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Mike Maloney: The Rollercoaster Crash

An updated look on the coming global currency re-set
Sunday, November 22, 2015, 12:53 PM

Precious metals sank to 5-year lows during this past week. The long painful price decline that began at the end of 2011 still continues unabated. Holders of gold & silver are understandably wondering if their faith in precious metals has been misplaced.

In this week's podcast, we invite Mike Maloney back on the podcast. Mike is the owner of one of the largest bullion dealers in the US, GoldSilver.com, and one of the top minds we know of on monetary history. In this wide-ranging interview -- which announces the release of a new educational video, The Rollercoaster Crash, which kicks off Season 2 of GoldSilver's excellent video series Hidden Secrets of Money -- Mike lays out the rationale for an approaching global reset of the existing fiat currency regimes, and why asset-backed currencies are highly likely to return in our lifetime:

History shows that whenever there is a problem with the currency, whether it is big inflation, hyperinflation, or deflation, people go back to safe haven assets. And we should be going into a deflationary episode that is overreacted to that causes big inflation or hyperinflation, which causes a breakdown of the current global monetary system, the global dollar standard that is now the longest-lived of these artificial monetary systems and has developed a bunch of stress cracks and is in the process of imploding right now. There is going to be before the end of this decade, most likely, another emergency meeting of a bunch of finance ministers and economists to try and hash out another world monetary system. It is just history repeating, and it is a natural consequence of a man-made, artificial manipulation of the free market.

But if this debt-based currency system has to evolve, switchover to some sort of asset-based currency system or currency system that is a free market thing, I am fine if the free market selects Bitcoin or if it selects gold or silver again like it has for the past 2500 years -- it keeps on selecting gold and silver as the optimum money. I am fine with whatever the free market picks. And I believe it will lead to greater prosperity. But we are in for some short-term pain. The good news is that for somebody that is properly positioned, it can be the best thing that ever happened to you because of this enormous wealth transfer. If currency a fails, its price measured in gold goes to infinity.

Today, there is about $200 worth of gold, investment-grade gold, per person. And there is about $40,000 worth of other liquid financial assets that compete in storing purchasing power. And so those liquid financial assets such as cash, stocks, and bonds, the problem with them is that their purchasing power can evaporate. It is something that is just based on trust. And if just 10% of those liquid financial assets come chasing gold, gold’s purchasing power has to rise 20-fold.

Click the play button below to listen to Chris' interview with Mike Maloney (78m:22s)

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. Context is everything. Everything. So what exactly is the context of our current monetary and financial systems? Well, you have to understand money creation, human behavior, and history if you want to have any hope at all of understanding where we are today and, more so, where we are going. Now if you have not seen it, one of the very best—and I do mean very best—educational video series out there is the Hidden Secrets of Money, written, produced, and directed by Mike Maloney’s team over at GoldSilver…GoldSilver.com I should say. It is so well produced, it is in a league all its own. Here to discuss the release of the latest installment, which is episode 6, "The Rollercoaster Crash," is Mike Maloney, good friend of mine. Mike, welcome to the show.

Mike Maloney: Thanks for having me, Chris. It has been a while. How are you doing?

Chris Martenson: Well, I will be honest with you, I am a little vexed by these markets. I trust we will get to talking about those in just a minute. But where we are in this story and why these markets are so vexing and the fact that we are in the mother of all bubbles really is…I do not think it is surprising it is taking this long to play out. But you have been writing about this and talking about this for a long time.

Mike Maloney: Yeah.

Chris Martenson: And so I just am fascinated to find out what your views are on all of this. We are going to get there, but I really just want to say that every time I watch the Hidden Secrets of Money, I am just so astonished. The quality is just…it is amazing. You and your team—a heaping pile of credit for making and then sharing this video series with everyone. In this most recent one, I saw clips of you, you are in Egypt. I think I saw you on the Great Wall of China. You are in London. You are all over the world. So before we just get into that, for our listeners, I am interested, tell us about the making of the Hidden Secrets of Money.

Mike Maloney: Well, I have to give the credit to my team basically. Dan Rubock is just awesome, and then my animators, Lincoln and Aidan. Aidan put like two years of his life into episode number 4. And we have got some stuff coming up featuring some of Lincoln's work that is just amazing. So we have a full-time crew doing this, but Dan shoots it, edits it. He scores it. He is a screenwriter. He basically does everything, except the animations, and he does it so well that it is really to a level of like the History Channel or PBS or something like that. And it is shot in 18 countries. So you mix all of these nice backdrops. All I do is I stand in front of the camera and say stuff. My job is not that hard. Dan is the one that really makes the series. But there is something big coming. And back after the NASDAQ crashes when I really became interested in the global economy and what is wrong with it…before the NASDAQ crash when….

My father died back in the 80s, and he left my mother with a good inheritance and estate that should have taken care of her for the rest of her life. And in the late 90s, her broker started saying he just does not understand these markets anymore. And they were going crazy. In hindsight, we should have stuck with him, but the statement that he does not understand the markets actually scared us. And my sister and I interviewed a whole bunch of financial planners along with my mother, and we picked the one that had the most glowing recommendations and testimonials. And he proceeded to lose about 50% of the estate in just about a year and a half. Now to be fair, there was a stock market crash that went along with that. At least he did not have us in a bunch of tech stocks. He had us in lower beta stocks. But when it got down to about half, I ripped everything away from him, moved it to cash, started studying the markets myself. And I am dyslexic. It was very difficult for me to read, but about the same time as when Apple came out with text-to-speech in their operating system, so any Mac since that period has been able…you just highlight the text, press a button, and the computer speaks to you. It reads it.

And so the world of books opened up to me and websites and everything else, and I was able to…I studied, oh…at first it was just addictive. All day on weekends, like 12, 13 hours on weekends. From the moment I woke up to when I went to bed, and then every night after work for between four and six hours of just studying the global…the economy. And you cannot study the US economy in isolation, it leads to global economics. And when you get to global economics, the only people back then that were worried about trade imbalances and budget deficits was the hard assets community, the precious metals sector. And they also love monetary histories. So I studied the markets first, global economics second, and then when I discovered monetary history, I just fell in love.

I sort of started seeing what was coming back in that timeframe of 2000, 2003. By 2004, I decided that I was going to get out of my previous business—which I was producing tradeshows for high-end audio and home theater electronics—and get into the precious metals sector. And I knew that I was going to be writing something someday. Started collecting a whole bunch of information on my research. And then in 2005 incorporated GoldSilver.com.

I had precious metals investor. In October 2002, I started buying gold when it was about $315, $325. I have got a whole bunch of Gold Eagles that I bought for $325 each. And then in April 2003, I discovered that silver was way undervalued compared to gold and started buying silver. So I was an investor first, and then I became a dealer in 2005.

I started writing my book in 2005. It was finished in November 2007 with a few touchups in April of 2008. And it came out in August just before the crash, and in the book I predicted the crash. And my favorite scenario after showing what would happen in deflation, big inflation, regular inflation—like things just go along as they are—hyperinflation, and then what I call the rollercoaster crash. And I said we were on a wild rollercoaster of a ride, that we would have a big inflation and then the threat of deflation, to which Ben Bernanke would overreact and do a big helicopter drop of currency, which would cause a big inflation. So we would have regular inflation, deflation, Ben Bernanke would overreact, cause a big inflation. Now because the base money that he created is held as excess reserves by the banks, it did not cause a big inflation of retail prices as much as asset prices. Real estate and stocks are back up into a bubble, and it is because of the Federal Reserve with low interest rates and zero interest rates and creation of all this currency.

But then I said that there would come a point where there would be a real deflation after the big inflation, where the currency supply actually contracts. And this is from people getting scared and not taking out new loans, not charging up their credit cards, and not rolling over old loans—paying down debt. That causes the currency supply to collapse because our whole monetary system is debt-based. You have to go deeper in debt every year in order to keep—as a society—we all have to go deeper in debt every year to keep this phony Ponzi scheme game going.

I saw all of that and wrote my book, came out in August of 2008, and it became the best-selling book on investing in precious metals of this century. I do not know what numbers the bestsellers of the 80s were. I would imagine because publishing was so much bigger back then that those books sold a lot more. But my book is produced in 11 languages now. But the video series, Hidden Secrets of Money, is free. It is produced to a very high level. We have a mission to enlighten the world that maximum prosperity can only be achieved through individual freedom, free markets, and sound money. And that is an absolute fact.

Chris Martenson: Well, I am so glad to use the word prosperity. And I am…just a little self-plug here, we are recording this on November 17th, which happens to be the day of our most recent book launch. This is actually our launch date for Adam Taggart and I, and the book's title is Prosper. So it all comes together. That seemed like a relatively seamless plug on my part, right?

Mike Maloney: Yes.

Chris Martenson: We are very….

Mike Maloney: Congratulations on the book, too.

Chris Martenson: Thanks. The book is just a tiny amount of production effort—and, by the way, it is a huge production effort—compared to traveling to ten countries and assembling all of that footage and putting together this enormous story. And you are releasing it in a in a serial format. This is, I believe, chapter 6, right? Episode 6 that has just come out.

Mike Maloney: This is episode 6. There have been five episodes per season. Season 1 was all aired in 2013, so this is really the 2016 season that we are starting here. So November of 2013 was the last episode of the Hidden Secrets of Money. So there has been some downtime here. It is not a huge crew, with three people working on this, but doing a production level that you would expect of 50. It does take a little bit longer.

The reaction that we get from people is that they just love complex subjects to be explained very, very simply so that they can understand it. And then when we visit all these different countries and trace the history of money—but we do not just…there have been other documentaries on the history of money, but it is just the history of money, not how each instance back in history reflects on what is happening today. And that is the big difference is we show you like the deficit spending that they did in Athens to fund war—the Peloponnesian wars that ended in 407 B.C. with Athens being defeated and the end of the classical period of Athens when all those great structures were built. Athens basically going from the world leader to fading into history and becoming eventually just a satellite of Rome. That deficit spending, it is the first incident where they debased the currency supply to fund war and great public works. It caused the end of their small Empire, and it is causing the end of the American Empire today.

Chris Martenson: Well, now let us talk about this. The subtitle to episode 6, which is "The Rollercoaster Crash," the subtitle is: "Top 4 Reasons for Deflation Before Inflation." You have gotten to a little of that. A very timely subtitle, I suggest here, because, look, there are signs of deflation all around. Whether we are looking at the Baltic Dry Index or the price of oil or global trade at this point in time or…

Mike Maloney: Copper, yeah.

Chris Martenson: Copper, wages, you name it. Everything except financial assets and the so-called incomes of the very top 1% or even fraction of 1%—those are saying inflation. But deflation everywhere else. Are things more or less…

Mike Maloney: There will be deflation that happens in all of those financial assets and for the top 1% or 1/10 of 1% also.

Chris Martenson: Now why is that—

Mike Maloney: But go on with the question.

Chris Martenson: The question is: Are things unfolding more or less as you expected? Is taking longer? Any surprises here or is this pretty much what you would expect in a time of history like this?

Mike Maloney: I have been saying that there will be a currency crisis before the end of this decade, so we have got until the year 2020. And for some reason, 2018 feels right. I have no specific…it is not…that is a guess. It is not something that I am coming to a conclusion on by studying data. But in looking at all of the data, it is suggesting that…and it has been for years. It has been suggesting deflation. And the thing is, we live in a world of Keynesian economists running things. The central banks are all run by Keynesians who believe that you can create prosperity by expanding the currency supply, and it is not possible. But they think that you can…they do not realize that when they expand the currency supply, they are robbing from one sector or from one point in time to give to another sector or another point in time. And so all it does is transfer purchasing power and economic energy. It does not create new economic energy or purchasing power. It is theft. It is fraud. But being that the world is run by Keynesian economists at the central banks, the next time that there is a big threat—the next big global recession. Now, we have a recession every two to nine years. There is a recession without fail.

There has never been an expansion period longer than nine years, and there has only been a couple of those. The average is like four and half of five years. There is a recession that is due. And we are seven years into this expansion, and so there should be a recession right around the corner, 2016, 2017. The Federal Reserve and most of the world's central banks are out of bullets. With zero interest rates, they really cannot take interest rates much lower. They have tried negative interest rates; they have proven that that does not work.

In the United States, we went from $0.8 trillion worth of base currency up to about $4.2 trillion, $4.3 trillion worth of base currency. And so we have expanded the number of…base currency, just for the listeners, is paper dollars and dollars that the banks have on deposit at the Federal Reserve in their reserves, all of which are redeemable in paper dollars. So it is really a measurement of the amount of paper dollars that exist, which used to be a tiny fraction of the currency supply. It was 0.8 trillion out about a $16 trillion currency supply. Today, we have got an $18 trillion currency supply but over $4 trillion of it is now base currency. So it is a much, much larger portion of the currency supply. But actually, I just forgot where I was going [laughter]. So go ahead.

Chris Martenson: Well, so we have all this money floating around it, and you were talking about how you are convinced that there is going to be deflation across everything, including for the top 0.1% and their beloved financial assets.

Mike Maloney: The next deflation, people do not understand that because we have got a debt-based currency supply and all currency that exists on the planet today is borrowed into existence, and when we borrow it, we promise to pay it back plus interest. The currency to pay the interest does not exist yet. Anybody that wants to fully understand that should watch episode 4 of Hidden Secrets of Money that really dissects and explains in very simple language how the monetary system works. But if people stop borrowing and start paying down debt, the currency supply starts to eat itself. It starts to collapse because the units of currency to pay that interest that is due are not being borrowed into existence, but we still have to make the payments. So the currency supply goes into deflation. The world’s central bankers are all Keynesians, and they have already proven that their only answer is to print. And they will print and print and print until deflation gives way. And at that point…some of your listeners are very advanced. Some are not. So for the ones that do not know velocity of money, velocity sort of determines inflation or deflation of prices in the short-term. Velocity is basically the number of times a unit of currency is involved in transactions over a year.

When velocity slows down—when business—if people get scared…Right now we have had the incidents in France. When war breaks out, velocity tends to slow. That is a very deflationary thing when velocity slows. If the economy gets bad and baby boomers—who all need to retire in just a few years—get scared and start saving and paying down debt instead of spending and getting themselves deeper into debt, then the currency supply starts to collapse. The Federal Reserve will fight that.

One of the things I have found is base currency used to be part of the people's money. And M2, which is the one of the other measures of the currency supply, is the credit-based portion of the people's money, the average person. It is measuring bank accounts that are under $100,000 and such. That is like Main Street’s money. Excess reserves and M3 is Wall Street and Donald Trump and the bank accounts larger than $100,000 and excess reserves held by the banks that they are not using to lend against. With fractional-reserve lending, they have to have a certain amount of base currency to be able to lend against, and then they just create credit dollars. They come out of nowhere as a ratio of how much base currency they have got on deposit with the Fed or as vault cash. And they have not really been lending. It is all sitting on the bank’s balance sheets.

All of the currency that Ben Bernanke and Janet Yellen have created is being held, most of it…some of its leaking out but most of it is held as excess reserves. And what that does is it enriches the banks, which pumps the stock market. You can chart an overlay of the Wilshire 5000 total market cap index, which is the value of the stock market over base money, and the correlation is astounding. I mean, it is just scary how these two charts almost match. They are almost identical. And so since 2009, the stock market rising has been an entirely artificial, engineered, manipulated pumping of the economy. Meanwhile, low interest rates have caused real estate to go back into a bubble. So we have got these government or Federal Reserve mandated or forced bubbles. And when these pop, it is going to be horrific.

I think we are going into something I call the Bernanke Bust. The crisis of 2008 was not Bernanke’s doing. That was Alan Greenspan's doing. He lowered interest rates too low, held them there too long, to try and get the stock market reflated after the NASDAQ crash, which was another bubble that he actually created. When it popped though, getting the stock market levitated again and the economy going, he accidentally created a real estate bubble, completely unintended.

There are always consequences—something that comes squirting out at 90 degrees from your intended goal—when you mess with what Harry Dent in the bonus feature calls Mother Nature. The free market is a natural thing. You put two people together on a planet that produce and they are going to trade among one another. It is something that just occurs naturally. And when government or an entity like the Federal Reserve meddles with it, there is always stored up energy and unintended consequences that happen. And my fear is that we went through the first half of the hurricane, 2007 through ’09 and ’10. And we have been in this eye of the hurricane were things been fairly calm since, but the second half of this hurricane is going to be horrendous.

We had a stock market bubble pop in 2000. In 2007 and ’08, it was stocks and real estate. This one is going to be stocks, real estate, and bonds. And it is Ben Bernanke creation from taking interest rates down to zero and quadrupling base money. We took two hundred years to make the amount of base money that we had. He created 800 years’ worth of currency in just six.

Chris Martenson: Well, this is something that I think really—it is hard to over belabor this, and it is hardly even belabored it all—is this idea of, you know what, this time is different. I hate those words usually, but it really is like to understand historically…and this is where I think your series comes in just beautifully. You have to go back and understand money through history. Start with Athens, right? And as you come through, you find out that the kinds of mistakes we are making today have been made many, many times before. And so I have to hold these two competing thoughts. On the firsthand, this time is different because we have never had a global money printing-fest like this. There is nowhere to go.

If I am working with somebody and somebody says, "well, where would I go when I hide out?" Very non-facetiously, I will say Estonia. They have the lowest government debt and they really have…if you are going to go to a place, find a place that is not like…has not bought hook line and sinker into the whole Greenspan/Bernanke magic voodoo style of things, which is that we can print our way to prosperity, deficits do not matter, as long as we can compound our debts exponentially, all will be well in the world. That is a magical line of thinking, right?

At the same time, I also want people to be aware that it is not different, at the same time this is different. Look how big this is. Look how giant this bubble is. The charts that you have to show now to show what you talked about—base money or credit—they are parabolic charts. In some cases, parabolic does not even do them justice, right? They are actually vertical charts. And we are all supposed to believe, well, they have it under control. The Federal Reserve and the central planners, maybe they got it right this time.

Mike Maloney: [Laughter] Maybe. Right. I am just amazed that they do not look around and say, well, applying Keynesian economics to Japan and their bubble popped in ’89, ’90, and they have been trying to print their way to prosperity since then. And it has not worked. They are stuck in this grinding deflation, and their economy is like Harry Dent says in this episode, it is a coma economy. They never let the free market work and complete the deflation and clearing of debt so that a brand-new economic spring can happen where you start with a solid foundation and you building again. So one of the things…the first episode of Hidden Secrets of Money is about…and I do not know, did I talk about the mission of Hidden Secrets of Money?

Chris Martenson: Not fully.

Mike Maloney: It is to enlighten the world that maximum prosperity can only be achieved through individual freedom, free markets, and sound money. That is a mix that creates prosperity wherever you look around the globe. It is absolutely true. So that is what we are trying to do.

In my book and in the first episode of Hidden Secrets of Money, I talk about the difference between currency and money. I want to appeal to you and everybody that is in our community, everybody that teaches and that advocates hard money or free markets, to start differentiating between currency and money. We do not use…there is no country on the planet today that uses money. They use fiat national currencies. That is why it is called "currency wars." That is why they are called "national currencies."

Money has to be a store of value. The properties of currency are that it is a medium of exchange, a unit of account. It is portable. It is durable. It is divisible—you can make change. Something called fungible, for your listeners, that is an interchangeability of all the units. In other words, if I loan you a $20 bill, you can pay me back in five ones, a five, and a ten, and I do not care. The value is the same as the 20. Money has to have all of those attributes plus be a store of value. The dollar has dropped 96% since the inception of the Federal Reserve and, therefore, does not qualify. It is not money. If it was money, prices would not rise. A single-family median-priced home would still be $3,000. It is not.

Chris Martenson: Three thousand.

Mike Maloney: Yeah.

Chris Martenson: You can rent a one bedroom in Berkeley for a month for 3,000. I know that.

Mike Maloney: Right, right.

Chris Martenson: [Laughter] Astonishing.

Mike Maloney: If we can all start differentiating and stop calling currency money, eventually people will get this, that there is a difference and that is the fact that we use these debt-based currencies and this Ponzi scheme type of monetary system that is responsible for all these giant booms and busts that cause these bubbles which are fueled by credit and manipulated. I mean, one person was essentially responsible for the global economic crisis of 2008, Alan Greenspan. I mean, he had help. Companies created things like mortgage-backed securities, these derivatives that helped fuel that bubble. But basically, if Alan Greenspan had not done what he did as a response to the NASDAQ crash, we would not have had a real estate bubble in 2007. And it would not have popped causing this global economic damage.

Chris Martenson: Indeed. So let us talk about that. So what you are really getting to is this idea that our monetary system has been used, misused, abused, maybe by people who understood Taylor rules and Q factors but did not really understand really the role of money. I mean, money is, come on, it is a medium of exchange. It should be a commodity. It is not a fancy thing. Why you should borrow it all into existence is a crazy idea that people are increasingly understanding is not a good idea. Let me sharpen that up, currency gets borrowed into existence.

Mike Maloney: Well, it allows few people to game the system and basically ride for free. If you are a bank, currency creation from a debt-based currency is a good thing if you are a bank. But I do believe that if we had had some sort of free market…I do not promote gold or silver. I believe in the free market, and the free market should be selecting what money is and what the cost of money is. But we use currency, which can be manipulated by a single person, like Alan Greenspan can manipulate the currency supply. That means we do not have a free market because the currency is 50% of every transaction. So that means that every transaction gets manipulated by one guy who has the arrogance and audacity to think he has enough information to make these decisions, more information than the free market. The free market has the information of every transaction going on in that society.

Chris Martenson: Yeah. So let us talk about what happens then. So Mike, I really credit you with bringing to my awareness and helping me more deeply understand the idea of a wealth transfer instead of a wealth destruction. So you are telling about how your mother's portfolio and estate was shredded, right? The way you would read about that in the Wall Street Journal and New York Times, they would say, "oh, my gosh, there was this great wealth destruction."

Mike Maloney: Yeah, that $4 trillion was lost in the stock market in this crash.

Chris Martenson: Whoops. Yeah, just went away.

Mike Maloney: There was somebody that had those stocks at the top and sold, and somebody that has it that is still holding those same stocks—the same percentage ownership in a company—at the bottom. The perceived dollar value has fluctuated, but has that company really changed? No. The true wealth is…people do not realize that the currency is just a medium exchange and it stores—temporarily stores—purchasing power for us. The value is all the stuff in society that we produce. So all of the goods and services that man creates is the value—the purchasing power—that is temporarily stored in an agreed medium of exchange. When you have an agreed medium exchange that a few people stop agreeing on and it starts to fall apart, when it is numbers that are just printed on a piece of paper, what gives a $10 bill or $100 bill any difference in purchasing power versus a Post-it that I write "100" on and hand to you? It is just numbers on paper.

Gold had a certain amount of value stored in it from the…it has to be dug out of the ground. Somebody has to be incentivized to spend part of their life digging that up, refining it, minting it into a coin before it is this agreed-upon money. But it is that energy that went into it that gives it value. And if people do not value it is much, then not as much comes to market because people are not willing to spend that effort to get it. If they are valuing it too high, more comes to market. It is has been selected by the free market over and over and over again as money for the past 2500 years. The free market selects gold and silver as money over and over again. Everything else is just currency.

Chris Martenson: Everything else is just currency. So let us talk about this wealth destruction. In your series you said that we are going to see that this decade is going to see the greatest wealth transfer in history. So again, just for the benefit of my listeners, this wealth transfer, it is a tricky idea, I guess, at heart because we have been sold on the other side of it. The wealth is really being transferred from whom to whom, and just what is that process? And second, any chance you are engaging in a bit of hyperbole when you say "the greatest ever"?

Mike Maloney: No. I do not believe there is any chance of when I say "the greatest ever" of that being hyperbole. This is the first time that it is absolutely global where we are going into a currency crisis. It is going to be a global event, this deflation. The Great Depression was almost global, not quite. The countries that were not on the gold standard, China and India, were sort of exempt from the deflation. And much of the world was living in poverty and deflation really did not hit those. It hit more of the advanced economies. This time, it is going to be a global event. And then when you take a look at some of the other factors like, for instance, you asked about the wealth transfer. If I you were in will real estate during…if you had ridden the NASDAQ bubble up and sold for real estate in 1999 before the crash and watched that crash play out in 2000 and then bought back in after the NASDAQ had crashed 70% of whatever it crashed…sold real estate and bought the shares in the NASDAQ, you would have increased your position tremendously and wealth would have been transferred from—at first from the holders of real estate to the holder of the stocks who was invested in the NASDAQ as it went up, but then he bought real estate cheaply compared to the NASDAQ. Then the stocks went down and real estate did not crash. So if he sold the real estate and traded it for stocks, he made tremendous gains. Meanwhile, he may have had cash flow from that real estate.

The same thing happens like…I have been buying gold since 2000…October 2002. I have got a bunch of Gold Eagles that I bought for $325 each. So gold spot was probably about $315. I discovered silver in March of 2003 or April of 2003 and discovered that it was tremendously undervalued against gold and started buying that at about $4.30 or so. And so if you look…if you do a chart of…in fact, I will send you a chart, maybe you can post it. But if you do a chart of gold versus the S&P, the Dow Jones Industrial Average, or the NASDAQ, you will discover that over the past decade gold is way, way up.

And even though it has dropped over the past four and a half years, it has still way outperformed the markets from the year 2000. And I mean it is by many multiples. The markets are barely—as far as a percentage basis compared to gold—they are barely up. In fact, the NASDAQ is actually flat. It has gotten back to where it was, but there has been inflation in the meantime.

So that was a wealth transfer. We got out of stocks and into gold. Gold did better than stocks. We can now buy many, many times more stocks. But this wealth transfer is not over with. If you are holding gold and gold goes to $10,000 an ounce and…you follow the Dow/Gold ratio, right?

Chris Martenson: Of course.

Mike Maloney: Or the S&P/Gold ratio. So it is the stock market divided by the price of gold. And what you see is that in 1903, the Dow Jones Industrial Average was worth 1-1/2 ounces of gold. By 1929, the stock market had risen to where it was worth 18 ounces of gold, so a whole lot more. But then the stock market crashed, gold’s price was fixed. It fell all the way down to just 2 ounces of gold. There was a day in 1932 where the Dow Jones Industrial Average was at 40.22 points and gold was $20.67 an ounce. And then the stock market rose, gold was still fixed. It went to $35 an ounce in 1934. But in 1966, the Dow Jones Industrial Average—if you divide the points by gold, it was worth 28 ounces of gold.

And the Dow bumped its head on 1000 points and could not break through it from ’66 to ’82. So now it is the Dow that is fixed, but in ’71 Nixon took us off the gold standard and gold became a freely traded commodity/money. And it was bid up in price from $35 to $850. Well, there was a day in 1980 where the points on the Dow and the price of gold were the same. So the Dow is now only worth 1 ounce of gold. The Dow had gone from 400 points in 1929 where it was worth 18 ounces of gold, the Dow had risen in points to 1000 but had dropped in value to 1/18 of its 1929 price. It was now 1 ounce of gold with the value of it. These are wealth transfers, being on the right side of the asset class trends at the right time. Then the stock market from 1982 took off, it broke through 1000 points and went to, I believe, it was 14,000 in the year 2000; 14,700 I think…or no, 11,700.

Chris Martenson: Eleven seven, yep.

Mike Maloney: Yeah, 11,700. And it was…the price of gold had dropped down near 250, so was worth 45 ounces of gold. There is no time in human history where paper assets were more overvalued and gold was more undervalued. In 1980, gold went into a small bubble at $850 and then went into a grinding bear market from $850 down to $250 in the year 2000, 2001. And there is no time in all of human history that gold was as undervalued because all investors had given up on by the year 2000. And at the same time in 1971, all countries stopped using gold as money. It was not backing the currency anymore. So no country wanted it and no investor wanted it. Before, it used to be our money. Everybody wanted it. So that was the most undervalued in all of human history, and it was the biggest bubble in stocks. And since then, we had a Dow/Gold ratio of about 16 now. So this tells you something. Where is the Dow, at about 1700 points now or something?

Chris Martenson: Seventeen six or five or eight, something like that.

Mike Maloney: So 1700. That sounds more like more than 398 doesn’t it?

Chris Martenson: Little bit.

Mike Maloney: Okay, in 1929, the Dow hit 398 points. It was worth 18 ounces of gold then. It is now worth 16. So the wealth transfer occurs without anybody having to trade things. It is this stealth background thing that is happening where you are in the proper asset that is rising against other assets. And the problem is you cannot see these things when you are measuring it in dollars. You have to start dividing assets into other assets like the Dow/Gold ratio. How much is your house worth measured in barrels of oil? How much is your house worth measured in bushels of wheat, tons of iron, pounds of copper, ounces of gold, shares of the Dow, or ten-year treasury notes?

Chris Martenson: Trying to measure the value of things using currency is like you bought a ruler from the Heisenberg Ruler Company. It is just absolutely uncertain at all points in time. It is shifting in value at all points in time. We can never really know the value of our currency any point in time, and so really you are describing…in the long sweep of history, we have seen aggressive periods of people falling in and out of favor with various assets.

Let me return to this idea of this being a slightly different time. Now, Mike, when I talk with people who are running big hedge funds or manage a lot of money, they are as confused as anybody right now because this is a period of time where…let me tell you something that is different. I am sure you know this. Central banks have never been more interventionist, more aggressive. They have a central bank preferred incentive buying program at the Chicago Mercantile Exchange, which only deals in highly-leveraged futures products for commodities and stocks. That is it. They do not sell you anything else, right? What are banks doing monkeying around with those things?

We know that central banks are buying stocks. We know that Japan’s central bank owns about half of their ETFs at this point in time. We do not know what they are not telling us about, but we can all guess, watching the hijinks that go on in markets here and there. Tell me, how do we begin to use history to make sense of a time like this where I am increasingly convinced that the majority of the trend in the moves we have been seeing in the markets have been set by a little committee of people, relatively small committee in various countries, called "central bankers," who have taken upon themselves the duty, the right, the obligation to manufacture appropriate prices to convey the right signal so they can get preferred outcomes of, I guess, I do not know what, consumer and political behavior. It seems fairly all-encompassing at this point, doesn’t it?

Mike Maloney: It is and it is just an incredible level of arrogance that it takes for somebody to actually think that they can manipulate the economy. Whenever we do something large in nature, there are always…you build a dam and there are other unintended consequences. Anytime we change nature, we find there is something that happens that we were not considering. The Monarch butterfly—we incentivize the corn industry, and we plow all of these fields and plant them with corn and spray these herbicides like Roundup, which kills the milkweed that the Monarch butterfly needs to eat and reproduce. And so we are seeing that population just collapse right now. We may be witnessing another extinction. And it is an unintended consequence of man meddling with Mother Nature. And Harry Dent called the free-market Mother Nature. It is true. You put…I think I already said this but you put two people on a planet together, and if they produce anything, they will start trading. It is just an automatic thing that happens.

The audacity of these central bankers to think that they have enough knowledge to be able to control the economy. What the free market does is—there is something called the "price discovery mechanism" where price is used to set supply and demand in equilibrium at all times. And what they are trying to do is upset that supply-demand equilibrium to achieve a boom or stimulate the economy over here or slow it down over there, thinking that they have got their hands on the levers and complete control. What they do not realize is that every time they interrupt the price discovery mechanism from setting things in equilibrium, it stores energy as they go out of equilibrium. And the free market, Mother Nature, will overwhelm their manipulations. And the more they manipulate, the greater the crisis is going to be.

There would not have been a NASDAQ crash had it not been for the policies of Alan Greenspan. There would not have been…or there might have been a very small one, a pullback. There would not have been a global financial crisis in 2008 had it not been for the policies of Alan Greenspan. We are now headed for the Bernanke Bust, and this time it is going to be stocks and…that was 2000 with stocks, 2007 and ’08. It was stocks and real estate. This time it is going to be stocks, real estate, and bonds. And it is Bernanke’s fault. Janet Yellen will just be dealing with the consequences. But the way that she deals with them and the way the rest of the world’s central bankers deal with them will determine the outcome. And being that they are all Keynesians, they only have one answer: Print.

Chris Martenson: Print, of course. The more educated I become about all this, the more cynical I become... I would love to be a happy, carefree guy. But the more I look at these various systems, be they education, prisons, politics, military-industrial complex, even healthcare, which really should be called "sick care" in this country, the more disillusioned I become. So maybe it is…is it only fitting that our monetary system is itself just another fraud? Because it is really a supporting mechanism for a wide variety of frauds and deceits. I mean, to paraphrase: Do we not have the monetary system we deserve?

Mike Maloney: No, we do not. Starting back with the Rothschild’s, a lot of conspiracy theorist still think that they control the world or whatever. But they were the ones that really refined fractional-reserve lending and central banking. We adopted it from—oh, I forgot his name. Paul Warburg was the architect of the Federal Reserve, and Senator Aldrich, who was at the head of the monetary commission back then, could not even understand what Paul Warburg…I mean, it took weeks for him to get a clue of the way currency would be created once they started the Federal Reserve and where the economy will be controlled. It is a Ponzi scheme that is extremely complex and hard to figure out. In episode 4 of Hidden Secrets of Money, we have created an animation that helps people understand how this Ponzi scheme works, but it benefits the few at the expense of the many. And, yes, we deserve a far better monetary system. What we deserve is the free market.

It provides the maximum amount of prosperity that can be attained, but we always hamper the free market. And so we should be…we really should be living 200 years right now, and if you wished, being able to vacation on the moon [laughter]. I know it sounds a little crazy, but we should reached this level of prosperity 500 or 1,000 years ago had it not been for all of these stupid roads that we ventured down into socialism. And we are swinging back toward socialism right now and allowing government and people to meddle with the free market. And then when the consequences of their meddling come back at them, when there is this blowback of a bubble popping, they scream, "oh, the free market is not working. We have got to do something about it." And it is their fault. It is because they did something about it in the first place. If they leave it alone, we will not have all these problems. If they just let people deal with one another.

Chris Martenson: So aside from the monetary system shortfalls, which I totally agree with…and I would love to actually see myself and others have the opportunity to select among monetary systems freely and let the market decide which is a better-managed currency. Because I tell you what, if I could run screaming away from the central fiat currencies, I would— and I guess I have, in my own ways, with hard assets.

But aside from the monetary system shortfalls, let us even pretend we are running it well. Isn’t it also true that there is just a math problem built right into the system of savings and retirement due to demographics, right? So maybe it never really made sense for people to expect a comfortable retirement unless they were in an expanding population shaped like an age pyramid with a relatively few at the top and also provided the economy was constantly expanding. I mean, that is really what retirement was predicated on. None of that seems to be true. I know you talked about this in your most recent episode. It is a really important point.

Mike Maloney: Yes, the population demographic really drives everything, and that is where Harry Dent comes. Harry Dent is one of the foremost demographics experts in the world. When you study populations, you discover that different age groups do different things to the economy. Children do not produce anything, and so they do not pay any taxes. And they do not buy anything unless it is with their parent’s money. When you get into the age when you are from a high school dropout to somebody that spends many years in college, when you eventually become working age, you start out at a lower salary. On the average, it is not quite a breakeven for society when people are 18 to 24 and they first go to work. They are not paying into the system as much as they are pulling out of the system by just existing. People do not realize that right now government spends…between federal, state, and local government, your cost of entry into society is about $18,500 per person. So that is a lot for a family four. And if you are not paying that amount of tax, you are actually a net loss to society. $18,500 per person. That means that somebody else is helping pay for your existence. You not paying for yourself.

As you get into your late 20s early 30s, you have learned enough, you become more valuable to your employer, and you start making enough to become a breakeven for society.

As you get into the demographic of 45 to 55, that is called the maximum spending demographic, and that is where people are making the most. They are spending the most of their lifetime. They have got kids that they are going to be sending to college and they are buying them cars. They are living in the big four bedroom, three bath house and they are driving the biggest, most expensive cars of their lifetime. That age group drives the retail economy.

Then they go into the maximum savings demographic. They are still making a lot, but now they are empty-nesters. They are going to sell their four-bedroom house and move into a one-bedroom or two-bedroom condo on the golf course. They basically say, "oh, man, we spent everything on the kids. We have not save anything for retirement, and we want to retire in five to ten years." So it does help drive the stock market because they are investing, but it does not drive the retail economy.

When they retire, they move into the maximum social burden demographic where they become a drag on the economy simply because they are no longer working, they are surviving by liquidating assets. It is a very deflationary pressure on the economy. They are liquidating stocks and bonds and their real estate. Something I had never thought of that Harry Dent pointed out is you have to subtract from the buyers. You have to subtract the dyers. Dyers are sellers of real estate, and so there comes a point when all of these homes that have three, four, five bedrooms, the big McMansions that were built during the last real estate boom, those have to hit the market. And there are fewer buyers than there are sellers, so that is a big deflationary pressure on real estate. We are in for a demographic catastrophe, and it is coming. And this happens on a backdrop of there is a recession due.

When I was writing my book, I discovered you could not read about the change in world monetary systems. You could read about the classical gold standard or the interwar gold standard, the gold exchange standard, or you could read about the Bretton Woods system. Or the global dollar standard. But when I looked at all this, I was looking for cycles. I put every economic event that I could in a spreadsheet and was looking for a regularity to their occurrence. What leapt out at me is that every 30 to 40 years, the world has a new monetary system, and they are entirely different from one another. I mean, full gold backing with the Bank of England being the clearinghouse of the classical gold standard before World War I. Partial gold backing plus British consoles or US bonds or British pounds or US dollars as your base currency backing the world’s currencies and the clearinghouse being both England and the USA. And then the Bretton Woods system where every country was backing their currency with US dollars and the US dollar was backed by gold at $35 an ounce. So all currencies were pegged to gold through the US dollar.

And then the global dollar standard was like this default when the Bretton Woods system fell apart, the world had been flooded with dollars because of all the loans during both wars and because under the Bretton Woods system, every country had to hold dollars in reserve. And so this monetary system we are on now is the most poorly designed, and it is an accident. It is just the default that was there when we went on to floating exchange rates and severed the connection with gold.

What happens with each of these monetary systems—a man-made system cannot account for all the forces in the free market. It builds up pressures, disequilibria, starts to develop stress cracks, and eventually starts to implode. And then you have an emergency meeting like the General Conference of 1922, Bretton Woods Conference of 1944, and I cannot remember whether it was the Smithsonian Agreement or the Washington Accord in 1971—but one of those. But they always have this emergency meeting of a bunch of economists and finance ministers to try and hash out a new world monetary system. Well, it turned out that the one in 1971—nothing came of it because we just went on this floating exchange rate system with the dollar as the world's reserve currency. That is falling apart right now at an amazing rate.

There were no nails in the dollar standard's coffin from ’71 until Saddam Hussein tried to sell oil for euros and skip the US dollar. He was destroying the petrodollar, which is another thing that keeps the US dollar in place as the world's reserve currency. But then there is one a country after another today abandoning the global dollar standard. China and Russia doing direct trade. There is an exchange in Russia now for Chinese yuan futures, so they can stabilize prices in time when they're doing trade between the countries and have predictable outcomes. It is just one thing after another. And just like a couple of days ago, the IMF announcing that they are considering the…on November 30, they are going to be voting whether or not to include the Chinese yuan as a backing for the SDR, the IMF’s fiat currency that they use for central banks. That makes it a world reserve currency. So the days of the global dollar standard are numbered.

When it starts to implode, this is going to be total chaos. They're going to try and keep the fiat currency game going. I do not think they are going to be able to. I think that what will end up happening—they will try SDRs or this thing or that thing. They will try and patch up a monetary system. But I think it is going to be chaos and that they will eventually look around and say, "what worked before?" And they will say, "gold."

The classical gold standard had full gold backing. The interwar gold standard had 40% reserve ratio. Bretton Woods did not have a specified reserve ratio, and it fell to where I believe it was like 8% gold backed against the number of paper dollars that we had created that were claim checks on gold. And then the dollar standard has no gold backing. So to go from nothing but a debt-based currency where every dollar created is a promise to tax you in the future…I mean, we just finished paying off the prosperity we enjoyed under Ronald Reagan. When we retire 30-year treasury bills, that is when you finish paying off the prosperity that we enjoyed 30 years ago.

But if this debt-based currency system has to evolve, switchover to some sort of asset-based currency system or a currency system that is a free market thing...I am fine if the free market selects Bitcoin or if it selected gold or silver again like it has for the past 2500 years, it keeps on selecting gold and silver as the optimum money. I am fine with whatever the free market picks. And I believe it will lead to greater prosperity. But we are in for some short-term pain.

The good news is that for somebody that is properly positioned, it can be the best thing that ever happened to you because of this enormous wealth transfer. If a currency fails, its price measured in gold goes to infinity, and the purchasing power, though, of gold and silver…right now the purchasing power of gold and silver back in like ancient times, that was our money. That was what was being traded, and it did not have any competition that diluted its purchasing power.

Today, there is about $200 worth of investment-grade gold per person. And there is about $40,000 worth of other liquid financial assets that compete in storing purchasing power. And so those liquid financial assets such as cash, stocks, and bonds—the problem with them is that their purchasing power can evaporate. It is something that is just based on trust. And if just 10% of those liquid financial assets come chasing gold, gold’s purchasing power has to rise twentyfold.

Chris Martenson: Well, I think first we would need free markets. And so here we are recording this on the 17th. It was on the 13th that France experienced pretty horrific terrorism acts and the response of France was to really tighten down and then sort of declare war on an entire religion as much is anything. And since that time, we have seen the S&P shoot up about 60 points and we have seen gold lose about 20 bucks. That would not have happened 10 years ago or 15 years ago, that specific pair of events.

Mike Maloney: This is the type of thing that makes you suspect manipulation because if you look at the number of ounces of paper gold sold on the commodities exchange compared to the number of ounces of real gold that is available for delivery, we are experiencing some extraordinary times, unprecedented things. The commodities exchange has always been sort of a fractional-reserve lending scheme where there is usually about 20 times more ounces sold in futures contracts that exist than actual gold to deliver into those futures contracts if somebody wants to take delivery of their gold. It exploded last week…I do not know what it is this week, but last week it was up at 293, I believe, ounces of paper gold that promise delivery of real gold. And so there are almost 300 people that think that they can lay claim to the same ounce of gold. It is a disaster waiting to happen, but when paper gold gets sold into the market, it suppresses the spot price.

Chris Martenson: Which leads to lower prices which, by the way, makes China go crazy. 2015 was the largest ever year of purchase of gold by China, well over 2000 tons. Throw another 1000 for India, just hemorrhaging from west to east. I could not believe, Mike, if you had said six years ago we would be in this situation and gold would just be weak every moment it could possibly be weak, especially in the paper market and thin overnight electronic markets in the United States and elsewhere. I look at all of that and I say, look, I do not gnash my teeth much about the manipulation anymore, I notice it. And I understand why there doing it. I mean, if I just did red team, blue team, I put myself on their team, and I say I am in the Federal Reserve. I have painted myself in this particular corner. What do I do? I have to try and control everything I can because this is a Franken market. The bubble is so big, perception is reality, they have to control perception at all points. I get why they are doing it.

What I do not get, and the thing that confuses everybody I talk to who is an astute observers is this: What is the plan? I get that you are trying to control it but for what outcome? Show me the happy path. If everything goes your way, where do we go? And all they do, the economists I talk to, they wave their hands vaguely at this idea of we are going to get back to full-capacity growth, right? Well, here we are ten years into this, and were not at growth. And we are going to get it back because there is too much debt. Every time we do get growth, energy shoots up in price, which just shoots the recovery right in the ankle, and that is where we are. And so nobody has a real plan for this, which is why I counsel people: Listen, I would rather be a year early than a day late. Get your preparations in order. I know I have been saying that for a long time, but given the potential energy stored in this system, given the massive concentrations of wealth, when one or more of those wealthy elephants decides "I do not want to be a paper anymore," the stampede is on, and nobody is getting through that doorway. I mean, you are in the precious metals business so you see what happens when there is a little bit of extra interest. What happens to the supply chain, say, for silver or gold at the retail level?

Mike Maloney: Well, we just had a big silver shortage just a few months ago, and the price of silver dropped two bucks during that shortage. But at the retail level like, for instance, Silver Eagles, they stayed the same or went up. Our cost for Silver Eagles, the premium that we pay over spot, more than doubled. As a dealer, we had to pay more than double the premium over spot that we would normally pay. Some bullion items did drop a little. Also, the mints got really backed up, and that affects our business because we buy a bunch of silver and have it minted. And if it takes two months to mint, you got a half a million or a million bucks or more wrapped up sitting at some mint for a while for two months instead of three, four, five days. And so it sucks a whole bunch of capital out of companies and makes the shortage even more acute, and so the price actually rises.

In 2008, gold had hit eleven hundred bucks, and it dropped all the way down to seven during the crisis. It dropped for…but it bottomed…I believe it bottomed near the end of October and turned around and started rising, and the markets continued to crash until March. But maybe it was…it was not October, it was a little later than that, November or December. But there was a point where I was speaking at an event in Florida, and I was looking at the price that Silver Eagles were going for on eBay. And they were going for more than four times the spot price. There was a client that called me and silver was now below $9 an ounce at this point, and he said the dealer that he went into in Chicago was charging $18 an ounce for 100-ounce bars, double the spot price. And so during that collapse, we were…the premiums we were paying were huge, and then we also had to adjust our premiums because we could only get so much. And we did not want to be sold out the first hour of every morning and then be basically out of business for the rest of the day.

And so we had to adjust our prices. It is just simply the free market during the price discovery mechanism. We were trying to balance our business, but there was about three weeks where we could not get any silver whatsoever. And our only product for like a week was kilo bars of gold. So the cheapest product that we had was $30,000. And then there was three days where we could not get anything. We were actually out of…basically out of business for three days. So when the spot price goes too low compared to what the real physical demand is, shortages develop, premiums explode. I am expecting…we are going into deflation I believe, not inflation right away. The big inflation or hyperinflation will come later as the central banks overreact.

But in the meantime, I think it could take gold below $1000. I think you could see $700 gold or the old $850 high again, but will you be able to actually buy some physical at that price? I doubt that very much. I think if it goes under $1000…about $1000 is sort of where the physical price might freeze. I might be wrong, but history shows that whenever there is a problem with the currency, whether it is big inflation, hyperinflation, or deflation, people go back to safe haven assets. We should be going into a deflationary episode that is overreacted to that causes big inflation or hyperinflation, which causes a breakdown of the current global monetary system, the global dollar standard that is now the longest-lived of these artificial monetary systems and has developed a bunch of stress cracks and is in the process of imploding right now. There is going to be, before the end of this decade, most likely, another emergency meeting of a bunch of finance ministers and economists to try and hash out another world monetary system. It is just history repeating, and it is a natural consequence of man-made, artificial manipulations of the free market.

Chris Martenson: It might be another normal outcome, but I know you have said this before, the number one feature of having a bubble, whether our bubble happens to be a bubble of faith in authority or a monetary bubble or debt bubble, however you want to categorize it, humans have been down this path. But the number one rule of a bubble is that the vast majority of people have to lose a lot of money in them. There is no other way for them to resolve.

Mike Maloney: Yes, that is true. In fact, the majority has to be wrong usually for people to make money in the stock market. That is how wealth is transferred. Yeah, that is the reason the banks hire all of the best traders that there are. And then they have got ultimate deep pockets, so the banks usually win at the trading game. But, yes, you are absolutely correct.

Chris Martenson: So this is just repeating itself again. People can watch Hidden Secrets of Money now 1 through 6. Where do they go to watch this?

Mike Maloney: The best place is HiddenSecretsofMoney.com. You can also just Google it and watch it on YouTube. But if you watch it at HiddenSecretsofMoney.com, there is a whole bunch of bonus features, and there is all of the previous episodes all organized there. There are playlists on Hidden Secrets of Money. Now, on the YouTube channel, I have a playlist about deflation before inflation or hyperinflation. I have been saying this for many, many years. The demographics and history do not point to just going straight into inflation. That would reward the public for mass stupidity, for borrowing and spending throughout their entire lifetimes and not saving anything, for using their homes like ATMs. And I cannot find a single episode in history of that happening. What would usually happen like during wars, World War I, everybody saved. And in the United States, as soon as we came out of World War I, we went into the depression of 1921. A huge deflation.

During World War II, everybody expected deflation just like happened after the stock market bubble popped in 1929, just like happened after World War I, so they saved all during World War II. And what happened is the opposite. During World War I, we expanded our currency supply, I am sorry. We were not a nation of savers during World War I. We were still…we were feeling pretty good the war was on other people's soil. And deflation happened to us. Deflation happened after the stock market bubble popped, and it trained people. And so during World War II, everybody saved. And by the time we came out of World War II, inflation happened instead. So whatever side the public is on, like you said, the majority has to be wrong, the opposite always happens. So right now we are a nation of borrowers, spenders, and debtors, and we are not going to get rewarded at the expense of the big banks losing and Joe Sixpack winning. That is just not going to happen.

Every time I look around in history, I do not see that.

We were a nation…we did not go into this huge savings mode like in Germany. Dduring World War I, velocity of currency slowed down. Even though they expanded their currency supply, currency supply was five times larger at the end of World War I than it was at the beginning in Germany. But velocity slowed. Every extra mark that was printed got saved. As soon as the anxiety was lifted, they went into a huge inflation that I call a pre-hyperinflation hyperinflation. Prices rose 900% from the end of World War…from 1918 to I believe it was February of 1921. So 900…prices went up nine-fold. And then they had a short period of stability, so it wiped out all of the savings that people had accumulated during the war once that anxiety was lifted and velocity picked up. So we are in for whatever is the opposite of what would be best for the masses.

Chris Martenson: The opposite for…alright, I like that I guess. I do not really like it because I wish we were not here, I have got to be honest with you. But, Mike, I have got to say, I am just in awe of the level of artistry, the storytelling, the overall quality of the Hidden Secrets of Money.

Mike Maloney: Thank you.

Chris Martenson: I really tell everybody they should watch it. It is a real testament to your passion for quality, for the story itself, and a gift to humanity.

Mike Maloney: I would like to ask your listeners, if they watch it and they do like it, I feel that these are very important things, and that we have to all work to pass this knowledge along and educate each other. And so if they could share it with anybody that they care about, that would really help things along.

Chris Martenson: I agree, I agree, and it helps…it does not do any good unless people are curious and interested. But anybody who wants to understand the world around them and where we're going and how we got here, I really think they should watch this and understand because it is so hard to keep our bearings in a bubble. That is hardest part. It is like navigating in the fog without a compass. It is just tricky. So thank you for putting it together, and thank you so much for your time today. And I cannot wait to see the rest of the episodes.

Mike Maloney: Thank you. Oh, and by the way for your listeners, one of the episodes features you. It is one of the future episodes upcoming next year. So we are starting the 2016 season with this release, and the last episode that was released was November 2013. So it has been on hiatus for a couple of years while we have been getting all of this together. And so this is an important launch for us, so thanks.

Chris Martenson: Well, I cannot wait to…I saw a little sneak preview of what that piece might be with me in it, and of course my viewers are going to say, Chris, why didn’t you do everything at that level of quality? So it is going to be a mixed blessing for me obviously [laughter]. I cannot wait to see it, I really cannot. So thanks again.

Mike Maloney: Thanks.

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43 Comments

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2248
One of my favorites

Chris, thanks for having Mike Maloney on; he's another one of my favorites.  I can't agree more with you about the high quality of his Hidden Secrets of Money videos; they are a real contribution to helping people understand money (or, rather, "currency") in all its obfuscation.  My son actually "discovered" Mike's videos on-line a year or so because they were trending, and proceeded to "teach me" about debt-based money!

Kudos, Mike, for your good work!

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5531
podcast observations

Some thoughts after listening to the podcast.

The wealth transfer concept is great.  I'm thinking what I should put in the denominator for all these various asset classes.  I'll have to listen to that part again and maybe I'll get inspired to come up with some charts.

If we are entering a highly deflationary period prior to the great overreaction by the central banks, the whole "end of the dollar" event will be preceded by an exceptionally strong dollar, which might be surprising to someone who just hears the "gold will prevail" theme that Mike likes to talk about most.  I'm glad to hear he recognizes that gold will drop substantially if that occurs.  He clearly doesn't believe that gold is deflation-proof, which I agree with.

The use of the dollar as a reserve currency is not impacted by the currency used for trade.  As I've said before, the "reserve currency" means what currency central banks use to store their reserves, NOT what currency that businesses use to trade.  If your personal savings are in gold, while your income and expenses are in dollars, then gold is your "reserve currency" and dollars are your trading currency.  Even if you are paid in dollars, and pay your rent in dollars, you can easily still have your savings in gold.

And if we're entering a strong dollar period, the use of the buck as a reserve currency should increase, not decrease, at least during this period.

If you are a debtor, sound money is the last thing you want.  If you are a creditor, sound money is Nirvana.  Changing to sound money, like every major change, will create winners and losers.

From what Mike says, demographics predict that real estate is entering a long period of decline.  This aligns with what Martin Armstrong is saying.  If true, one would expect that Japan will see this decline before we will, since from a demographics standpoint, Japan is much further along.

My sense is that Mike feels if he could only impose a sound money system, the "free market" would then fix everything.  I'd like to point out that the "free market" has consistently voted in favor of credit since the beginning of time.  If we imagine that some arbitrary system of "sound money" can abolish credit - and by extension the credit cycle - well that just seems unlikely to me.  A truly free market will always end up voting for credit, just like it always does.  Credit is not some banker-imposed nightmare, its what we all want, at least most of us anyway.

Humans love windfalls, credit, bubbles, the prospect of easy money, and especially ponzi schemes.  And if the market were truly free, we would probably vote for them every single time.

At least that's what history suggests to me anyways...

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Nice to see there that there's still some adults around...

Thank you Chris & Mike for the podcast.  Hearing your voices reminds me that there are still some "adults" who prudently advise fiscal restraint when a "Weekend at Bernie's" mentality pervades our  monetary policies.

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I totally agree with Dave on

I totally agree with Dave on the free market aspect of money. As far as anyone should be concerned, credit money is the most direct manifestation of the free market. Despite the fact the Fed has power to manipulate interest rates, credit money is still rooted in personal freedom to take out loans in order to create money. Contrast that to any non-debt based money, and you have to have some third party entity that issues the amount of money that it thinks there should be in the market. Even if there was a large marketplace for a myriad of different currencies, you would still be subject to the same inherent problem - not to mention the sheer amount of work you have to put into keeping track of each individual currency, and having to maintain a balanced portfolio. 

Mike's overall outlook is a good one, but there are some inherent problems with it. I think he over-emphasizes base money, and actually calls this "helicopter money." I strongly disagree with this being "helicopter money," which I define as issuing debt-free money - or what Steve Keen calls "QE for the public." This did NOT happen, and is the reason why private debt is still so high. Keen has shown that private debt is the ultimate driver for deflationary pressures, and he calls for a "modern debt jubilee." On the contrary, I don't see how increasing only your base money will de-stabilize your currency at all. Base money is largely economically inert (with the exception of banks using it to speculate), so until it is lent out to the public, it doesn't affect money in circulation. Therefore, I stand by Keen's belief that the federal government can temper a lot of these problems simply by large scale fiscal stimulus and issuing debt-free money. Whether or not they do this is to be seen, and will be a difficult move politically. 

 

 

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Hidden Secrets of Money Videos

You might want to try YouTube to watch the videos.  I tried without success to get the videos to play on hiddensecretsofmoney.com, even after completing the free registration.  There must be a way to get them to work there, but I couldn't figure it out in a reasonable length of time.

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book suggestions

The best book for understanding aspects of money that are generally ignored by virtually all finance/economic theory camps is "Debt: the First 5,000 Years," by David Graeber, which explains that currency/money developed to pay debts and manage credit, not the other way around.

To understand Dave's point about exchange-trading money (which can be sticks of wood, shells, scraps of paper, etc.) and reserve money, I suggest Fernand Braudel's magnificent 3-volume history of early capitalism, particularly volume 2 "The Wheels of Commerce."  I realize suggesting 1000+ pages of reading doesn't go over big in today's "wow, this article is over 300 words long, forget it" world, but it's one of those case of "you get what you pay for," 

I would also highly recommend David Hackett Fischer's "The Great Wave: Price Revolutions and the Rhythm of History" which covers what has happened in history when demographics, resource depletion, devalued money and labor surpluses collide.

2,000+ pages of reading here, but your understanding of currency/money/credit will be revolutionized by these three works.

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my next 2-parter on USD

My next 2-parter on the USD describes why we might see another leg up in the USD as Davefairtex mentioned... the eventual re-set will be ugly, and little financial 'wealth" will make it through the wormhole, but we'll probably have quite a roller-coaster ride before the ultimate crisis.

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Episode 1

Call me picky.

Mike Maloney wrote:

"Wealth is never destroyed.  It is simply transferred."

I get the point Mike is trying to make, but wealth is not a constant.  It's not like the law of conservation of energy, where it only changes from one state to another.

Wealth is destroyed in war.  Wealth is consumed (energy, food).  It is reduced through mismanagement (erosion, rust).  Heck, the passage of time alone reduces the quantity of some forms of wealth, while increasing the quantity of other forms.

The great pyramid in front of which Mike gives part of his presentation is an excellent reminder of this.

Today, we seem to be trying our level best to reduce the absolute quantity of wealth, while at the same time increasing the quantity of claims on wealth.

 

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Charles, why does there HAVE

Charles, why does there HAVE to be a wormhole? What will happen if the federal government institutes large scale fiscal stimulus a la a REAL helicopter money drop? This would essentially be to the effect of a debt jubilee as the public would use this money to pay down debts. I mean, sure this would be terrible for creditors, but I think if push comes to shove, this would be on the table for Congress. Even if it wasn't, I think this would at least offer a viable solution... 

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Bronx..

I would see your point more readily were the helicopter money to be debt-less.. but what are the chances of that?  If congress voted to give us a bunch of money, say via a retroactive tax rebate.. they would simply have to borrow that much more.. i.e. do that much more deficit spending to make up for the budgetary hole.  National debt rises, and the wormhole gets that much closer.  

Unless this was debtless money being created... you are only describing the socialization of debt, i.e. moving deck chairs around on the titanic.. you can pay off your car loan, but the national debt would rise an equal amount.  Make sense?      

Edit;  Sorry, I hadn't read far enough back in the string to realize that some of these points had already been sussed out.. good discussion

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Gold and deflation

I couldn't disagree with this statement more;

I'm glad to hear he recognizes that gold will drop substantially if that occurs.  He clearly doesn't believe that gold is deflation-proof, which I agree with.

I am not saying that Gold could not take a quick whack lower.. it could.  What I am saying is that this idea.. that Gold would be hit in a generalized deflation, presupposes that today's price actually represents the supply vs demand balance for Gold today.  In other words.. if today's price for Gold was set by a physical trading market, and there were not numerous signs that suggested stress, I would agree with Dave and others who promote this idea. 

But the price of Gold today is not representative of the balance of physical supply vs physical demand.  So for me, this blows the theory Dave proposes above right out of the water.  Here is the best piece I have found written lately that helps explain;

http://www.safehaven.com/article/39627/londons-lbma-and-new-yorks-comex-...

London's LBMA and New York's COMEX Gold Markets In Collapse

By: David Jensen | Sat, Nov 21, 2015
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That title is a strong statement to make. Indeed.

However, as discussed in 2014 and again in January of this year, with daily gross trading turnover at the LBMA (London Bullion Market Association) in January of ~ 200M oz. of gold per day, it was inevitable the world's pre-eminent physical gold and silver pricing platform in London would fail due to Gresham's Law and we can now see from available information that it is collapsing.

Gresham's Law predicts that the introduction of debased (or 'bad') money will drive more valuable (or 'good') money out of circulation leaving only the debased, and ultimately worthless, money or claims circulating.

Many will chuckle at the proposition of Western gold market failure and note that the price of gold has gone nowhere. If the markets are in collapse due to lack of available of gold, then where is the price action exploding to the upside? Well, digital gold and silver are still available in copious (infinite) amounts and continue to trade on both the LBMA and COMEX exchanges - you can have as much digital or virtual metal as you want on these digital exchanges. There is no shortage of virtual metal and thus the virtual price that most investors follow won't move up. The bullion banks have always sold-down this virtual gold price when it has risen.

The telling of the story is instead in physical metal availability and so we look first to the LBMA - the primary global 'physical' exchange. The LBMA indicates in it owns market guide that its primary gold trading contracts, unallocated spot market contracts which are claims for spot physical gold (ownership right-here, right-now), give the holder just an unsecured claim for physical gold. This has allowed the creation and trading of non-existent gold to the point that the London spot physical gold market trades 200% of the global annual gold mine production of gold - each day.

Looking to the availability of vault gold in the physical market in London (with a special acknowledgement to the important research by Ronan Manly and Koos Jansen of BullionStar.com), we can see below that outside of the holdings of the Bank of England (official sector holdings) and ETFs and other funds in London, there are approximately 6 tonnes of privately-held gold potentially available to the spot market. It may be argued that the official sector holdings held by the BofE or gold from Switzerland can be made available to market by leasing but the 6 tonnes of Privately Vaulted gold in the graphic below tells another story.

The 'Unaccounted' Privately Vaulted gold (gold potentially available in size to the spot market) has declined from 1,651 tonnes in 2011 to 6 tonnes this year. During this period, physical gold has been predominantly moving rapidly to the East where it has been bought by Asian buyers.

To meet the market requirements in Asia, Western gold has been refined in Switzerland into 99.99% pure kilo bars from Western 'London good delivery' bar format. The gold vaulted in London would be logistically more difficult and costly to move to refineries in Switzerland so we can therefore infer that this gold would be the last available gold to be refined in Switzerland and sent on to Asia. The consumption of these London stockpiles tells us now that the readily available Western gold is gone. Sure, smaller amounts of leased gold can be made available from central banks or surreptitiously from the ETFs and other funds to the market but the rapid decline of London's gold vault holdings tells us that there has already been a landslide in the London gold market.

To give a sense of scale of this event we can estimate the open interest of spot claims by using a 2x to 3x multiplier of the daily gross turnover as exists in other physical materials (commodities). For ease of calculation, if we use the 200M oz daily turnover of January 2015, that translates to an open interest of 400M to 600M oz or ~ 13,000 tonnes to 19,000 tonnes of gold. That's versus 6 tonnes of Privately Vaulted physical gold in London outside of the BoE and the various gold funds.

Vaulted Gold in London

The New York COMEX gold market tells a similar story. The ratio of open interest contract claims on gold vs. registered vaulted physical gold available to settle trades in NY COMEX warehouses has increased now to a 300:1 ratio. Even on this non-physical exchange with numerous escape clauses in the COMEX Rulebook to allow cash settlement, the gold has virtually disappeared with only 150,000 ounces remaining in the registered accounts available for delivery against the 300x larger open interest claims in this market.

John Exter, who was a former Federal Reserve official, called gold 'power money' or the ultimate form of debt settlement as gold stands alone as nobody else's promise (compare our debt-based fiat money system where all money starts its life as debt). Because of gold's integrity as money and as an asset it has always existed as an unappreciated indicator of the unsoundness of central bank monetary profligacy and government fiscal deficit policy. The suppression of the gold price by pricing physical gold with the exchange of virtual gold will reach its limit with lock-up of the London and New York gold (and silver, platinum and palladium) exchanges when the metal completely disappears.

Savers and investors will then move to other real goods to secure their wealth as this age of fractional reserve trading and central bank monetary sophistry ends - a story of fiat money failure that been repeated over the last 300 years in the West. A monetary and bond market crisis will signal citizens calling the government and central bankers' bluff, once again.

Over the past few days, the London 1-week GOFO rate (LIBOR minus the gold lease rate) has suddenly surged to - 0.30% and the 1-month rate to -0.23% both from positive values signalling physical market stress. We will know whether this is meaningful with time, however the broad story has already been told - the gold is, in broad terms, gone from London and New York.

A final note: We've seen NATO, Russia, China and Iran become much more active militarily and geopolitically over the last 24 months. Are they getting ready for the next phase which is a Western financial crisis and then military conflict (as historically favoured by politicians to deflect attention from the crises they've created) instead of reforming the system? It looks like it from this vantage point.

 

COMEX Wharehouse - Registered Gold Stocks Cover

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Jim H

I don't see how the national debt matters at all. The US government is a monetary sovereignty, which means it issues currency. Every other entity is a user of currency, therefore, you cannot think of the federal debt as the same thing as personal debt. To illustrate this point, let me ask you a simple question - what happens if the fed just rolls this debt over repeatedly? Let's say Congress issues debt-less money, which then in theory increases our national debt. Well, then the treasury can issue more debt to pay off existing debt. When you issue your own currency and you owe yourself currency, it's a non-issue. 

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I agree with your point Bronx...

Were the money issued to be debt-less.. that would be an interesting way to create a true jubilee.  My point was that with the FED in place, the idea of debt-less money would probably not get much traction.  If I were the FED owners.. I would view the idea of debt-less money as a very, very dangerous idea.  

I do not agree that national debt does not matter.. not at all.  Even at very low interest rates.. the cost of financing that debt eventually rises to consume the entire "budget".  Then what?  Wormhole is what.    

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History, man, history.

I have to agree with CHS that a thorough read of Fischer's "Great Wave", would do everyone a great service. Given war, immigration, currency manipulation, and demographics, currently, there are uncomfortable signs that the proverbial lump is poised to hit the fan, again.Mr. Maloney's austerity suggestions are timely and sound, but is he telling us PP'ers anything new? Debt isn't going away any time soon and I don't see any slow down in deficit spending (the Canadian government just announced  it is estimated it will cost $1.2 billion to settle the 25,000 Syrian refugees in Canada). What's happening with the $85 million a month of MB Securities that the Fed has on their balance sheets? Mrs.Yellen doesn't want the auditors any closer to the books than is necessary and seems quite comfortable to let the real inflation rate erode what little savings are left in most of the boomer's pockets. A quick read of Akerlof and Shiller's book confirms that P.T. Barnum's ghost is still haunting the credit card issuers and mortgage brokers as Wall Street continues to stoke the wealth gap. Complexity spawns ignorance and human nature spawns stupidity. "The best we can hope to do is to break even. Unfortunately, we never break even." (1st and 2nd law of thermodynamics). Maybe when Hell freezes over, we'll have a chance (third law of thermodynamics). Sorry, it's snowing outside and I'm feeling a little irascible! I think I'll go pay off my Visa card with my MasterCard, so I feel better. 

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What exactly is this wormhole

What exactly is this wormhole that you are talking about? Can you explain to me what it means and what events are going to transpire during said wormhole? 

The fact of the matter is that the national debt is nothing but a measure of federal spending that had to occur IN PLACE of private spending. It is not actual debt in the sense that the money needs to be paid back, for reasons which I have already stated. So, let's say that Congress massively increased public spending and skyrockets our deficits, piling onto our national debt. What would happen is that the federal reserve would need to buy a large chunk, if not majority of these treasury bonds (what is left over after institutional investors buy them). This will then massively expand the Federal Reserve's balance sheet. Interest on this debt would then result in more debt being issued by the treasury, which would then be bought by the Fed. This, in itself, has no real life impact as it's simply digital currency exchanging hands in between branches of the government and "pseudo-government." The numbers may be staggering, but it has little effect on the actual economy. Why? Because all the federal reserve has to do is press the delete key, and get rid of all its assets. If that were the case, then the treasury would owe them anything, and this cycle is broken. 

The ONLY caveat to this is the fact that by virtue of such large fiscal stimulus, you MAY bring on inflation, depending on how much economic output is actually stimulated. The more debt that is purchased by institutional investors, which means the general public, the less inflation would occur as it simply shifts spending capacity within the existing economy. However, if significant amounts of debt needs to be purchased by the Federal Reserve, then you have freshly digitized currency flowing into the economy into the hands of end-users, which may cause inflation. But, you would only see inflation if the production of goods and services are not also increased. However, with what we are seeing in today's world with increasing automation and large excess productive capacities, inflation may be less a risk than it has been in the past. 

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free lunch

A large number of people see borrowing another $10 trillion (heck, make it $100 trillion) as the solution, especially at low rates of interest.  This is essentially following the Japanese model of monetizing debt and keeping zombie loans and institutions alive via injections of more borrowed money. 

But few address what's happening in Japan. the economy is still stagnating, despite endless fiscal and monetary stimulus, and now tax receipts cover the interest on the national debt and not much else. 

The next solution is to write off all that govt debt, but what most people tend to forget is that this sovereign debt is somebody's asset. Wipe out the debt, wipe out the assets and the income streams propping up pensions, 401Ks, etc.

there is no free lunch, and that's the wormhole--in my view.

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Charles,  You're right in

Charles, 

You're right in that one person's debt is another's asset. But, they don't have to write off ALL government debt. Simply what is owned by the Federal Reserve. Let the people keep their assets - pensions, 401k, CDs, what have you. There is a lot of room in the system for fiscal stimulus before inflation (may or may not) rear its ugly head. 

 

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bronx43 wrote: I don't see
bronx43 wrote:

I don't see how the national debt matters at all. The US government is a monetary sovereignty, which means it issues currency. Every other entity is a user of currency, therefore, you cannot think of the federal debt as the same thing as personal debt. To illustrate this point, let me ask you a simple question - what happens if the fed just rolls this debt over repeatedly? Let's say Congress issues debt-less money, which then in theory increases our national debt. Well, then the treasury can issue more debt to pay off existing debt. When you issue your own currency and you owe yourself currency, it's a non-issue. 

Read "Fiat Money Inflation in France".

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David Graebar

Could it be the existing money-less societies studied haven't progressed in the modern sense because money was not adopted due to mystical reasons and other societies did develop money from barter and became Europe and America.   It is well known that in prisons certain items develop into being used as money after being traded in barter fashion (the other side of a barter transaction can be a service like knocking someone off in prison).

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sov debt & monetization

bronx, et al-

If the national debt was entirely owned by domestic creditors, at one level there would be no problem with just rolling it over endlessly.  At the 30,000 ft level, we'd be paying money to ourselves.  However, if you dig down a bit, there are winners and losers.  Domestic taxpayers would essentially be transferring a nice slice of the national product to the sovereign debt creditors (top 1% and pension plans) in perpetuity.  Sovereign debt in that sense is just a guaranteed slice of the national product for whomever holds it, and the bigger the debt, the larger the transfer.  Money paid to the creditors could have been spent on national defense, infrastructure construction (we can only hope), more bureaucrats, education, or transfer payments to our favorite social programs.  And if we simply issue more debt to pay the interest, that still results in a wealth transfer to the group holding the debt, at the cost of higher inflation overall.  (Deficit spending is inflationary).

And that brings up reality, namely, that foreigners hold a good chunk of US debt.  Interest paid to them really means transferring a chunk of the national product to people outside our economy, every year, in perpetuity.  With foreign-owned debt, the interest payment not only crowds out other budget choices, its a tithe we pay to someone else in perpetuity.  And if its for consumption rather than self-liquidating items such as infrastructure, its really foolish - in my opinion.

Now then, we could do things like having the Treasury issue enough currency to pay off debt, or have the Fed "cancel the debt" they hold (after printing a big slug of base money to buy it) and so on, but this operation is not impact-free.  There is a side effect: excess base money is created, and it shows up as excess reserves.  The excess reserves do have an impact on the economy, and from what I can tell, the effect is to suppress short term interest rates and blow asset bubbles because of the reach for yield.  Here's my theory on that:

In the old days (i.e. pre-2008), savings were scarce because every dollar of non-base money (which was 95% of money in circulation) was borrowed into existence.  The requirement to pay interest on each dollar made sure that every dollar in circulation was a dollar that was truly deemed necessary by the free market.

However, if you suddenly parachute in a bunch of money that no longer has an interest rate attached, this creates a money supply that is in excess of what the market needs to function.  Money is therefore no longer as scarce, and so short term interest rates drop.  (Interest rates are, at one level, an indicator of supply & demand for money; low rates = high supply relative to demand).

My guess is (and I really need to construct a model to prove it) that the more interest-free base money we have out there, the more firmly short term rates will be suppressed.  Supply of money exceeds demand.

Our elastic money system is actually pretty elegant.  Free market creates money only when necessary - and when its no longer needed, participants have the incentive to pay it back and destroy it.  Savers (deferred consumption) are rewarded by interest payments.  But these days, there is more money out there than the system really needs, so savings are no longer rewarded.  What's the long term consequence of not rewarding savers?  That I haven't really sorted out - but I'm guessing its not a particularly good thing.  Likely, it results in asset bubbles ("asset hyperinflation?") as yields everywhere are driven down towards zero and asset prices are driven towards infinitly.

At some point the pendulum will swing, and people will worry about risk instead of yield.  Since asset prices will have been driven much higher than normal because of the excess base money, it just means that the crash will come from a much higher price point.  Perhaps that's what "rewarding savers" in our old elastic money system accomplishes - it restrict the heights to which asset prices may go during the good times when perceived risk is low.

Right now, since the Fed holds debt on the balance sheet for each dollar of base money printed, they can theoretically reverse the operation by selling the debt and destroying the base money.  If they cancel the debt, the base money can no longer be extracted from the economy.  Its out there in perpetuity.

There is no free lunch, as Charles said.

If you create a huge amount (say 10 trillion) in base money, might that have a different effect than suppressing interest rates further?  It might.  I just don't know.  However I don't think it will be impact-free, and I don't believe the impact will be something desirable, however I'm not sure exactly what it will be.

We're conducting an experiment with the national economy.  We should realize this.

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Arrhythmia

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THE $64K QUESTIONS

Hi Dave,

Very interesting post, as indeed was Mike M and Chris' podcast, really excellent.

We're all seeking to protect ourselves (I assume?) from the crisis that will come to pass, sooner or later. My guess was 2017, Mike Maloney's is 2018, but from the look of it, we can all agree that is probably going to be before 2020.

My own research on energy and economics suggests that we are entering a period of prolonged economic contraction, of at least 25 years, that will see contraction of the world economy by around 10% by 2020. I'm deliberately using the term contraction, so as to distinguish it from what will be happening to currency, that is deflation or inflation. By contraction, I mean that the volume of manufacturing and service output will be reducing. 

The first $64K question is what will be the key governments' response to this, essentially recession with reductions in fiscal revenues and all the problems, political and financial that flow from that? My guess is that, as Mike Maloney says, it will be to "print." But that said, we none of us know.

The second $64K is how should we best protect ourselves, and in particular what should be our approach to precious metals and cash holdings? But in particular, what should be the balance of holdings between cash and gold? If we enter a hyperinflation, its obvious that gold is good.

So the third $64K question is what will happen to gold in a contracting economy, accompanied by a  deflationary context? If the markets continue to see gold as a commodity, then I'd assume that we'd see continued reductions in the price of gold, both because of reductions in commodities in the round, but also because of a strengthening dollar assuming Chris' periphery to core model plays out.

But two things could change this. First, is the increasing recognition amongst the conventional but literate financial minority that, because of the contraction/deflation, the overall system is unsustainable, including the bank and financial systems, and that there's thus a need to hedge in precious metals. Second, is the shortage of physical gold, and the recognition that the ETFs et al are worthless. And these two things could happen together.

The question I'm struggling with is, first, what's the best proportion of gold v cash? And second, does it make sense to have some debt, especially if one has secure means of paying the debt?

Dave, would be fascinated to have your thoughts, Dave.

Steve

(Chris/Charles, if you're reading this, it would be great to have Alasdair Macleod on a future podcast, too. He's been providing some fascinating written insights, recently)

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Bronx...

You said,

I don't see how the national debt matters at all. The US government is a monetary sovereignty, which means it issues currency.

You are really sounding like an MMT'er (modern monetary theory, aka chartalist, aka neochartalist) ... are you?   The US Gov't gave away the right to create currency to the FED in 1912... so while I agree with some of your points in a conceptual way, they amount to nothing but a dream unless congress votes to take back this right from the FED.  Do you think that will happen?  

Later you said,

You're right in that one person's debt is another's asset. But, they don't have to write off ALL government debt. Simply what is owned by the Federal Reserve.

So again.. you are proposing something that is not at all as simple as you make it sound.  The US Gov't does not control the FED.. they cannot simply vote to write off the assets on the FED's balance sheet.  The FED would have to decide to do this.. and the US gov't does not get a vote.  Again, short of voting out the FED, which I am not against... your proposed solution would not happen.  

The wormhole remains as far as I am concerned.. it's the mathematical end game for the debt-based fiat ponzi.  Usually this end is hyperinflation.  

 

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Dave,  Thank you for your

Dave, 

Thank you for your well thought-out response. I can see your point about suppression of short term interest rates and agree that it likely has some unintended consequence (which is currently unknown) down the road. However, I simply do not buy into the borderline doom porn that exist here. I came here expecting a more levelheaded approach to analyzing current affairs, but a lot of what I see is the same rehashed arguments used by the likes of Alex Jones or Peter Schiff. 

Looking back, I saw that Steve Keen has actually been on the show, and at that time, everyone on this forum was lauding his analysis. But did these people actually listen to his lectures or understand them? His view is almost entirely different from that of Chris Martenson - with only superficial similarities. And he calls for a debt jubilee via fiscal stimulus or creation of debt-free money. 

Either way, these are largely academic discussions. I am holding USD at this moment, and diversifying a reasonable amount into precious metals. However, I do not buy into goldbugs' sentiments. 

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Jim, Yes, I adhere to MMT,

Jim, 

Yes, I adhere to MMT, because at least empirically, that's how the whole system is behaving. While I agree that my proposals are politically unlikely (which I actually conceded to earlier), they are nontheless a viable option that would attenuate the problem at hand. However, I definitely do NOT buy into the hyperinflation scenario. In my mind, that's even less likely than Congress ending the Fed.

However, a scenario that I do buy is a new world monetary system once things get untenable. How this system will work and how wealth will be transferred will be impossible to tell, but I do agree that there is enough concern to diversify into commodities, especially precious metals - but only marginally. I do not agree with the goldbug approach of 50%+. 

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steve keen

bronx-

So I'm quite familiar with Keen's proposal.  I've studied his models in fairly close detail, and I know how his theory works.  He is very clear that any printed money will be handed to citizens, and strictly used to get rid of the private debt.  If printed money is used to repay private debt, they both go away - matter meets antimatter and they both vanish (minus the big explosion).  As a result, there is no problem with excess reserves, because the newly printed money is gone.

However if the Fed prints money and then buys treasury bonds from their current owners, and then the Fed cancels those bonds, the former bond owners still have the newly printed cash.  In other words, the bonds get zapped, but the newly printed money remains in circulation, and most likely ends up as excess reserves.

Bottom line: zapping bank debt with printed money is not the same as zapping sovereign debt with printed money.

That's because bonds and bank credit have very different effects on the money supply.  Creating a new bond simply results in an existing-money transfer from creditor to borrower, while new bank debt results in the creation of new money by the bank, and given to the borrower.

If you trace the money flows, you will see what I mean.  I actually designed a simulation for this event, but I never got around to implementing it.  Still, I can see with my mind how it plays out.  Hopefully with my poor description, you can see it too.

However, I simply do not buy into the borderline doom porn that exist here. I came here expecting a more levelheaded approach to analyzing current affairs, but a lot of what I see is the same rehashed arguments used by the likes of Alex Jones or Peter Schiff.

So I'm not familiar with the rehashed arguments of Alex Jones and Peter Schiff you are referring to.  Perhaps you can help me out and tell me what my mistakes are rather than simply lumping me in with a bunch of people I don't follow.

 

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Dave, Thanks for your

Dave, 

Thanks for your response. I didn't actually mean that you were advocating doom porn. In fact, you were one of the reasons why I even started posting here as you seem to have a great grasp on finance and I appreciate any insight you can provide. I meant simply that the overwhelming sentiment here reflects those shared by proponents of doom porn - the fringe media, whom we will avoid discussing for now. The whole concept of "wormhole" doesn't fit right with me, because I view it as a thought-stopper. In fact, it is the exact same kind of thought-stopper that Chris Martenson himself talked about in one of his earlier interviews. We see exactly what I mean in this thread. "X will cause a wormhole." Then the thought stops right there - no one here can actually describes IN DETAIL what that entails or what it even means. 

I do see what you mean by sovereign debt vs bank debt, though in Keen's proposal (correct me if I'm mistaken) but I don't remember him calling for cancelling sovereign debt. His entire framework is rested upon private debt to GDP ratios, and all he proposes is cancelling of this private debt. I don't think there necessarily needs to be any action on bonds in terms of his "modern debt jubilee." Now, I also recognize that if we don't cancel sovereign debt, then there would be a consistent flow of currency from taxpayers to holders of sovereign debt, but I don't see that as necessarily de-stabilizing. Is it 100% fair? Debatable. But I don't think it will lead to systemic shocks like what is going on now. 

The only thing that Keen's proposal scares me about is inflation, simply because he calls for a "modern" debt jubilee as opposed to a simple debt jubilee. This results in FAR more debt free money being injected into the system. However, inflation is a tricky subject - what is your take on this? 

 

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gold vs avocados

JimH-

But the price of Gold today is not representative of the balance of physical supply vs physical demand.  So for me, this blows the theory Dave proposes above right out of the water.  Here is the best piece I have found written lately that helps explain...

Yes, I know, that's your working assumption.  Somehow a supply/demand imbalance exists, and yet it has no impact on price, not even on premiums vs COMEX.

Any alleged supply/demand imbalance that isn't reflected in prices is just hot air and wishful thinking.  If demand truly exceeds supply, price will move until demand is suppressed and supply is increased.

Right now, it appears that the folks in the east want physical gold more than those in the west.  So gold moves to where it is wanted.  That's not an imbalance, that's just gold changing hands at the current price.

A part of the problem is, many in the west are content to own COMEX GC contracts instead of physical gold.  If and when that changes, then GC contracts will no longer act as a substitute for physical gold.  Once GC contracts aren't seen as a valid equivalent to physical gold, then 1200 tons of new physical gold demand will hit the market (that's the COMEX GC open interest right now), and price will definitely jump higher.

If this were any substance but gold, you would see my logic.  If we were talking about shirts, or avocados, you would agree that if an avocado supply/demand imbalance existed, price of avocados would move higher until demand dropped off.  But this is gold, so logic and common sense get tossed right out the window.

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Thank you Dave...

There it is.. the thing that acts as a wedge between you and I.. the thing that makes it so hard at times for me to believe you are for real;

Any alleged supply/demand imbalance that isn't reflected in prices is just hot air and wishful thinking.  If demand truly exceeds supply, price will move until demand is suppressed and supply is increased.

Thank you for laying it out there.  I would tend to agree with you if in fact price were discovered in the Asian markets.. represented by the red in the chart below.. vs. the Comex market, represented by the physical delivery volumes shown in blue...

 

ChinavsCMEDeliveriesAU.php.png

 

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My money's on avocados and what moves them.

Bronx, Dave, Jim: While your viewpoints are interesting, I find them a bit ephemeral given the financial crunch facing us. This world runs on cash flow and velocity is, in my opinion, the indicator on whether the economy will continue to move. I think most of us agree that when financial times get tough, "them's" with cash, hoard it or put it into riskier and riskier investments, including gold (remember, gold is a hedge and not an investment). The Feds only option may be to print their way out of it or finance more military expenditures(same thing). And, as you guys have alluded, inflation will result, even in a deflationary cycle.

Bottom line: better to be in something that cash flows and adds to the benefit of society. Why has Berkshire Hathaway put its money into the oil sands and railways? With Obama canceling the Keystone pipeline and Suncor producing oil at $23 a barrel, wouldn't you think old Warren could smell those B/N rail tankers full and on their way to Houston? NG is falling in price, LNG projects are being canceled and tight oil isn't getting any cheaper to produce. As long as the EROEI is still around 18:1, energy is the best place to put your money. Well, maybe water is a better investment with the drought and all the "fracking" screwing up the ground water supplies. Oh ya, Warren's in that too. When things get dire, the masses will focus on needs rather than wants. That's where my active capital will be and I won't be worrying about any wormholes.Besides, roller coasters can give you a thrill, so enjoy the ride.

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COMEX: 1200 tons

JimH-

So COMEX accounts for 1200 tons of gold demand, in terms of the aggregate open interest.  (382k contracts x 100 oz/contract x 32151 oz/ton = 1188 tons).  That's substantial, but its also relatively steady state.  That is, when a futures contract expires, anyone wanting to maintain exposure simply sells the expiring contract and buys the new front month.  I've done this myself.  That's how it works.

If COMEX goes away, that's 1200 tons of new physical gold demand that will hit the markets.  That will definitely move price - once - until that demand is satisfied.  But that's not 1200 tons of demand each year.  Once satisfied and the 1200 tons are obtained, price will not be affected further.

Its probably best if you don't confuse stocks with flows.  Think of the 1200 tons of paper gold open interest as a stock, and not as a flow of deliveries.  COMEX is just a big leveraged version of GLD.  At least, that's how it is used anyway.

SGE spot instruments are used to provide a flow of gold to customers who want to take physical delivery.  That's how it is used.

SGE also has futures contracts.  I haven't gone down that particular rabbit hole, but I'd guess that SGE gold futures are used in much the same way as are the COMEX futures: providing exposure to gold price using leverage.  SGE futures buyers probably look and act a whole lot like COMEX GC futures buyers.

So if COMEX (1200 ton) paper price gets out of alignment with the spot price, we see premiums at spot.  We see them right now, but they aren't very substantial.  Once there is a shortage at spot for the "COMEX price", then spot premiums will climb.

Until those spot premiums climb, there is no spot gold shortage.

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What's happening in Gold...

Dave,  The Gold that supports all of the Western leveraged markets is disappearing.  LBMA, Comex, and GLD.  All demonstrably leaving town for the East. 

http://www.safehaven.com/article/39627/londons-lbma-and-new-yorks-comex-...

The consumption of these London stockpiles tells us now that the readily available Western gold is gone. Sure, smaller amounts of leased gold can be made available from central banks or surreptitiously from the ETFs and other funds to the market but the rapid decline of London's gold vault holdings tells us that there has already been a landslide in the London gold market.

To give a sense of scale of this event we can estimate the open interest of spot claims by using a 2x to 3x multiplier of the daily gross turnover as exists in other physical materials (commodities). For ease of calculation, if we use the 200M oz daily turnover of January 2015, that translates to an open interest of 400M to 600M oz or ~ 13,000 tonnes to 19,000 tonnes of gold. That's versus 6 tonnes of Privately Vaulted physical gold in London outside of the BoE and the various gold funds.

http://www.silverdoctors.com/harvey-organ-monstrous-gold-removal-from-gl...

Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 200.26 tonnes for a loss of 103 tonnes over that period.....

We had a monstrous withdrawal in gold inventory at the GLD to the tune of 5.06 tonnes  and this was done with respect to the downing of a Russian fighter jet???/ thus the inventory rests tonight at 655.69 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold.

You are not facing the fact that the leveraged Western paper markets are going to break once they cannot deliver into the Eastern demand any longer.  The flows, of which you readily admit, are of a rare and finite material.  The flows cannot keep going forever.  The flows are sucking a giant vacuum on the entire Western (and primarily LBMA) unallocated system.  When this baby blows.. it's going to take a lot more than 1200 tons to get it back to equilibrium.  I have no idea where price will finally come to rest.. but it won't be at $900.    

 

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gold disappearing

JimH-

Dave,  The Gold that supports all of the Western leveraged markets is disappearing.  LBMA, Comex, and GLD.  All demonstrably leaving town for the East.

Yes, I agree 100%.

You are not facing the fact that the leveraged Western paper markets are going to break once they cannot deliver into the Eastern demand any longer.

Could go two ways:

1) The easily accessible gold starts to run low.  Big bars start to become harder to find, at least at the COMEX price.  As a result, premiums start to appear, in Shanghai, in CEF, and in PHYS.  As a result of the premiums, more people stand for delivery at COMEX and gold starts to leave PHYS and GLD.  As a result of these measurable shortages, the COMEX price moves higher.  If price moves high enough, this causes eastern demand to slow down - as it always does when price moves up.  Equilibrium is reached.  More scrap gold comes out of hiding.  Nothing breaks.

2) This Baby Blows; this is the goldbug wet dream.  There is literally no gold left in the west.  Not in GLD, not in PHYS, not in CEF, not at the LBMA, and not at COMEX.  All 170,000 tons of above-ground gold are made into little gold bars and jewelry for our Chinese and Indian friends.  One day there is gold in all those ETFs and at the COMEX and at LBMA, and the next day, it is just all gone.

I'm betting on scenario #1.  Scenario #2 is the storybook ending for the goldbugs, and things in the marketplace seldom work out that perfectly.  Especially for goldbugs.  Adjustments are usually a process, kind of like major market tops in SPX, and people waiting for the one-day Earth-Shattering Kaboom generally end up with their Illudium Q-36 Explosive Space Modulator vanishing.  Not to mention that it simply isn't in the interest of our banker friends to let that sort of thing happen.

#2 could happen, but I just think the odds are against it.  Too many forces don't want it to happen, so in my mind, that makes it less likely.

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keen & inflation

bronx-

You're right, Keen advocated just a fix for private debt, not public debt.  Perhaps I misread your post - you seemed to be advocating that the Fed print money, buy up the public debt, and "cancel it."  This would have that effect I was talking about, namely, leaving all that base money in circulation, camped out in Excess Reserves, basically widening the extremes of the highs and lows of asset price cycles.

Keen himself conceded that the modern (private) debt jubilee would be inflationary; he also suggested it would really hose the banks, as it would dramatically reduce their income stream.  Doing simple math: if we gave 50k to everyone 16+ (CNP16OV=252M people), that would be 12.6 trillion.  If we assume 60% of people have at least 50k in debt, that ends up destroying 7.4 trillion in bank credit (bankers lose), and another 5.2 trillion in newly created base money lands in people's accounts.  Most likely, the non-indebted people receiving the cash would run out and spend a good chunk of it.  Let's call it 3 trillion in immediate new spending, or about 16% immediately added to our 18.3 trillion of nominal GDP.  What would that do to prices?  Oh they'd definitely go up, but I'm not sure by how much.  I'd need a model to sort that out.  Simple math: maybe a 16% one-shot inflationary hit, and another 12% spread over the next 2 years?  Probably would be more, not less.

Buck probably tanks hard, maybe it too drops 30%.  This adds to perceived inflation, since all commodities and imports rise in price.  Nominal GDP rises, so ability to service all debts (public and private) jumps.  However, M2 remains more or less unchanged - lots of credit money gets destroyed, and a little bit less base money is created.  Call it a wash.  Velocity probably jumps substantially, although its not clear if this is just temporary.  Probably there is a big spike which then drops off.

The reason he called it a "modern" debt jubilee is because it avoids moral hazard by giving money to everyone, not just to debtors.

As for "doom porn" - I agree with Chris, we have civilization-wide resource limit issues (especially in energy) that, when combined with population growth, are going to cause the world serious heartburn at some point in the not-so-distant future unless we have a Deux Ex Machina event from LENR - and perhaps even if we do.  However, I believe money and credit systems have more immediately pressing problems because of the multi-generational debt bubble, so that's where I put my focus.

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How about #3?

Could there be a #3 possibility and is it actually different from #1 and #2?  What if somebody (a lunatic or a very clever person) decided to cause a 7 sigma event by doing something "crazy?"  What if someone simply wanted to destroy the world monetary system in short order, just because?  Or what if someone came to believe they had positioned themselves just right to end up on the top of the pile after blowing up the world monetary system?  So, I see two wink questions: 1) Who would do either?  2) Could it be done and how?

1) Who would do it? Any number of crazies come to mind: Kim Jong Un, ANY central bank, BIS, IMF, Lloyd Blankfein, Jon Corzine, Barack Hussein Obama, etc, etc.  There are also other very serious people who might have run some very sober calculations and decided they would be the richest people in the world after igniting a strategic nuclear currency war: Jamie Dimon (they ARE stopping a lot of gold for their own accounts), China, Mario Draghi, Warren Buffett, Donald Trump... Who knows?

2) Could it be done by one very powerful player, or a few working together?  We are in such a fragile state it seems to me that it most definitely could be done just by knocking out one leg of support and letting the whole rotten edifice collapse under it's own weight.  Of course, this looks impossible or unlikely Dave, but that's only if everyone believes in Mutually Assured Economic Destruction: you're assuming everyone is being "rational" and pulling together to keep us limping along (or at least mitigating the violence of any crash landings).  But what if some powerful someone decided to stab everyone else in the back?  

C) How could it be done?  Frankly, if I knew the answer to that I would probably have done it myself by now, just to keep the situation from getting more explosive by the day and give us a shot at creating a better system while we still can.  How about buy up a large chunk of COMEX gold contracts and stand for delivery?  (By the way, how much would that cost?  I'm checking under my couch cushions.) If that didn't quite do it, do it again in the next delivery month.  How about a whistleblower providing proof that publicly cited US gold reserves are false and that the actual amount on hand is only 19% of what is claimed?  How about a little EMP of unknown origins that hit just the right financial and electronic assets, crashed the system, and caused a nearly instant loss of confidence in all things monetary and governmental?

I'm not sure what's going to happen.  But I'm backing away as fast as I can to avoid being pulled down in the vortex of whatever it is.

 

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Deflation THEN Big Inflation/ Hyperinflation

Dear all, 

thanks for an informative and spirited discussion!

Mike's expectation of "Deflation followed by Big Inflation/ Hyperinflation" echoes the Ka-Poom theory which Chris has written about. However, Japan is apparently further along in the QE experiment than the other developed economies, so why haven't we seen 'Ka-Poom' play out there? Japan seem to have had 'Deflation ('90's crash) followed by Stagnation'. Why should not we see the same thing play out for US & Europe? i.e. a crash followed by years of a depressed growth coma-economy?

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the whole point of the unease

is the "unintended consequences", as arising from market distortions that are institutionalized with a debt-based money system and exacerbated by those who maintain the pretense they understand what all the consequences will be.  The eventual consequences of these distortions are unintended, usually unforseen, usually unpleasant, often enough large, and most often out of left field and therefore not prepared for.

 

Not "doom porn" per say.  People around here are susceptible to confirmation bias, but from my observation, have wound up here because their own conclusions tend to lead them here.  Making a statement to the effect that this community is unable to tease out the nuances of Keen (or Schiff, or Jones for that matter) and come to their own syntheses  based on the information they've been exposed to is ludicrous.  And, if I may, somewhat condescending.  It is just that this crowd isn't fully invested in the pabulum promulgated by the -er- conventional authorities.  There are certainly differences - even major ones - of world views and opinions here, including yours.

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option #3

Tom-

Jim H was speaking about the "gold disappearing from the west" scenario, and we were discussing how that will probably play out.  He sees gold shortages as ending up with a "storybook ending for the goldbugs."  I disagree - I think it will most likely end up differently, most likely just with the gold price rising when shortages start to occur.

You bring up another scenario, which has nothing to do with gold running out because of Chinese and Indian buying, and is more of a James Bond storyline.  I can think of a large number of such storylines, and all of them result in a "bolt from the blue" unhappy ending for the monetary system.

I believe that a "derivatives accident" is probably the most likely end-of-the-monetary-system over the weekend scenario.  Maybe the #2 or #3 is a deliberate cyber-attack on the system by a state actor.  #4 might be an EMP attack, most likely by a state actor executing it on the sly.

A Dr. Evil scenario is further down on my list.

But back to the original point - how do you see the "gold moving from west to east" story playing out?  Will it end in a COMEX default and all the gold vanishing over the weekend?  Or will it just result in premiums going up, and then prices going up, and then prices stabilizing at higher levels?  If you were in charge of the bullion banks, which would you pick?  And believe me, if you were in charge, and you wanted to keep COMEX operational (because it was both a money-maker, and an axis of control), you would have options.  You wouldn't just "hope for the best" right up until things blew up.

We have to assume they're clever people, and they have contingency plans.  I contend that they will not just  provide the goldbugs with a happy ending by running 60 mph right into the brick wall.

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The Crown Joules

I'm still surprised Modern Monetary Theory gains so much traction considering it doesn't actually describe how an economy works.

For the record, I subscribe to the Gail Tververg debt sponsored energy extraction model combined with Kondratieff cycles (as popularised by Martin Armstrong). Perhaps that puts me in minority but so be it.

An economy is a transition of energy, nothing more. The stuff that you put in your mouth to stay alive is dependent on photosynthesis. Want to go somewhere to trade, yep, that takes energy too. Want to build a platform for fiat debt currencies, yep, you guessed it, energy too.

See how far you get without the ability to convert mechanical motion into electrical energy, go on, I double dare you...

I'm going to paraphrase Gail here but one of her current themes, "The global economy requires oil to be priced under $75 per barrel otherwise it stagnates, yet oil companies require costs to be above $75 per barrel otherwise they go broke."*

*Granted, tar sands are more expensive than conventional oil fields but the Saudi's now have expensive social programs to quell dissent which are funded through oil revenue.

Energy costs have to be low to encourage people to spend their electronic debt tokens on other items. If oil becomes expensive then our electronic debt tokens get swallowed by high energy costs instead of purchasing 'soon to be landfill' goods.

My current thinking reckons they'll be a bail out of the oil companies, probably nothing as overt as that but the financial tools which allow them to drill (junk bonds) will be swallowed up by central banks otherwise the economy tanks.

Steve Keen has been mentioned here, but I'd like you to think of the ends rather than the means. The end surely is to keep the wheels turning, why perform a debt jubilee and relieve people of their debt burden when you can suppress their expenditure by keeping oil prices low through means of oversupply? My thinking is that our masters have found a more elegant solution - for the time being...

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Time for requisite "Hollow Man" quote!

*Granted, tar sands are more expensive than conventional oil fields but the Saudi's now have expensive social programs to quell dissent which are funded through oil revenue.

Energy costs have to be low to encourage people to spend their electronic debt tokens on other items. If oil becomes expensive then our electronic debt tokens get swallowed by high energy costs instead of purchasing 'soon to be landfill' goods.

My current thinking reckons they'll be a bail out of the oil companies, probably nothing as overt as that but the financial tools which allow them to drill (junk bonds) will be swallowed up by central banks otherwise the economy tanks.

Great idea, Luke! We can just tuck them next to those Sub-Prime Mortgage Backed Securities sitting on the Fed's balance sheet as reserves. If the MBS's are still tied to actual properties, maybe the banks can donate them to the millions fleeing the war zone in the middle east as a re-settlement effort and get a tax credit for their benevolence.  Then all we'll have to worry about is food and water: gold will be an after thought. Or am I just being silly and taken this thread too far??

This is the way the world ends. Not with a bang . . .
 
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Maybe I was trying too hard to be funny

Maybe I was trying too hard to be funny, Dave, and didn't make my points clearly enough or maybe it even seemed like I wasn't following the conversation closely enough.

I agree with your points: the bullion banks seem like the potentates of the universe right now, they're very clever and they have plans within plans within plans.  I also agree with you that's it not in their best interests to have an accident or run into a brick wall at 60 mph. I also agree that they will maneuver and scheme to keep the system going as long as possible (as long as it continues to be a money tree for them); they will attempt to soften for themselves any negative events that do occur; and they will attempt to engineer a profitable way out of "the system" if it ever does collapse, and install themselves at the top of the next system.

Now let's see how many of my points you might agree with:

1.  The bullion banks only SEEM to be the potentates of the universe.  They can't control everything. They don't know everything. They aren't as monolithic as they SEEM.  Therefore, things may happen that are not in their best interests, that they don't see coming, that they are not positioned to profit from.  (In fact, my view is that something bad would already have happened it if weren't for the mass psychology that they ARE in control.  I think it's only psychological duct tape and twine holding the whole system together at this point.  I believe that once the psychology turns the whole system will fail.)

2.  "Black Swans" are real.  Unexpected things happen, accidentally and on purpose, even to the bullion banks, to Presidents and Kings and Central Banks, and me and you.  Clever Lilliputians like us (and the giant bullion banks too) are aware of "Black Swans" and can take steps to be somewhat prepared for them and to possibly make them slightly less likely.  But when it all comes down to it, "Black Swans" will still happen from time to time and even the giant bullion banks can be caught off guard and not completely prepared.  And at times like these, "Black Swans" happen more often than they "should," sort of like a county having two "500 year floods" in 12 years.

3.  Bad things can happen suddenly, and other bad things which develop over a long time span can SEEM to happen suddenly because the observers do not see all of the build up over time.  Observers may not see the fuse burning until the day it detonates the explosive, though in hindsight one might conclude all the signs were there if anyone wanted to put them together.  So, I conclude something could happen suddenly, even in the gold market.  

4.  Everything has a life cycle: good things and bad things.  Good and virtuous systems gradually decay due to human weakness and evil, though they are amenable to reform and a new start.  Evil and destructive systems have a life span too, and it's my observation they tend to collapse quickly at the end, instead of just slowly evaporating.  The COMEX system and the fiat money system are fraudulent (and logically flawed) in my view and are currently decaying.  But I expect them to go the way of most frauds with a relatively sudden collapse in the end.  Call it karma, call it a natural cycle, or call it the moral law of the universe (God), but a day of justice and payback is inevitable given enough time.  Is this the year?  I don't and can't know that.  Bernie Madoff is a prime modern example of how frauds usually collapse "suddenly" at the end, despite the brilliant Bernie's best efforts and plans.

4.  I think of the London Gold Pool as just one example of the above truths. The central banks, bullion banks and governments SEEMED to have it all under control. But something bad happened.  It was a long time coming (because the whole thing was logically flawed and fraudulent from the start), but to most people it SEEMED sudden and a "Black Swan" out of the blue (is that too many color allusions?). And over, say, 12 years, gold went from $35/oz to $850.  That was not the bullion and central banks' plan, but since they make the rules and print the paper/digital currency, and own the politicians (and we allow all this), they were able to recover, re-write new rules in their favor, and get back on the gravy train (our current, aging, decrepit gravy train).

4.  There are some big picture things I'm sure of, but I'm agnostic as to your detailed questions:

But back to the original point - how do you see the "gold moving from west to east" story playing out?  Will it end in a COMEX default and all the gold vanishing over the weekend?  Or will it just result in premiums going up, and then prices going up, and then prices stabilizing at higher levels?  If you were in charge of the bullion banks, which would you pick?

In my post above (#35) I meant to introduce into the conversation some of the "wild cards" hiding in the deck somewhere.  My point being: I'm 100% sure the end results will not be Plan A, B or even C in the bullion banks' playbook.  I'm aware enough of my limitations to know I can't even come close to predicting the details of what will happen, but the movers and shakers at the bullion banks don't seem to be hindered by any such awareness of their limits and fallibility.  And like all arrogant tyrants, their fall will catch them like "a thief in the night."  At least, that's what I think.

"Welcome to the Hunger Games. And may the odds be ever in your favor."

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5531
wild cards

Tom-

Sure, I can buy the basic theory that things won't die as a result of something that's easily seen coming.  Eurozone is having its biggest problem from those migrants, which certainly nobody saw coming one year ago, and nobody was prepared to handle.

And that would suggest the COMEX won't die from a slow transfer of gold from west to east.  Everyone sees that coming.  Price will simply adjust and life will go on.  It will be something else.

 

 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1463
Fiat Money Inflation in France

Please read "Fiat Money Inflation in France" as it answers all the questions asked in this thread.  Helicopter money doesn't work.   Fiat money is doomed by politicians.

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