Commercial Loans Blog

When Money Becomes Worthless and Commercial Loans

Posted by George Blackburne on Fri, Sep 9, 2022

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Joke Du Jour:

As a brain wave technologist, I often ask postoperative patients to smile to make sure their facial nerves are intact.  It always struck me as odd to be asking this question right after brain surgery, so a colleague suggested I ask patients to show me their teeth.  Armed with this new phrase, I said to my next patient, “Mr. Smith, show me your teeth.”  He shook his head. “The nurse has them.”

 

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Short Commercial Loan Lesson:

For the past week or so, we have been talking about the equivalent of HELOC's on commercial property.  Lines of credit, secured by commercial properties, are extremely hard to find; but apparently, according to my readers, the occasional bank will reluctantly make them... in a first mortgage position.

The problem is that almost all commercial mortgages today contain a prohibition against junior financing.  If you put a second mortgage on a commercial property, the underlying first mortgage could be called in full at any moment.  Yikes!

When Money Becomes Worthless:

Back in the early 1920's, shortly after the end of World War I, Germany was saddled, under the terms of the Armistice, with the cost of the war (reparations).  The government of Germany was forced to assume an impossible amount of debt.  Germany could never possibly repay such debt.  The very idea was absurd.

 

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To buy time, the democratic government of Germany, known as the Weimar Republic, resorted to printing paper money in enormous quantities.  They had to print paper money so fast that the German government only had time print their paper money one side of the paper.  One side.  Haha!

There is a story (true?) of a widow who withdrew all of her savings in order to buy her groceries for the week.  The amount of paper money filled a wheelbarrow.  She painfully rolled the barrow to the grocery store, where she was forced to leave the barrow and the money outside.  When she finished shopping, she went back outside to get her money to pay.  Her wheelbarrow had been stolen, but the near-worthless money had been dumped on the ground!

There are other stories of paper money being used as wallpaper.  Workers would go on strike if they were not paid daily at lunch time, so their wives could rush their wages to the grocery store before the money became even more worthless.

 

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I can now foresee the time when this happens in America.  The money will be digital, but I could see a time where it takes hundreds of thousands of dollars to fill your gas tank or to buy a few days of groceries.

"George, you're nuts - funny, but bat-snot crazy.  The dollar has never been stronger."

It's true.  The Euro has fallen to less than a dollar.  Russia has invaded Europe, and China is threatening to invade Taiwan.  The investing public worldwide is flocking to the dollar, the ultimate safe haven.

 

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But will the dollar still look like a safe haven if Chinese carrier-killer missiles destroy much of our Pacific Fleet in the opening minutes of the war?  Think about the replacement cost of this fleet.  Remember, I have predicted that the Chinese will invade Taiwan in April of 2023, when the ocean tides are next favorable for their landing craft.

But forget about this "silly" notion of invasion for the moment and think about the definition of dangerous precedent.  A dangerous precedent has been defined by the Cambridge Dictionary as an action, situation, or decision that has already happened and can be used as a reason why a similar action or decision should be performed or made again.

Need to become a popular politician?  Borrow a whole bunch of money and then give it away to your potential voters.  Trump, Biden, and Congress have all done it... and they keep doing it.  Folks, if a dog breaks into the chicken house, you have to shoot him.  I fear this pork and insane printing of money will never end.

 

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At some point, the smart money is going to say, "The U.S. now has an impossible amount of debt.  I'm outta here."

In the past, folks, I am often early in my predictions.  I started predicting a deflationary depression way back 2004 to my investors.  People thought I was nuts.  I even wrote a book, The Reverse Multiplier Effect.  It was four more years before the deflationary "Great Recession" hit.  I was early.

Maybe the Chinese won't attack until April of 2024 or April of 2025.  Maybe I am early again; but Japan is rushing to build 1,000 intermediate range missiles.  China may not be able to wait any longer.

 

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All of these missiles are conventional.  No one wants a nuclear war; but on the flip side, nuclear weapons are no longer a deterrent to invasion.  Neither side will ever use them.

If you are saying to yourself, "The Chinese will never invade because we could nuke them back to the Stone Age," then you are smoking that California oregano.  Russia invaded Europe.  No one used nukes.  No one will likely use nukes if China invades Taiwan.

Where To Invest When Money Becomes Worthless:

If the dollar could plunge to pathetic levels, and the stock market could crater as foreign investors flee our shores, where does a wise investor put his money these days?

 

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1.  I have always loved farmland.  Farmland can't be burned down in riots or blown up with missiles.  People always need food.

2.  Businesses (stocks) in companies that capture and deliver water.  I don't know of any, but if some promoter came to me with the idea of constructing water-catching basins and delivering the water by pipelines to desperate locations, I might be an easy sucker.

3.  Gold?  Naw.  The price of gold has been manipulated for fifty years.  The Federal government and the New York investment banks don't want you to know just how worthless our dollar has become.  They play games with gold futures to make the price of gold look stable.  I think there are a bazillion gold contracts for every actual ounce of gold in America.  Don't waste your time.  It's a crooked market.

 

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Did you know that a group of gold producers sued the Fed and the New York investment banks for manipulating (suppressing) the price of gold for decades?  After ten long years and millions of dollars in legal fees, the case was quietly settled, with a confidentiality clause.  The manipulation of the price of gold continues.

4.  This is going to sound very self-serving; but subprime first mortgages on small commercial properties did surprisingly decent during the S&L Crisis, the Dot-Com Meltdown, and the Great Recession.  Even though commercial real estate values fell by 45%, most of the hard money commercial first mortgages in our portfolio surprisingly kept making their payments, even though the properties were upside down.  In other words, more was owed on the property than the property was worth.  

Careful here, folks.  Past performance is no guarantee of future results.  But I have been moving my company's own profit sharing plan into commercial first trust deeds all year.  

 

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I did not start out this training article to sell our first trust deed investments.  We have three ravenous investors for every good commercial first trust deed opportunity right now.  But in an environment where the U.S. could suddenly lose its status as the world's safe haven, this is where I would personally want to be invested. 

And farmland... but I think farmland today only pays about 1% in net rents.

 

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Topics: commercial loans, Hyperinflation

Economics:  Is Weimar-Germany-Style Hyperinflation Coming?

Posted by George Blackburne IV on Fri, Sep 24, 2021

Screen Shot 2021-09-23 at 7.04.39 PMWhat technically is hyperinflation?  Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.  While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.

The woman in the picture to the right is actually using German currency to heat her home in 1923.  By the end of 1923, German printing presses were only printing currency on one side of the paper.

Every month my oldest son, George IV, writes a company Investor Letter to Blackburne & Sons' wealthy investors.  I thought you might find this month's Investor Letter particularly interesting:

September 22, 2021

INVESTOR LETTER

George Blackburne, IV

In past investor letters, I presented to you Cathie Wood’s argument that we are actually heading towards a deflationary event (she stops short of calling it a crash). You may recall that in her view, inflation will be temporary.  Once the stimulus funds run out, consumers will tighten their belt before they begrudgingly head back to work.

 

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This belt tightening, coupled with technology improvements, will create a deflationary movement.  On a related note, there was an article on Vox.com, a more left-leaning news site, that was discussing the reasons why people were not going back to work. A whopping 41% of respondents said that they were not returning to work because there was not an opening in their "preferred profession."  I suspect that once the stimulus funds run out, these workers will head back into the work force, regardless if their preferred position is available or not.

In today’s letter, I am going to present to you the view of Michael Burry.  You may recognize the name from the movie “The Big Short,” where he was played by Christian Bale.  Burry was the hedge fund manager of Scion Capital, a fund that correctly “shorted” the subprime mortgage-backed security market and the subsequent crash in 2007.

Contrary to the views of Cathie Wood, Burry is arguing that we are not just headed for an inflationary crash, but this inflationary crash will be on a scale much larger than 2007.  Burry believes that the adoption of Modern Monetary Theory (MMT) by the Fed will have disastrous consequences.  You will recall that MMT states that because our debt is denominated in dollars, the government can, and should, print money until full employment is achieved.  Unlike other theories, MMT does not require backing up this money expansion with raising taxes or cuts in spending.

 

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In some recent tweets, Burry quoted an article describing the economic situation in Weimar Germany during the 1920’s and how remarkably similar those conditions were to our current situation. “Prices in Germany were steady, and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world”.

Burry then further quotes the article, “Side by side with the wealth were the pockets of poverty.  Greater numbers of people remained on the outside of the easy money, looking in, but unable to enter.  The crime rate soared, and almost any kind of business could make money.  Business failures and bankruptcies became few."

"The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out.”  He then finishes his string of tweets with the following: “People always ask me what is going on in the markets.  It is simple.  Greatest Speculative Bubble of All Time in All Things.  By two orders of magnitude.” – Michael Burry June 15, 2021  Whoa.

 

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Burry further warns that when “dollars might as well be falling from the sky,” companies are inclined to take more risk, which leads to malinvestments (one of my father’s favorite words).  This makes me wonder about the SBA’s new very aggressive lending parameters.  For those of you not aware, the SBA is now willing to work with borrowers with credit scores as low as 620.  I wonder how many of these borrowers, propped up by PPP loans, will default when the well runs dry?

Obviously Burry has a lot of credibility given his past predictions, but are there any numbers we can look at to boost his argument?  Well, as we all know the Debt to GDP ratio is at an all time high.  In addition, M2 Money, which is a tracker for the money supply, has also reached all time highs.  What is really intriguing is the fact that the Purchasing Managers Index (PMI), an index that tracks the overall health of businesses, is higher than pre-pandemic levels.

This begs the question, why is the government printing more money?  Burry believes this is where MMT is coming in to play.  Because we have not reached our targeted unemployment level, the Fed is going to continue to print money.  This will only fuel the speculative bubble and will lead to the eventual collapse.

 

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It should be noted, however, that just this morning Jerome Powell, chairman of the Fed, announced the possibility of raising interest rates in 2022.  Whether or not this is “too little too late" remains to be seen, but it is definitely a step in the right direction.  By raising the rates, it will force companies to be more prudent with their borrowing and should cool the speculation.

Switching gears, I wanted to answer a few investor questions I had received.  Now please remember, we are not financial experts. We get our information from a K-mart magic 8-ball we found in a dumpster at the back of the building, so take our thoughts with a grain of salt.

One investor had asked, "If/when the dollar loses its reserve currency status, would the weak dollar lead to a rise in real estate prices due to foreign investment or just the opposite?"  Well, I gave the magic 8-ball a little shake, and it replied, “Reply hazy. Try again.”

 

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I think the way in which we lose our reserve status would be critical.  If there was a sudden crash, we are taking everyone else with us.  A majority of our foreign investment comes from China, who in turn makes their money from selling America goods and services.  If the American economy tanks, I think it would be unlikely that foreign investors would have enough money to significantly drive-up real estate prices here in the US.  If they did invest in American real estate, they would most likely wait for the market to bottom out before moving in.

But if we slowly lose our status to China over the next two decades or so, then yes, I could see a situation in which foreign investors increase their investments and drive-up real estate prices, especially in places like the Bay Area.

Another investor has asked what do I expect to see in the real estate market in next few years?  I will be honest; I think we are due for a big correction, if not an outright crash.

 

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Topics: Hyperinflation