Erode Your Debt Using Inflation | Real Estate Investing | KenMcElroy.com

hey guys it's ken so if you guys are in debt or not in debt this video is going to be a great one for you to watch because as a lot of you guys know one of the people that i like to study is buckminster fuller and what buck mr fuller says is if you can work with the forces that are happening already you're going to be way better than trying to work against them so hopefully you guys know that people are getting into massive debt they're getting into student debt credit card debt homeowner debt and the government of course is getting into more and more debt especially now it's even more transparent with the cares act and all the things that they've been doing to try to keep the economy going but the point is that everyone's got growing debt the second thing that's really important is that we are heading into a time of inflation now a lot of you have probably never experienced big inflation like a lot of people have in the 70s and 80s but all you have to do is go back and see that we've been in a very low inflationary period of time and now i believe we're heading into a high inflationary time and i'm going to talk a little bit about that but since we do know that we're getting into massive debt and there is a question on whether we're going to be in an inflationary period or a deflationary period you need to be prepared for whatever it is next for you and there's lots of things that you can do right now to be on the right side of this so as all this stuff happens which you do not have any control over then you're making money during the next 10 years as opposed to eroding whatever money you might have so let's start with the first thing so let's talk a little bit about debt so as you can see here there's the government is putting out lots of money into the economy right now in the form of debt we're going to get back to that in a little while in addition to that there's a lot of people racking up lots and lots and lots of debt and they're concerned about their incomes right now as a result of this pandemic and covet and all the things that are happening right now there's a lot of uncertainty in the market one thing is for sure but this debt is slow moving lava just like this picture says here it's definitely coming it's going to get worse we're in the middle of the pandemic there's going to be more money thrown at the economy in the form of unemployment in the form of ppp or another cares act or whatever it might be to get us out of where we are right now so let's talk about the different kinds of debt so i talked a little about the family debt and the federal reserve debt the government debt and then our own personal consumption type of debt so here's a great example of the average u.s household by debt type and you can see that most average households are in about 16 to 17 000 of credit card debt about 176 000 in mortgage debt and 28 000 in auto debt student loan debts right around 50 you get the point so everybody's racking up this kind of debt this is really important for you to understand that it's not necessarily good debt but we're going to show you in a minute how inflation is going to help erode this debt for you with you doing nothing the second piece is going to be the federal reserve or the governments and and if you guys don't already know what we are sitting in right now is in the fiscal year of 2020 the federal budget deficit was 3.1 trillion so what that means is that this is more than triple the shortfall recorded in fiscal year 2019. what this means is if you focus here the outlays are 6.6 trillion and the revenues are 3.3 trillion so imagine if that was your own personal home so so you're spending almost a hundred percent more than you're actually collecting and by the way this is all public information you guys should be able to see this this is at cbo.gov on the topics around the federal budget it's all here go check it out but the bottom line is is that we are hemorrhaging cash at the federal level and that's creating more and more and more debt as we talked about earlier so there's two things happening at the same time one the government's creating a bunch of debt and two of families are also creating lots of debt so now let's turn to the debt to gdp and if you guys don't know what gdp is it's gross domestic product so you can kind of see what's happening here this line here is the gdp okay so this is the production of the us economy as a whole this is the debt and what's happening right now is the u.s debt is surged by millions of dollars as consumption has declined and businesses have failed so this right here is the coronavirus this right here is the pandemic we're going through so what we have is we have a consumption issue and a rising debt issue so typically the gross domestic product or the gdp to debt like right here this we had the ability to pay off the debt at some point in here we passed the debt was higher than the gdp and that's when it starts to become worrisome and so you need to understand that the government now is in a position where it's going to have to spend a lot more money on the economy to try to keep businesses afloat to try to pay people's rent to try to give them income so that they can live and work and eat and all that stuff's coming and we're still in the middle of this pandemic so expect to see more and more cares act type programs into 2021 as this starts to continue to rise you're going to see more and more and more debt so the point here is is that the government is going to stack more and more and more debt up and it's also going to happen at a personal consumption level so everyone's going to get into a lot more debt in 2021 and 2022 for sure so now let's look at the next slide and that's the fed inflation target or the federal reserve or the central bank's inflation target and each country that has a central bank has an inflation target so this is just basic monetary policy and what they're trying to do is use the interest rates and the inflation rates to keep the economy stabilized that's what they do among other things so what does all this mean what it means is in august of 2020 the chairman of the federal reserve jerome powell said this it will likely aim to achieve inflation moderately above two percent for some time after periods of persistently low inflation so the federal reserve in its own admission is basically saying that now they're going to kind of raise that target where previously their target was around two this is a very very very important piece for you to understand because now the federal reserve has basically said we are going into periods of higher inflation now nobody knows if that's going to be just above two could be three could be four could be five could be six we just don't know and for those of you who might think that five or six or seven or eight or nine percent inflation is crazy just go back and look at history and you'll see the united states has had many years with those figures so now let's talk about what all this means and what i think it means in the 1980s we had a president by the name of ronald reagan and he had a really cool quote he said inflation is as violent as a mugger as frightening as an armed robber and as deadly as a hitman this is the president of the united states saying this to the people what inflation does is it steals away your savings and erodes debt which is the whole point of this video and that's what he's saying here but again it's okay as long as you see the signs you just saw that the federal reserve is going to now have just above two percent what that could mean is that these inflation numbers are going to rise over time and erode not only your debt but the public debt as well so the question is what is 2021 gonna be and beyond one of the things that you guys might be noticing already is that we're already seeing things are more expensive things like food as an example and in this particular cartoon where we're starting to see food go up local national global we're starting to see things like components electronics things that go into housing like lumber and plumbing and drywall and roofing supplies those are all starting to creep up over time and that's what we're talking about inflation the one thing that's not going to rise with inflation are wages and see this guy here in this water with the shark coming this is inflation coming after wages because generally wages are pretty fixed and inflation is going to be higher so if you're getting a one percent or a two percent raise as an example in your annual salary and inflation we already know was at two percent you're basically not making any more money the following year your paycheck might be more it might be two percent higher but you're also losing it at two percent annually as an example so these are things that you're going to need to take notice of when you're negotiating your salary if your wages are trending less than inflation as an example you're losing ground if your loan has a fixed interest you're probably gaining ground and we'll get to that in a minute if your loan has a variable interest then it's also rising with inflation and you're losing ground so there are some things that you can do personally right now to make sure that you're beating inflation as we move forward into 2021 and beyond let's talk about who the winners and the losers are going to be as inflation comes so there's lots of people that made lots of money in the 70s 80s 90s and 2000s and so the question is what moves did they make as we had high inflationary times and low inflationary times that's it they just understood where are things heading and they put themselves in a position to where they were moving with the forces and not against the forces and that's what we're trying to do for you right now one thing is for sure savers will lose so here's how it works let's say you have ten thousand dollars in the bank and inflation is now two percent we've seen that if you look some years it's been a lot more but let's say we go into three and four percent inflation basically that means if the bank's paying you one and hopefully you're getting one because i doubt you are and inflation's at three you're losing two percent a year on the purchasing power of that money you still have that ten thousand dollars in the bank inflation is eroding it remember it's the shark below the water that you need to be careful of not what you're making on your savings account so your savings account is going to show 10 000 a year plus one percent as an example you'll actually have the same amount of money but it will be buying you less so now let's talk about the next thing and that is how do we use inflation to grow our money because that's what we all want to know i can tell you that one we just talked about savings not a good thing because inflation is going to be higher than the interest you make on your money two retirees living on a fixed income again let's say somebody gets a thousand dollars a month they're gonna get a thousand dollars a month in 20 years it's going to buy them less that's what that means workers on fixed incomes same concept borrowers on variable rates those rates are going to go up with inflation the whole economy from general economic uncertainty exporters will be less competitive these are things that we'll lose during inflation right here guys i'm telling you you need to keep your eye on this stuff if you're in this category you can easily shift to this side of the category debtors unfixed repayment plans what that means is that if i get a loan let's say ten years ago at three percent and inflation's at three percent i'm basically borrowing for free that's what that means because that three percent is fixed so is the principal amount if i have a million dollar loan from 10 years ago it's still a million today so i pay it off today in cheaper dollars that's what it means the second thing governments with high public sector debt owners of land and physical assets that's what we talk about real estate will be one of the hedges that you can invest in along with debt real estate itself the components the roofs the paint the stucco the drywall the lumber the concrete all that stuff's going to be more expensive to build something later just like it was 10 years ago and firms who can cut real wages these are all the winners we're going to have as we start to see some of this higher inflation so now let's talk about how the government is going to erode their own public debt and you alongside of them are also going to erode your debt using inflation so first let's start to look at the government so first i want you to look at this chart over here which is the annual inflation by the decade so this is a great chart you can find this on the internet i went on and found this in less than five minutes so in the early 90s which none of you were around uh it was almost 10 then it was hardly anything that it was negative then it was almost 5 2 3 8 almost six three and then of course this is the period that we're in right now and this is where we're projected right now they're projecting it let's say at around 3.1 percent which i think is probably going to be fairly accurate based on everything that's going on but the point is if you don't understand this guys and you're trying to invest and you're not considering this it's a real real mistake these are real tools that you can use to make a lot of money by just understanding this so now we're going to talk about something that we're going to include for you in the show notes and a link for these people here these were these were professors joshua aizenman and nancy marion wrote a paper i love this paper it basically says as the u.s debt to gdp ratio rises toward 100 percent which we already showed you is already happening policy makers will be tempted to inflate away the debt this column examines the option and suggests it is not far-fetched the u.s inflation of six percent for four years would reduce the debt to gdp by 20 in just four years so what did these two mean by that so what i did is i started to do a little more research i started when i read their paper which will include for you you can take a look for yourself but second i went back and started to take a look at what did we really do back when we financed the war because obviously we're using government money and we we're in the form of debt and what they did here was as you can see both the federal debt and the debt held by the public went up significantly during wartime okay not a big deal but really we're not in a war right now we are seeing this big increase in our debt right now for something else obviously coven 19 in this pandemic so how did they get it back down here and what they did was they drove inflation up during those periods of time and that's what i wanted to show you here was that the debt what went up here and so did inflation during this period of time so inflation went up for that 10 year period and what it did per this paper was it lowered the government debt by almost 40 percent so right now as we know the government's spending trillions and trillions and trillions of dollars on the economy but one way that they can erode that debt is by letting inflation rise and that's why i brought up to you earlier in this video the chairman of the federal reserve is going to allow inflation to be a little bit higher than two percent and obviously in this chart even they think that it's going to be closer to three i don't know where inflation is going to be maybe it stays at two maybe it's at three maybe it's at four but either way it's going to erode that debt just like they did during this period of time when it went all the way up to almost five percent over that ten year decade now remember these are decades guys these are ten year periods so maybe it's six one year maybe it's four or one year maybe it's three next year and then maybe it's five next year maybe it's three four five six whatever it is the point is we all think that inflation is coming because the government can erode their own debt as per this article here that we're going to include for you what it also means for you personally that you should be in debt too because this is not just going to happen to government debt inflation doesn't care if you have it or the government has it it just does what it does and so if you buy a million dollars or 10 million dollars of real estate and you have seven million dollars in loans on it then your debt is also going to be paid off with cheaper dollars too so you're going to not only get the cash flow and all the benefits from borrowing fixed rate real estate so the point is not that the government's going into debt and not that the government's going to inflate the economy with all this new debt to save it that's not the point the point is if you think it's true then why don't you be on the right side of it why don't you also go get into debt why don't you buy real estate the cash flows where you get all the tax advantages borrow a fixed rate loan at three percent and then if inflation is at four you're actually beating inflation so you're using other people's money to borrow plus you're getting inflation on the real estate as a whole plus you're more likely to get inflation on the rents themselves as things become more and more expensive over time so do what the government's going to do and let them erode your debt just like they're going to erode their own public debt so there's two more things that i want to talk about before we wrap up obviously how can we profit from inflation that's where your head needs to be for 2021 whether it's your wealth advisor your financial planner your banker somebody that you're giving money with maybe your own business even your employer as you're sitting there looking at your own wages because if inflation goes to five percent and you're getting a two or three percent you're actually also falling behind from a wage standpoint so all of those things are going to be helpful for you so just watch this inflation rate and in the old way of thinking in my opinion debt will now be an asset cash will now be a liability now my parents would freak out if i told them this because in their day this was the exact opposite but things are different now this isn't the 70s and the 80s this is now the government is in serious debt and we are going to see inflation and real estate will be a hedge moving forward now one last thing that i think you guys are going to find really really interesting and that is this debt clock and so for those of you who haven't seen this debt clock i would really recommend that you take a look at this so let me show you something that maybe will blow your mind as we go on to the internet here and i type in the the us debt clock hopefully you guys can see that it is moving this is the national debt this is the tax revenue as you can see down here these are the unfunded liabilities per person at 479 thousand dollars you can go to usdclock.org one of the really cool things about this is they have what's called a debt clock time machine and you can go on this time machine and you can actually type in the year based on the current projections of course this probably does not have the new cares act that's going to be coming out which will actually make it even worse but let's just go to 2025. as you can see you know we're we're somewhere at around 50. so i would encourage you guys to take a look at this it's actually very interesting it's fun to look at it's crazy to see how fast it's moving but this alone should tell you that the government's going to be super motivated to have higher inflation because this is a national debt these are these are debts that the u.s owes so anyway have fun with this u.s debt clock you can scroll back to current year prior years new year's two three four five years out and kind of see where things are trending keep your eye on this because i think that it's really eye opening as you start to look at the government really has massive unfunded liabilities that they owe to you in the form of social security as an example in the form of medicare as an example and there's a number of other unfunded liabilities in addition to the other things that they owe and all of this to me means that they're going to want higher inflation because as they inflate then this debt that they owe is going to be paid off of course and cheaper dollars in the future so guys thanks for listening please like and subscribe share if you guys like this these videos take time to put together i enjoy doing them hopefully you'll send these on to someone else and also i love your comments keep those coming in as we try to do more and more videos for you guys based on the stuff that you want so again thanks for watching

Channel: Ken McElroy

Views: 194,428

Rating: 4.9451561 out of 5

Keywords: Rich Dad, Entrepreneurship, Investing, Personal Development, Get Wealthy, Earn Wealth, Ken McElroy, Entrepreneur, Rich Dad Advisor, Success, Business, Self-Help, Coaching, Real Estate, Real Estate Entrepreneur, Real Estate Investing, Freedom, Lifestyle Business, Hustle, inflation 2021, debt to gdp ratio, monetary policy, fed meeting, government relief, jerome powell, debt snowball, debt free, inflation indexed bonds, cash flow real estate, income property, income producing assets

Id: fLD8AscLQgY

Length: 24min 31sec (1471 seconds)

Published: Fri Jan 15 2021