decade, potentially, you have real negative interest rates. - Yeah, well, as you said, it's simple process of elimination. They're probably not gonna default.

The restructuring we're not so sure about. It seems like it's inflation. You walked through it pretty clearly, but for folks that might not understand the mechanics, could you explain a little bit deeper of why is inflation good if you have debt and it's bad if you are saving. Say you have, like, a bank account. - (tuts) Yeah, well, inflation's (indistinct). Let's keep it simple here.

Let's say you have a piece of real estate. I'll use U.S. 'cause the U.S. is probably the best example. But let's say you bought the asset for $500,000 and you took out a $400,000 mortgage on it fixed for the next 30 years. Well, that debt, that $400,000 is fixed. And your monthly payment is, whatever, $1,500 a month.

But if you've got inflation running at 2% or 3% per year, that debt is fixed, right? That debt is basically diminishing every year, right? It's becoming worth less and less and less. So you can imagine, in 20 years, what's the value of a $400,000 mortgage. It's gonna be nothing 'cause, generally speaking, as your income should also be somewhat tracking inflation so if your income's going up 2% per year, it becomes easier and easier to repay that fixed debt.

So that's the idea behind inflation. And you look at it from governments, right? Governments have - A little more than 400,000 (laughs). - Yeah, they've got massive amounts of debt. You can only imagine a scenario where every year things got cheaper and cheaper. Well, the cost of that debt, it's gonna become more burdensome to service because if things get cheaper and cheaper, that probably means less and less tax revenues coming in. But meanwhile, your debt pile is the same and actually becoming again almost bigger because the value.

Governments are the biggest debtors in the world. And so for them it's certainly beneficial to have some inflation. So the value of that debt becomes worth less every single year.

Now, obviously this is extremely burdensome on the average person and bank. Another simple example is you can lock up your money today. Particularly for retirees you lock up your money. You're trying not to take a whole lotta risk. So you're like, "Well, I'm gonna take $100,00 that I've got here in my savings. I'm gonna put it into a GIC," guaranteed investment certificate.

GICs, if you're really lucky today, you might get 1%. So you might get 1% on your GIC savings instrument. Well, again, if inflation's running at 2% per year, it means, every single year, your return on that savings or that investment is -1%. So your savings are basically being eaten away every single year. So that's extremely difficult on people with no assets.

Even if you're just an income earner, and you're trying to save. For example, let's say you're trying to save for a down payment on a house. Every single year your savings...

Not only is the price of the real estate is going up. Let's say 5% per year. But your savings for that down payment is declining by 1% per year.

So it becomes extremely difficult. And I think that's what we're seeing now. And I think that's pretty evident to anyone watching this interview is that you're seeing this massive wealth inequality, this social divide, where, again, people that are well off, they have assets, those assets are going up in value. And then you have a portion of society that doesn't have any assets or very little assets. And they have a little bit of savings.

But those little bit of savings are being basically evaporated through all the money-printing and through the inflation. - So I wanna end on... You're a Realtor. So you speak with a lot of different people about their finances and their dreams and the markets and real estate. Are a lot of folks bringing these elements into the picture? Or are they more just, like, "I need to get in.

Things are crazy"? So I guess the question is is it more of a visceral or emotive "Argh, I just feel desperate. I need to do something"? Or is it, like, "Man, inflation's potentially coming. It would be great to take on some debt right now"? - Yeah, no, it's a good question.

I would say my clients typically tend to be more educated because they obviously know where I'm coming from. They're reading a lot of my work or my videos or whatever. So a lot of them tend to be...

I have a lotta clients in the finance space, lot of portfolio managers, stuff like that. So we tend to see eye to eye. And so for a lot of them, it'll be a financial decision. I'm, like, "Hey, listen. We want hard assets.

We think that the government's basically debauching the currency and they're gonna do everything they can to support real estate. I wanna get in and wanna have a portion of my net worth into the real estate market." So that's one side. And then I get the other side or the other portion of my clients, where it really is just an emotional need if you think about, again, general societal behaviors. And things that we've been taught, growing up, is that you go to school, you get a degree, you get a job, you start a family, you buy a house.

That's the track. That's what most people are taught to do. And so for a lot of people, especially when they're starting families, they want that house. And again, that's why we talked about in this interview that that part of the social contract seems to be breaking, because people do have this fear of missing out where they're, like, "My gosh, every single year real estate here is going up 10-15%.

And, oh yeah, I'm getting a 2% wage increase. But that's not keeping up with the pace of these house prices going up. So there is a desperation, and there is a fear that if they don't pull the trigger, they might never have a backyard for their kids that they can truly call her own. I don't think there's a lotta people out there that aspire to be renters indefinitely, for the rest of their lives.

Most people at some point wanna be able to own their own home and raise their family and have that stability. And that's just a social thing that's built into our DNA. And again, that's why I do worry, obviously, about some of these policies. And where we're going is that that hope, for a lotta people, is fading. - Yeah, well, I really appreciate the work you do with your channel especially because I think that education component is a really big part of not feeling completely cast aside with the wind. It's like, okay, if I understand these forces perhaps a little better, I can more accurately assess and have my decisions and go forward.

So, on that, thank you so much, Steve, for joining us. Where can folks find... And we've alluded to your channel a million times. So what's the title? How do they find it? And are you on social? Or where are there places can people find your work? - Yeah, probably most active on Twitter and YouTube. So you just @SteveSaretsky on both those platforms. Yeah, super active on there.

So you can just reach out to me. Yeah, happy to have a conversation with anyone even if it's just chit-chatting. - Awesome, and then your YouTube, I believe, is "The Saretsky Show"? - Yeah, but I think if you go onto YouTube and just type in Steve Saretsky, it'll pop up there, so.

- Okay, awesome, great. Well, thanks for joining today. I really appreciate it. - Yeah, thanks a lot for having me on.

That was a lotta fun. - And that's a wrap. If you what we do here, make sure to like, subscribe, rate, and review. It's the best way to help us get our content out to the most people.

And, that way, we can keep doing this every week, so we look forward to seeing you next time. And thanks again. (illuminated music continues)

2021-07-21 17:30

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