“The US Economy is Collapsing Before Our Eyes” - Billionaire Sam Zell’s Economic Warning

When you think about, we added about 7 trillion to our debt in three years. Uh, this is, this is, you know, this is the Weimar Republic. And if the United States isn't careful, they're going to find themselves in the Weimar Republic. If we lose the U.S dollar as a reserve currency, we're looking at, uh, 20 to 25 percent reduction in our standard of living.

But the reality is that the Biden Administration and Powell have gotten away with not doing anything other than continuing to inflate the bubble. I think it's very, very dangerous. Sam Zell is a billionaire investor and one of the most highly respected investing minds in the world. In 1968, he started Equity Group Investments, which today invests in industries like energy, logistics, and health care.

Sam Zell is considered the forefather of modern real estate investment trusts. He currently chairs five public companies, including one of the nation's largest residential REITs. His background and spot at the top of the investing world gives him an unmatched view of the economy and markets. This is why some of his recent comments really got my attention.

So, make sure to stick around to the very end of the video to hear what he recommends you do to protect yourself from what's happening. Let's listen to what Sam Zell had to say.

Let's start with the Fed and Jay Powell. Uh, he sort of said a message: we may have to keep the rates higher longer. What did you make of that? Where is the Fed headed, do you think? Where should it be headed given what we're seeing in pleasure right now? To be honest with you, I don't know, and it's very obvious neither do they.

You know, we're in this mess because the Fed didn't do their job over the last three years. I mean, you know, when you think about, we've added what, 7 trillion to our debt in three years. Uh, this is, this is, you know, this is the Weimar Republic. And if the United States isn't careful, they're going to find themselves in the Weimar Republic.

Well, what about that point specifically? Because the Biden Administration, their budget came out, and nobody believes that budget's actually going to get implemented. But at least directionally where they think they're going, uh, they were going up to something like 110 percent of GDP in debt, higher than what we had in World War II. They're adding like 17 trillion dollars to the debt over time.

At what point does this become not a problem but a crisis for the United States? When people don't want to buy our debt, when we're faced with the prospect of losing the U.S dollar as a currency—is that, you know, an international currency? And if we lose the U.S dollar as a reserve currency, we're looking at, uh, 20 to 25 percent reduction in our standard of living.

Uh, if that was included in the definition of the U.S debt, uh, maybe you'd get some attention. But the reality is that the Biden Administration and Powell have gotten away with not doing anything other than continuing to inflate the bubble, and I think it's very, very dangerous.

Sam Zell compared what is happening now in the United States to what happened in the Weimar Republic roughly 100 years ago. A quick history for those who may not be familiar: the Weimar Republic was Germany's government from 1919 to 1933. The Weimar Republic went down in history as suffering from some of the worst inflation in the history of the world.

The economy of Germany was already suffering as a result of the fallout from the First World War. However, things got even worse in the year 1923. In early 1923, German workers embarked on a prolonged general strike as a protest against the occupation of the Ruhr by French troops. Despite its shaky economic condition, the Weimar government decided to support the strike by continuing to pay striking workers.

It did so by increasing print runs on banknotes, aka the government printed massive amounts of money. Government economists understood the dangers of flooding the economy with paper money, so the policy was intended to be temporary. But as the protests continued into the summer and autumn of 1923, no alternative way could be found to address the crisis.

Paper money was continuously being pumped into the German economy, leading to devaluation and hyperinflation. By mid-1923, the nation's central banks were using more than 30 paper factories, almost 1800 printing presses, and 133 companies to print banknotes. Ironically, the production of paper money became one of Germany's few profitable industries.

At the height of the crisis, Germany's state governments, major cities, large companies, and even some pubs were all issuing their own paper money. As more banknotes went into circulation, the buying power of each unit of currency, called the reichsmark, decreased, prompting sellers to raise prices. In 1918, a loaf of bread cost one quarter of a reichsmark. By 1922, this had increased to three reichsmarks. In 1923, the production for bread spiraled, reaching 700 reichsmarks in January, 1200 in May, 100,000 in July, 2 million in September, 670 million in October, and then 80 billion reichsmarks in November.

As I'm sure you can imagine, this out-of-control hyperinflation had devastating impacts for citizens and businesses throughout the country. Sam Zell is comparing the United States today to the Weimar Republic in 1923 because of the massive amounts of money printing. Here is a chart that helps explain what he means.

This is a chart of the amount of currency in circulation in the United States. We can see here that the amount of currency in circulation shot up dramatically in the beginning of 2020 in response to the economic situation the country was facing. In the spring of 2020, the U.S government took truly unprecedented steps to attempt to stabilize the economy, which included printing massive amounts of money.

In fact, more money was printed in the last three years than was printed for the first 230 years of the United States being a country—truly mind-boggling when put in that perspective. Sam's not the only one with the cynical view of the economy. After the recent banking collapse, even Citadel founder Ken Griffin and investing legend Ray Dalio have said they're worried about what's in store for the economy.

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But right now, you can get priority access to skip the wait by signing up using the link in my description. Now, back to the video. The dramatic steps that the U.S government and the Federal Reserve took to prevent a full economic collapse worked. However, these drastic actions and unprecedented money printing did not come without repercussions.

One of those nasty side effects was inflation. While the inflation currently impacting the U.S is a drop in the bucket compared to the Weimar Republic, it is still painful for the country. The current inflation is the highest in roughly 40 years and has been extremely painful for lower-income and middle-class Americans. To quote billionaire investor Ray Dalio, inflation occurs when there are simply too many dollars chasing too few goods, or put another way, there is a mismatch between supply and demand.

Here we have a basic supply and demand chart to demonstrate the point. This here is our supply line, showing how much of a good is available. Here we have our demand line, indicating how much demand there is for a good and how much consumers are willing, and more importantly, able to pay. The point at which these two lines cross is the price for that good.

I know I talk about the supply and demand relationship in a lot of my videos, but it is truly foundational to understanding how the economy and stock market works. Speaking of my channel, make sure to hit that subscribe button if you aren't already because it really supports the channel. I put out a new video every week that will help you stay up to date on what's happening in the economy and stock market.

So hit that subscribe button to join our community of nearly 200,000 people. When the government prints large amounts of money, it increases the dollars that are circulating through the economy, which has the effect of increasing demand for goods, and moves our demand line here out to the right. Notice now the supply and demand lines cross at a higher price point. This is a very simplistic example, but this demonstrates how money printing can lead to inflation.

A big driver of this elevated demand has been what is referred to as free money. Here is what Sam Zell had to say about it: "Whatever else you think, it looks like we're coming close to the end of free money, where we're basically pushing money into the system across the board."

"Certainly, Jay Powell is tightening the screws; you complained about free money; you thought it was a bad thing for investors—a terrible thing. If it's ending, what do you get to do? What does that allow Sam Zell to do that you couldn't do before?"

"First of all, your assumption that it's ending is a little, uh, naive. I mean, we look at it in, uh, in the real estate arena where, uh, you know municipalities are, you know, uh, deferring the ability to foreclose or get people out of a house or get people out of an apartment. Every time the strategy leads to a decision, there's a deferral, and we'll wait another three months; we'll wait another six months.

And so we're talking about ending free money, but we're not ending free money, and/or we're ending it at a much slower pace than ought to be called for. So I'm not sure that, uh, the assumption that free money is over. And I think we've got some serious problems. I mean, we've got the classic problems that we've always had, which is if you keep feeding them free money, they get used to it and then they say, 'Well, where's my free money?'

And you know, look what's happened to the housing market. You know, in a matter of what, 60 days, the monthly payment has doubled. You know, these are extraordinary times, and I'm not sure we have the leadership either in Powell or Biden to basically deal with that."

When Sam Zell was talking about free money, he isn't necessarily referring to the government just literally printing money and giving it away to citizens. Instead, the term free money has more to do with the era of zero interest rates that have become commonplace for the better part of 15 years. As we can see in this chart of the federal funds rate since 2008, interest rates have been hovering around zero percent.

This has made it incredibly cheap to borrow money—so cheap that in many respects, it was virtually free. Here's what I mean by that: in December of 2020, I purchased my first-ever home. The interest rate on my 30-year fixed-rate mortgage was just 2.5 percent. After factoring in inflation, my cost of borrowing in real terms was essentially zero percent or even negative.

The shorthand calculation to approximate the so-called real cost of borrowing, or in other terms, the cost of borrowing after factoring in inflation, is pretty straightforward. Simply take the interest rate on a loan—so in my case 2.5 percent—and subtract out the inflation rate. I'm using three percent as my best estimate of the long-term normalized inflation rate. This leaves me with a real cost of borrowing of negative 0.5 percent.

This era of free money has sent stock prices and asset values soaring to record highs. However, the era of free money seems to be coming to an end. As Zell mentioned in the clip, interest rates have risen so quickly that it's caused housing payments to nearly double in just a matter of months.

A four hundred thousand-dollar loan for a 30-year fixed-rate mortgage at a 2.5 percent interest rate results in a monthly payment of 1580. Bump that rate up to eight percent, and that monthly payment skyrockets to nearly three thousand dollars. That's almost a doubling of the monthly payment just from the higher interest rate.

Using a formula to calculate the real cost of borrowing, that eight percent interest rate and three percent normalized inflation rate results in a real cost of borrowing of five percent. While money may still be cheap relative to historical standards, it's definitely way more expensive than it was.

So, this brings us to the million—or in the case of Sam Zell—billion-dollar question I want to answer in this video: what does all of this mean for investors given where we are right now? I know you only do something like three or four deals a year, something like that, right? Yeah, depending on the year, but yeah, okay—is this year going to be different? I mean, given what you're seeing, is that creating opportunities for Equity Group Investments?

"It will eventually, not yet. The buyers and the sellers haven't agreed yet as to what the price is. The seller is still looking for the number that was on the table, you know, six months ago when interest rates were zero. Now interest rates are three to five, and he hasn't adjusted his price. The buyer, on the other hand, is looking at his cost of capital doubling, his availability of capital diminishing, and he's saying, 'Wow, under these set of circumstances, I got to get a much better deal than I previously got.'"

Sam Zell is 81 years old, meaning he has lived and invested through many cycles. Having spent many hours studying him myself, a big part of his success can be explained by the fact that he knows when to be aggressive and when to be patient. Right now, it seems like we're in a period of time where it pays to be patient and let asset prices adjust to this new world of higher interest rates.

So there you have it. Make sure to hit that follow button and subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest entrepreneurs. Talk to you again soon.