Dec. 15, 2015 - Freedomain Radio - Stefan Molyneux
01:08:57
3152 The Biggest Economic Crash in History | Mike Maloney and Stefan Molyneux
In the flux of never before seen economic uncertainty, Stefan Molyneux and Mike Maloney discuss the difference between currency and money, the historical role of gold as money, the dependence of the United States government on wall street for tax revenue, the role of the Federal Reserve in the creation of unstable economic bubbles, the possibility of deflation, $20,000 gold and how you can protect yourself in these uncertain economic times. Michael Maloney is the founder and owner of GoldSilver.com, a global leader in gold and silver sales and is also the author of the bestselling precious metals investment book of all time, “Guide To Investing in Gold & Silver: Protect Your Financial Future.”Get "Guide to Investing In Gold and Silver: Protect Your Financial Future" at: http://www.fdrurl.com/mike-maloneyCheck out GoldSilver.com at: http://goldsilver.comFreedomain Radio is 100% funded by viewers like you. Please support the show by signing up for a monthly subscription or making a one time donation at: http://www.freedomainradio.com/donate
Hi everybody, this is Stefan Molyneux from Freedom Main Radio.
Hope you're doing well.
So we have Mike Maloney.
He's the founder and owner of goldsilver.com.
I think the name is fairly self-explanatory.
He's a global leader in gold and silver sales, also the author of the number one all-time best-selling precious metals investment book, Guide to Investing in Gold and Silver, Protect Your Financial Future.
Mike, great to chat with you.
It's great chatting with you, Stefan.
So, I was thinking about this conversation today, and what I was remembering was way back in the day, I came from England to Canada in 1977.
Now, back then I was 11 years old, which meant that most of the economy for me revolved around the price of candy.
And...
A candy bar back in the day was 10 cents and then within like 10 or 12 or 13 years it had gone up to 90 cents or a dollar and I actually had a job when I was 12 in a convenience store and so I got to see a little bit you know when you're on the other side of the counter you just get annoyed at prices.
Going up.
And I was talking to the owner and saying, you know, how come everything's so expensive?
And he sort of stepped me through it.
He was a very nice guy.
He stepped me through it and kind of led me behind the scenes of what it's like to run a business, which I think has given me sort of a lifelong empathy for the middleman who often takes the brunt of government policies.
And he explained to me a little bit about money and kind of got the ball rolling for me.
And you've made, I think, a very important distinction.
We'll start sort of the ABCs of the financial sea that we try and navigate.
Between money and currency, which to me is real value versus paper.
I wonder if you could help people who don't have much exposure to this kind of thinking to understand what the difference is between what used to be called money and what we now have as this fiat paper.
I was writing my book, and I was touring the world with Robert Kiyosaki, who wrote the best-selling book on...
It's basically the best-selling financial book in history.
It's a book basically about accounting, yet he's sold 35 million copies.
It's called Rich Dad, Poor Dad.
But while I was on stage with him, he started saying, in 1971, we stopped using money.
And started using currency.
And I really started thinking about that.
I was writing my book and I was studying the different monetary systems that we've had over the past century.
Every 30 to 40 years, the world has a new monetary system.
The one that we're on is overdue for its own demise and restructuring.
But we used to use 100% gold, basically.
When a treasury issued notes, they were fully gold-backed.
Then we took a step down in between the wars.
We had a 40% backing and then a mixture of gold and debt as base currency that the banks could then pyramid all of their loans off of.
And then we went on the Bretton Woods system, and it was even more debt and less actual money backing it.
And then now we're on the dollar standard, which has been very, very inflationary.
And people don't understand that one of the things about currency, when you experience prices going up, like that candy bar, I remember Tootsie Rolls, this big for a nickel when I was a kid.
Penny candy.
It was called penny candy.
You could actually do something with a penny, which now you can't even use in Canada, at least.
And, you know, same in the United States.
A penny is basically worthless.
When you watch old movies that are in, like, the Wild West or something like that, penny candy, you got two for a penny.
Because there was actually a half penny at one time.
I mean, I've got one American half penny at home.
And it's as big as a quarter.
A half penny is a piece of copper the size of a quarter.
But anyway, currency has to be a medium of exchange, a unit of account.
It's got to be portable, durable, divisible, and something called fungible.
If I loan you a $20 bill, you don't have to pay me back that exact same $20 bill.
I'm happy with five ones, a five, and a ten.
I'm satisfied.
So that's fungibility, is the interchangeability of the units.
And then money has to be all of those things plus a store of value.
The dollar has lost about 96% of its value since the inception of the Federal Reserve and therefore does not qualify as money.
The reason money stores value is because it's limited in supply and there isn't an entity that can just inflate the currency system at will.
The currencies that we use around the world, there is no nation that actually uses money.
The currencies are all debt-based currencies.
When a physical paper dollar comes into existence, say, we're going to create a trillion dollars.
The Treasury issues a bond, and that bond is then sold to one of the big primary dealers, the banks.
But then the Federal Reserve, through open market operations, writes a check On a checking account that has a zero balance.
There's not a penny in there.
When they write that check for a trillion dollars and hand it to the banks in exchange for that bond, the banks get to make a cut on it, so they make a profit.
But basically, it's the Federal Reserve buying a bond from the Treasury.
So the bond is future debt.
We are promising as a nation, or the Treasury is promising on our behalf, that We are going to pay for that bond with future taxation.
Whoever buys that bond is basically loaning the government currency.
We're going to pay for it with future taxation, paying back the principal plus interest.
And the currency to pay the interest was not borrowed into existence yet.
The Federal Reserve wrote that check for a trillion dollars.
We promised to pay back that trillion dollars over a 5-year, 10-year, 30-year period, plus interest.
So we're promising to pay back 2 trillion over a 30-year period.
But where did the second trillion come from?
And then it's the same with the fractional reserve lending at the banks.
When currency springs into existence, when you buy a car or you buy a house, and it's your signature on that paper that allows the bank to then create the digits and put them in your account, the currency.
But you borrowed it, and you didn't borrow the part to pay the interest back on.
So there is always, no matter what currency is created, what dollar, what pound, what euro, they are all created with interest due.
There aren't any units of currency created without interest due on them.
And the currency to pay that interest does not exist yet, therefore, All fiat national currencies have to lose value over time because you continually have to dilute and debase the currency supply to pay the interest on the debt.
I mean, we just finished off in the United States paying off the prosperity we were enjoying under the Reagan administration, the 30-year bond.
It's crazy!
There is this weird thing that goes on in the economy now.
It's hard for people new to this kind of information to understand the degree to which we are We are Alice in Wonderland because that which formerly was an asset has now become a liability in so many different situations.
And that which formerly was a liability has now become an asset.
I mean, just off the top of my head, I mean, not working used to be a liability.
Now with the welfare state, not working can be an asset in that not working gets you money.
And then because of the welfare cliff, like the sort of way you work and you tax it effectively at 100%, working, which used to be an asset, has now become a liability.
It cuts into your payments.
Children used to be a liability.
Now they're an asset because you can be paid for having children.
Houses or that which depreciated used to be considered sort of a liability and necessary evil.
At least until the housing crash, they were considered to be an asset.
Bonds in a company that was producing something used to be...
Something which was an asset.
You'd own part of a productive enterprise.
Now they've become a liability in that you're guaranteeing future tax increases by consuming minuscule amounts of interest in the here and now.
And there's this very strange reversal.
It's almost like we live in opposite land at the moment.
And of course, that can't be sustained for any particular length of time.
No, it can't.
And this all has to eventually fall apart.
But, you know, a lot of what you're talking about is the unintended consequences of good intentions.
All of these politicians that don't know anything about economics and they don't realize that economics is a closed system and you can't stick a straw into outer space and draw in economic energy.
They run on a platform of giving away more free stuff than the other guy.
But whenever they do that, that stuff has to be paid for somehow.
Somebody's got to pay for that supposed free stuff.
It's either paid for by inflation, higher taxes, or robbing Peter to pay Paul.
You tax the rich to subsidize the poor.
In Puerto Rico, they came up with some very well-intentioned laws to support single mothers.
And so they make a certain payment per child.
And it's fairly generous.
And the unintended consequences they got there is that far less people are getting married.
What will happen is a girl will get pregnant and again and again, and her boyfriend and her parents will then move in with her.
So it's created these unintended consequences of having far, far more unwed mothers just because of the incentive to be unwed.
Right.
There's an old analogy, I'm sure you've heard of it, or a metaphor from Socrates and Plato, which was the allegory of the cave, where he said that the growth of philosophy is you realize that you're not looking at things themselves, you're looking at the shadows of things cast by a fire you can't even see.
And then once you see the fire, then you see the things that it's cast in the light on, rather than the shadows, you're seeing the things, eventually you go out of the cave and you see the sunlight, you see the whole world.
And when I was younger, I would get very caught up in the detritus of daily political events or short-term political upheavals or questions or contradictions.
And as I'm getting older...
The short-term noise, I call it.
Yeah, yeah.
And as I'm getting older, I'm trying not to turn into the guy who's like, one theory explains everything, because that's usually a bit of a hole with no bottom.
But as I get older, I sort of begin to realize...
I just want to get your thoughts on this.
The degree to which...
Politics is so fundamentally wrapped up in currency that our current political system is really a shadow cast by a monopoly power's capacity to create finance out of nothing, to create the illusion of wealth out of nothing.
And it is a kind of rust that eats society from the inside and that you almost don't see it until right before the collapse.
And I think we're getting close enough now.
And again, I know that that's alarming for people, but there are things you can do, which we'll talk about.
But the degree to which our current political system relies entirely upon this debt-based fiat currency, this currency that can be created out of nothing.
And it seems to me it's hard to find a political question that doesn't at some point come back to this power, this crazy almost infinite power that the state has.
Yeah, it is a crazy infinite power and it's a monster that is growing at many times the rate.
Of the private economy, so it's consuming the private economy.
And it is corrupt and it's driven by the financial system now.
Politics is basically being driven by the financial system.
You talked about this illusion.
You know, the problem is we can't all borrow ourselves rich.
And that is what we have been doing, is trying to borrow ourselves rich.
And that's the reason that this will I'm going to send you some charts and I hope you can put these up later.
I don't have them in front of me right now.
But one of the things that I discovered recently is I was on the Federal Reserve's website and I was just looking.
I go there every once in a while and I just look at a whole bunch of charts just to sort of try and piece together the puzzle of what's really happening in the economic picture.
Because all the politics, it's just short-term noise.
It doesn't matter who we elect.
Whoever we elect, they are going to spend more than their income.
They're going to somehow reduce our prosperity because they spend more than their income.
It either comes in the form of currency debasement and inflation, higher taxes, or this redistribution of wealth.
And they're going to lie to us.
Every president that we've had For a long time, they look into a camera and they tell us lies.
That part doesn't matter.
What we have to do is inform enough people how the monetary system works and how the whole political and financial system is set up to sort of milk the average person and transfer wealth away from the working population To the people that sort of get to ride for free,
and they do that by trying to rally us all together, either by scaring us or selling us popular ideas that we're all going to be able to live for free.
But these charts that I want to send you, I call this the financialization of government.
I was looking at a chart of the government's income, the total income Whether it's federal or whether it's federal, state, and local, the income of governments are now dependent, since the year 2000, on how well the stock market is doing.
I was looking at our national income, and I noticed that it goes up in the year 2000 with the NASDAQ. It does this big pullback, so there's less taxes coming in.
And then the crash of 2008, and we're going up again.
And you have to go all the way back to the Great Depression to find reactions, correlations between the stock market doing well and the level of tax revenues that the government collects.
And what this means, you know, in the Great Depression, when the stock market fell by about 90 percent and tax revenues fell by something like 60 or 70 percent, it was huge.
The government wasn't so indebted with future obligations.
With all of the debt that we carry and then all of the future obligations, the promises that started during the Great Depression under the Roosevelt administration, it means that the government has to perform or it falls apart.
And so the next time that there's a stock market crash, and you know, Every two to nine years, without fail, there's a recession.
And we're seven years into this economic expansion.
So it's not going to last forever.
There is a recession right around the corner.
The likelihood of it grows every day we go along in this economic expansion.
And when that happens, if the stock market goes down, The Federal Reserve has to rescue the stock market now.
If they don't rescue the stock market and create a whole bunch of liquidity, it risks the demise of the government.
The government is now threatened by the stock market going down because tax revenues will go down, deficit spending will explode.
And so we're caught in this sort of trap.
And to me, this sort of guarantees some sort of implosion someday.
Now, I read about your argument to do with this, and I, of course, and I've talked about on this show the degree to which the financial sector has corrupted the government.
I mean, Barack Obama was the single biggest recipient in history, in American history, of donations and support from the financial sector.
So I thought it was kind of like payback, kind of like want to get donations next time, and I'd never considered the degree to which tax revenue was dependent upon the financial sector, and I I don't know why that is.
What has changed that has made so much tax revenue come out of the financial sector?
Well, you know, we've changed from an economy where we used to actually produce stuff to an economy where we hand currency back and forth to each other.
A large portion of the tax revenues come from people that trade stocks or make a profit on stocks.
And so...
It's just the evolution going from an economy that used to do its own capital formation, it would create stuff, create its own foundation, and its wealth was built upon a solid structure, to an economy where we're trying to borrow ourselves rich.
Right.
So when the government is protecting the financial sector, and this to me is a sort of piece in the puzzle because like a lot of people in America and even around the world were really quite confused with the tarp bailouts, with the massive hundreds of billions of dollars that were shoved from the fiat currency printing presses into the hands of rather sweaty pseudo-capitalists in the financial sector.
And if...
Your argument, I accept it as true, they were actually protecting their tax base.
It wasn't really just a payback of political favors or anything like that.
It was, well, we need to give you people money to create the illusion that we're still consuming taxes that come from productive people.
That's probably part of it.
I don't know if they actually had that full realization.
I think Ben Bernanke, he's this ivory tower quant that has a bunch of theories.
Again, these people, and they're the people that are running things, they just don't seem to understand that economics is a closed system.
And whenever you do something artificial over here, there's some unintended consequences that come squirting out at 90 degrees.
Like, you know, the NASDAQ crashed, Alan Greenspan lowered interest rates to reflate the stock market, and he accidentally created a real estate bubble, which caused the crisis of 08%.
Ben Bernanke created an extra $3.2 trillion.
Before the crisis of 2008, there was about $0.8 trillion of base currency, so less than $1 trillion.
We're up at $4 trillion now.
It took 200 years to go from no dollars in existence to $800 billion, or $0.8 trillion.
And then we have created like another 800 years of currency in just the past six.
So it gives you a perspective of this.
If you had mentioned things like all of this, increasing the currency supply, the base currency, fivefold.
Base currency for your viewers, that's the paper dollars that exist, or the deposits that the commercial banks have at the Federal Reserve Bank.
That are redeemable in paper dollars.
So basically it's a measurement of the paper dollars that exist.
And those paper dollars are what all of the other fractional reserve lending, so the rest of the currency supply is based off of.
And before the crisis of 2008, Only about 4% of the currency supply was created by the Federal Reserve.
The other 96% was created by banks doing fractional reserve lending.
People think the government creates currency.
Well, the Federal Reserve is a private bank owned by the world's biggest banks.
It creates the base money, lends it to the commercial banks, which then use it to pyramid these Currency numbers that they just type into computers.
But the unintended consequences from all of this, it's like I said, it's a closed system.
This currency that Ben Bernanke created, I also created a chart that I'll send to you, where I took the Wilshire 5000 total market cap index.
So this is basically the value of the stock market.
It's the market capitalization of the largest 5000 companies in America, which probably represents far greater than 90% of the value of the stock market.
And I overlaid that on a chart of base currency and the correlation since the bailouts of 2008.
I mean, these two lines just go up together.
The reflation of the stock market is an illusory thing where it's completely generated by the Federal Reserve creating currency that's held as excess reserves but that the banks can use during the daytime.
So they can't Write a mortgage with this base currency backing it.
They're not going to lend it out for you to buy a car, but you can use it as a margin lending in the daytime, and that propels the stock market.
So there's going to be huge unintended consequences to this, and basically what I'm doing is trying to get ready And I'm trying to spread the word.
We've got a series called Hidden Secrets of Money, and the mission is to enlighten the world that maximum prosperity can only be achieved through individual freedom, free markets, and sound money.
And wherever you go around the world and you try and measure these things, it turns out that that's the truth.
Well, I certainly not going to disagree with that.
Now, one of the pushbacks that comes from, I guess we could say, the Austrian approach to inflation, which is where, of course, inflation refers to an increase in the money supply.
The inflation in prices is sort of the shadow cast by that rising hell mountain, so to speak.
And one of the pushbacks has been to say, well, according to Austrian theory, because you could say 400% increase in base currency trying to levitate the stock market out of the canyon it's fallen into, we should be seeing some sort of associated rise in prices.
And this has been put forward as a challenge to the Austrian theory.
The argument that the banks are just having it sit around, letting it back to the Fed, getting some interest.
The fact that there does seem to be inflation, as you've pointed out, if you go back to the old Reaganomics way or Reagan's time of measuring, that there is significant increase is the fact that grocery companies have reduced the size of their offerings while keeping the price consistent.
There's a bunch of things I think that would indicate that prices are going up, but they're certainly not rising relative to the amount of money supply increase.
I wonder if you could talk about that for a moment.
Well, there's different aggregates of the currency supply.
I don't call it the money supply, by the way, because we just don't use money.
We use currency.
And I'm hoping that more and more people will start differentiating between money and currency, because it's when the day the public wakes up and understands these differences and how currency, a whole monetary system based on currency, robs them of prosperity and transfers it to people running the game who get to ride for free.
But what was the question?
Again, I sidetracked there.
Oh, just why there hasn't been an equivalent rise in prices compared to the increase in the money supply.
Again, there's different aggregates of the currency supply.
Base currency used to be a very, very small portion.
It's much larger now.
Then there's M2, which is up at around 12 trillion, and then there's M3, which is up at around 18 trillion, excuse me, that the Federal Reserve no longer provides statistics on because there was one component That they eliminated and stopped measuring,
but that component was less than 1% of M3. So there's a couple of, like John Williams at ShadowStats Government Statistics, he recreates M3 minus that one component, so it's still accurate to within 1%, and that's good enough for me.
But what we have seen here is M2 measures more of the people's currency.
The portion of base currency that is currency in circulation And M2, these are mostly bank accounts that are $100,000 or less that they're measuring and other different types of accounts that are under $100,000.
That's sort of the people's currency.
M3 takes into account all of these accounts that are way over $100,000 and money market funds and brokerage houses and things like that, all of these huge accounts.
And so that's more the finance industry's currency supply.
One of the things I just showed at the presentation is that if you take M2 and then you deduct the excess reserves, the excess reserve, we talked about base currency going from $0.8 to $4 trillion.
If you deduct that other $3.2 trillion, what you see is that there's actually been a little bit of a collapse of the M2 currency supply, the portion that the public uses.
And this is one of the reasons you don't see inflation in retail prices that much.
What you do see is inflation of the asset prices that The stock market has inflated hugely and is back into a bubble, and real estate has bounced back into a bubble.
It's not as big as the bubble of 2007, but it's still a very significant bubble that we're in right now.
And the stock market, once again, is in...
And bubbles are not sustainable.
And what they're trying to do is get this bubble to go forever.
And the longer they keep on pumping this thing, the more negative economic energy will be released in the opposite direction.
They are just storing up energy by artificially inflating this thing.
Well, and even that negative energy doesn't have to be that bad, except they're going to try and cushion the fall as well, right?
There's a famous example of in 1920 in America, there was a crash that was about as bad as the 1929 crash, because they still had some vestiges of 19th century classical liberal free market laissez-faire economic thinking.
They let it play out.
It was done within about 12 to 16 months.
Everything went back to normal.
You didn't have the 14-year grinding worldwide depression that resulted in a world war.
So they're going to try and cushion this fall, and that is what is going to make it seem so much worse that it actually has to be.
I mean, the free market is a band-aid off quick kind of scenario and you're all done, but that's not the way the government wants to play it usually.
No, they'll drag it out like Japan.
You know, you were talking about what I call the depression of 1921.
Most economists call it a recession, but it was actually an economic contraction where wholesale prices fell twice as much.
Wholesale prices fell 66%.
In the Great Depression, they only fell 33%.
The deflation was 33%.
There were aspects of the Depression of 1921 that were twice as bad as the Great Depression.
And Congress and the President started talking about doing something to fix it, but by the time they had made any decisions to take any course of action, it was over with.
The free market had healed it.
Then we had a smaller contraction after 1929.
But the government made all these plans to come in and fix it, and they drug it out so that it lasted a decade.
And look at Japan.
That is exactly what they've had.
They've had this big market crash back in the late 80s, early 90s, and they've had this zombie economy ever since, because they just will not allow the free market to clear out all the excesses and to rebalance things.
These Keynesians purposely won't let the scales balance.
They want to keep it tipped to one side, thinking that they're saving things, but they're actually causing tremendous pain and harm.
It comes out of a, to me at least, a rampant narcissistic megalomania that somehow some guy in an air-conditioned office or now some woman in an air-conditioned office can somehow in a truly hive mind way replicate the billions of decisions that occur every day around the world or even in a particular country.
In the free market.
And then the free market, of course, should be free to provide all of the incredible free information that it provides, you know, in terms of prices, in terms of interest rates, in terms of supply and demand.
You have an incredible amount of information provided to you just in terms of price, in terms of price of money, price of goods, price of services.
And that information is continually mixed in with the white noise of political advantage and political manipulation and, you know, maybe even starry-eyed Pollyanna-ish do-goodery that never seems to pan out.
But all of this incredibly complicated, sensitive, real-time information that's provided to help us allocate our scarce resources most effectively, it's like listening to a beautiful orchestra and then there's some giant squid out front with a kazoo constantly blowing it.
Nobody can hear the actual music that the market is generating.
And then people say, oh, well, you see the free market doesn't work.
And that is one of the big problems.
Every time these guys manipulate something and then there are the consequences, they say, look, the free market isn't working.
It wasn't free.
They manipulated it.
These guys have this level of ignorant hubris.
They do not really understand what they're doing.
And they think they do.
They're not that smart, but they think they are.
And we suffer, as the whole world suffers.
Prosperity compounds.
The transactions that we do tomorrow, the number of transactions, the size of the economy, and the level of prosperity are dependent upon the number of transactions that we do today.
If you squash with regulation or some sort of manipulation of the economy, If you extinguish a few transactions today, that means that somebody didn't get paid where they then will not be able to buy something tomorrow and create another transaction.
And so, because prosperity is this compounding effect throughout time, it means that we suffer.
I can't imagine, had we not gone down these stupid socialistic roads of Mao's China and the USSR, We keep on trying this over and over again, and we just refuse to learn from history that the free market is the source of all prosperity.
You know, in Russia, it turned out that the black market was the one place that you could do well.
And what was the black market?
That was capitalism, which was illegal in Russia.
Well, I've read a study, and I'll put a link to this below.
It's one of these grand indictments of even a small amount of regulation.
And the study says that if federal regulations had stayed at the post-war, post-Second World War level, and it wasn't exactly like some anarchistic flameland of hell, Back then, then the GDP growth would have produced a GDP in America currently of over 52 trillion dollars, you know, as opposed to the 15 or 16 or 17 that there is.
So three plus times the amount of wealth.
And imagine how much good we could do with that amount of wealth.
And that's if everything else has stayed the same, but regulations simply hadn't increased to that degree.
Imagine if you took that all the way back to where we first started putting together societies and stuff and where we would be today if we hadn't had these continual setbacks, these dumb experiments.
All we had to do was learn from it like one time and know what not to do.
You and I would be doing this interview on a mind-meld holodeck, and we wouldn't actually have that much to talk about, except I'm really glad they listened.
But of course, that's usually not the case with people who have good ideas.
But we should be living 200 years and have the option of vacationing on the moon, if we like.
The level of prosperity that we are currently experiencing, people just do not realize that we live in a modern-day dark ages.
And the reason they don't realize it is we have no basis for comparison.
Every time we do these regulations and stuff, we permanently cripple future prosperity because you can't go back in time and repair those transactions that didn't happen.
Right, right.
Now, we've mentioned history, and I think you've...
It's a great Churchill quote where he says, the further you look back into the past, the further you can see into the future.
Yes.
And my graduate degree was in history, and it's one of these depressing but liberating and enlightening realizations to realize that history is basically a broken record with different costumes.
The same story still keeps playing out over and over.
Where do you think the greatest parallels are in history to the sort of close to financial reorganization, to put it as nicely possible, times that we're in at the moment?
Wow.
This is a tough one now.
It really makes me think.
The thing is, history repeats, but every time it repeats, there's a twist.
It's not exactly the same.
It doesn't actually repeat, but it rhymes really well.
I think that comes from Mark Twain.
And so it's this rhyming thing, but you've got to take a look at what the twists are.
And the twists are going to be created by the fundamental structure of society and what has been twisted by the economics of the situation.
You know, when I was writing my book...
Now people have written about this, but back then you could study the classical gold standard or the intra-war gold standard called the gold exchange standard or the Bretton Woods system or the global dollar standard, but nobody had written or I don't even know if they had put together the fact.
I tried to research it and couldn't find anything on it.
That every 30 to 40 years, there was this crisis.
There was an emergency meeting of a bunch of finance ministers and so on to hash out a new world monetary system.
And then they'd cobble together some man-made thing that won't work because it can't account for all the forces in the free market.
And I believe that within the next five years or so, we are on the verge of another shift in world monetary system.
Now, the first three of them, classical gold standard to the gold exchange standard to the Bretton Woods to the global dollar standard, these were baby steps off of gold.
So you had full gold backing 40%, unspecified that felt like 8%, and then just debt backing, no gold whatsoever.
And when this one falls apart, I have a feeling that they'll try to keep the debt game going, but I don't think they're going to be able to.
And so we're going to experience a period of chaos, like Jim Rickards says.
But then they're going to look around and say, what worked before?
And what worked before was an asset-backed currency.
It was backed by gold.
And if we go from nothing Back to something.
It is not a baby step.
It is enormous.
And this time, instead of the transition in world monetary system affecting just the international banks and governments, which is what the average person didn't feel it last time, this one, I believe, is going to be felt globally.
Also, when you look at examples of, for instance, hyperinflation in history, hyperinflation was usually isolated to a single country.
Like, you had Weimar, Germany.
There was a German hyperinflation, but you could store wealth in France or England or America.
There were alternatives.
I believe that we're going into deflation first.
We need to take this big deflationary dip as the bond bubble pops.
That's a deflationary event.
There will be less currency in the currency supply.
Central banks around the world, they are scared to death of deflation, and so are governments, because in the debt-based system, the monetary system and government spending on this, you know, when you're doing a deficit every year, those can't operate under deflation.
They implode.
Governments will just fall apart just like the USSR did.
So, if deflation sets in, central bankers around the world, and people like Ben Bernanke and Mario Draghi have already shown their cards.
They have proven that their answer is to go to negative interest rates, which, I mean, if you had talked about negative interest rates to somebody just six years ago, seven years ago, they would say, what are you talking about?
Negative interest rates?
That's impossible.
Well, and just to show people how bizarre that is, one of the reasons why there are interest rates, of course, is that we're mortal.
Therefore, we prefer things now rather than later because we're not going to live forever.
Now, interest rates at zero would be an indication of like Old Testament Methuselah-style longevity.
In other words, I don't care if it's later or now.
I'm going to live forever.
There's no possible time parallel for negative interest rates.
Which is that you would rather consume something in five years than now.
I mean, it's completely mental from any kind of time preference standpoint.
Absolutely, and it shows you the scale of emergency that we are still in.
There is a major economic crisis still playing out, but it's all being covered up, and it's all storing energy while they're trying to apply their Keynesian remedies that they keep on proving don't work, so then they say, well, we need more.
Right.
Now, deflation coming before inflation, because again, back to the Austrian model, the amount of money supply increase is supposed to be related to inflation and money supply results in inflation and prices.
What are the mechanics for deflation occurring before inflation?
Well, as far as inflation and deflation of the currency supply, velocity of currency is basically determined by the mood of the public.
And the central bank's Don't seem to understand that they have no control over that.
If they create 10 times the currency and velocity slows down 90%, you haven't achieved anything.
Velocity, for your listeners, is how many times a unit of currency changes hands over a specified period of time, like a year.
So what we've seen was they created all of this base currency and velocity just slowed to offset it and we didn't see The type of inflation in prices that we should have seen.
So, what was your question again?
Sorry.
Oh, just why deflation would occur before inflation in the coming scenarios that you propose?
Well, first of all, like I said, price levels are more determined by the mood of the people.
Over the long period of time, price levels are determined by quantity of currency.
But in the short period, it's the velocity of the currency that determines prices.
But we are in a massive debt and bond bubble.
And in the next recession or the one after that, there's going to be a period of time where the public really gets scared.
And all of these baby boomers that need to retire in just a few years, that haven't saved up enough to retire, and when they start realizing that the government isn't going to be able to come through on all the promises that it's made, they're going to Pull in their horns and stop spending.
And velocity slows down.
And at the same time, you have a bond bubble popping.
And if you remember the crisis of 2008, banks were afraid to lend to each other.
And what happens when you don't roll over, if you take the M2 or the M3 currency supply and you deduct base currency, the M2 currency supply, there was a contraction.
Of $1.7 trillion, it went from, I believe it was 11.9 or something, and it contracted $1.7 trillion.
It was huge.
If you take away these excess reserves that Ben Bernanke created, and basically what he did was he offset deflation, except that was sitting in their accounts and not moving.
Except it would move during the daytime in the stock market.
So it didn't get used to create all of the loans to pump up Main Street.
It got used by Wall Street instead.
So it was a gift to Wall Street.
But this deflation, when the banks get scared, they don't roll over old loans.
And there's a whole lot of loans that are rolled over on a daily basis or a monthly basis or an annual basis.
And if they don't renew those, that means that they have to be paid off.
And when they pay off the principal, that currency vanishes.
It was just a credit and a debit on the books when they created that currency.
And the credit and the debit meet each other and annihilate each other like matter antimatter.
And at that point, you've got true deflation, the contraction of the currency supply.
I've never, in studying monetary history also, I've never seen the general public, Joe Sixpack, rewarded for mass stupidity.
Well, for that you really have to get into politics.
And it seems to me that the reason, it is hard for people to see the sort of storm that's coming because they're kind of sealed off from the loss of value that has occurred because of wildly misguided and counterproductive policies that Of the last, you know, sort of 50, 60 years.
I would say sort of really since The 1960s and I think the reason for that and when you start to look at I don't know I've seen some wild calculations of like 150 160 trillion dollars of unfunded liabilities like more than 10 times the GDP of the country and so on I think why people don't see it as much and why they need people who set out those canaries in the coal mine to see what's coming is that we are consuming the future in the form of debt and we are consuming the past in the form of savings and I'm sort of thinking of the younger generation who's getting help through college by their parents savings
and We're good to go.
When those artificial supports give way, it's going to be like one of those Wile E. Coyote Falls from the old Roadrunner cartoons.
I mean, it really is going to be shocking, I think, to people how quickly the wealth that is illusory is going to vanish.
Yeah, most people don't realize that all of the people...
Look around and they consider wealth to be stocks, bonds, dollars.
And the true wealth is the real estate that's out there, the factories, the oil wells, the forests, these true assets.
And all of the fictitious wealth, especially this $160 trillion worth of derivatives that you're talking about, is a claim check on actual wealth.
But they're rehypothecated.
Right now, on the commodities exchange for gold, there are close to 300 claim checks that have been sold.
They sell futures contracts.
The futures contract is a promise to deliver gold someday in the future.
Those promises, this imaginary gold that they sell into the market, is what determines the spot price of gold.
And right now, there's close to 300 ounces of imaginary gold that have been sold into the market for each one ounce of real gold that is deliverable into those contracts.
That's the level of leverage that this whole society runs on, the derivatives that you were just talking about, all of the stuff in the financial sector.
If you try to settle everything, And actually turn in your claim check, sell your share of stock, exercise this option.
What you would find is it's like a game of musical chairs where there's 7.7 billion people playing, but there's only about 100 chairs.
People are going to get cozy.
Right, real quick.
Alright, so I just want to talk about bonds very briefly, and then let's get into, now that we've scared the living crap out of people, let's get into sort of the golden parachutes that they can start to work with.
And I like the 301.
Fiat gold is just a kind of weird concept I've still got to wrap my head around in terms of these futures.
One point I have to make there is that that artificially suppresses the price of gold by having all this imaginary gold sold into the markets, and it gives people what I believe is going to be this deflationary dip that we're going into.
The price of gold may fall, but it's going to be temporary, until all of the world's central bankers react just like Mario Draghi and Ben Bernanke did during the crisis of 2008.
And they're going to print until deflation gives way.
And that means that someday there's going to be huge inflation that follows this deflation and possibly even a hyperinflation.
Now, no hyperinflation.
You talked about what's different this time.
This time, every currency on the planet is fiat.
That has never happened before.
This time, when this crisis happens, we learned in the crisis of 2008, all those mortgage-backed securities, these derivatives, transmitted the crisis.
I mean, somebody can't pay their mortgage in Las Vegas, and the country of Iceland has to file bankruptcy.
Right.
Well, I've said before that when people say, well, you know, the U.S. dollar is doing well relative to X, Y, O, Z currency, and it's like, well, if 10 people fall out of a plane, you know, they're doing okay, except that the ground is still coming.
So it doesn't matter relative to each other.
It matters relative to reality how they're doing.
So with regards to bonds, you know, when you look at things like Chicago and Detroit and Puerto Rico and so on, It just seems so bizarre that these bonds could have any kind of real value.
I guess there is the assumption that there will be some sort of federal bailout of these bonds should they ever take a significant haircut.
But it seems like we're sailing past Greek-style territory when it comes to these bonds.
Do you think there is going to be a big correction?
Do you think there's going to be a bailout?
I assume there will be a bailout, but what do you think the effects will be?
Yeah, well, you know, what people don't really look at, for some reason, the United States Treasury bond is still considered the safe haven asset.
I think that, you know, during this deflation, People will run toward where they've been trained to run, just like trained monkeys.
They're going to do what they've been trained to do, and they'll still run to U.S. Treasuries.
The crisis will probably start overseas in China or Europe or something like that.
The U.S. Treasury will be the short-term beneficiary and do fairly well.
This is an IOU. I think I wrote this in my book back in 2007.
So, you know, you've got Uncle Sam, this guy, that has been going around town borrowing currency from everybody for the past 60 years.
In the past 60 years, there's only been four years where he has been able to pay back more than he has borrowed.
Four years out of 60.
And he keeps on going further and further in debt, and now he's looking you in the eye and saying, come on, please, just loan me a little bit more.
I promise I'll pay you back.
Like the shifty brother-in-law that you hope doesn't call you.
Exactly.
And, you know, Puerto Rico, for instance, is a prime example.
Now, they can't print their own currency.
That's one of the differences here.
The U.S. Treasury, we can print our own currency to pay back the principal and the interest on those bonds.
Puerto Rico can't.
So their hand is being forced a lot sooner.
The same thing with Greece.
They were part of the Eurozone.
They can't print their own currency.
To cover the debt.
And so their hand is being forced a lot sooner.
But basically, we're in for the same outcome.
It's just that, you know, when you look at the Japanese crisis, you know, they suffered this huge deflation.
They've been mired in it since the early 90s.
And their stock market crashed in the late 80s.
But during that whole horrible economic period, they had us to sell stuff to.
And to whom will we sell stuff during this crisis?
If the economic driver of the world suffers an enormous downturn, where does the slack get taken up?
Well, my new book, of course, is going to be entitled Space Aliens with Bitcoins.
My game plan on how humanity is going to survive.
Anyway, it's a fold-out book.
But, okay, so let's give people some relief from the danger.
And that, I think, comes in the form of gold.
Gold, of course, is now conceived or perceived by many people to be ornamental.
Like the purpose of gold is to fill a jewelers shop in the mall.
That really has not been the purpose of gold throughout history.
And it does fulfill, I guess, way back to Aristotle's view of what a currency is, what is needed for there to be a currency.
And people, again, until you know this kind of history, it's really hard to understand what gold is all about.
It's nice that you can make rings out of it, but it's really nice that it binds civilization together and maintains our standard of living a little bit more than a ring.
And the price of things in gold has a remarkable stability over time.
Just two examples that pop in the head.
One is quite a famous example, is that...
A hundred years ago, a nice suit would cost you about an ounce of gold.
Now, a nice suit costs you about an ounce of gold.
And I've seen calculations for the price of a steak dinner and other things.
And it is weird and eerie the degree to which the price of things remains stable over gold.
I mean, if there was gold, however much it would be to buy a 10-cent candy bar when I first came to Canada, you know, the fleck of gold or whatever, it would be the same price.
to buy the candy bar now and that degree of price stability it's really hard For people to understand what it's like to have money that doesn't slowly vaporize over time.
The money that retains its value.
I mean, the degree to which people spend money because they just don't want it to lose value or they throw it into the stock market they don't really want to be in or they buy bonds simply because there are termites eating your money all the time.
So you've got to keep it moving, which is sort of, I think, part of the point of this whole system.
But the degree to which gold is stable in terms of what it can buy I mean, if there were cell phones around, it would be half an ounce of gold to buy a cell phone 2,000 years ago as now kind of thing.
So I wonder if you could tell people a little bit about why you consider gold to be such a cornerstone of hedging against these kinds of economic transitions.
Yeah.
In a future episode of Hidden Secrets of Money, you'll see debunking the myth of the Roman suit.
Because you talked about a suit being relatively the same price now as it was 100 years ago, which is true.
However, gold has a purchasing power range, a valuation channel, I call it.
Where it goes up and down.
It would buy you a suit before the Federal Reserve by the peak of the stock market in the roaring 20s.
You really couldn't get a suit.
There's people that say In ancient Rome, a man could clothe himself from head to toe with a pair of sandals, a toga, and a belt for the price of an ounce of gold, and you still can today.
But if you look at this, in the peak of 29, a decent suit, shoes, and a belt was going to cost you more than $20.67, which was an ounce of gold then.
But then we had the Great Depression.
Prices fell by 33%, and gold, when Roosevelt was allowed to devalue the dollar, gold rose from $20.67 an ounce to $35 an ounce.
So that, combined with the deflation, would buy you a very— $35 bought you a fine suit in the Great Depression.
A belt and shoes.
But then, it was still $35 in 1970, but we had had all the inflation of the currency supply, and by 1970, the $35 would buy you a pair of shoes, not the suit.
Then gold became free trading, and now we've got gold at $1,100, $1,200, and yes, it buys you an entire outfit once again.
So it zigzags in this range of purchasing power.
The reason it stays in that range It's because we mine gold at about the same rate that we make babies.
So the currency units per person are almost the same as in ancient Rome and today.
Now, there's one thing that you're going to see in this upcoming episode is that in the meantime, we have become very, very efficient.
The time value Contained in stuff, the amount of human labor that it takes to create anything.
That toga in ancient Rome, I mean, somebody had to tend a field of cotton or sheep And then shear the sheep or pick the cotton and comb out the seed and then dye the stuff with hand-mined dyes or dyes that are collected from plants.
Very, very labor-intensive.
And then weave it on something called a spindle and distaff, which is like this vertical...
It's basically two sticks.
Hand-weave the cloth.
And then cut out a cloth and hand-stitched this toga together and now we've got factory farming that does all this stuff on thousands of acres very quickly.
It goes through these mills that spit out miles of cloth every minute and dyes that are production dyes and then it goes to A factory where shears, they stack all of these layers of cloth and then cut them all out at the same time so you get 50 sleeves and 50 legs and so on and then it goes to a place where specialists that just make the right sleeve or the left leg do so and they crank these things out one
a minute And then that all gets delivered to a store where you've got this selection of hundreds of styles of suit in multiple colors, and it's the same story for the belts and the shoes that come off the production.
So the time value contained in stuff is far less.
And this is why, instead of earning a subsistence living like we did 2,000 years ago when an ounce of gold would clothe a man from head to toe, where the average person may not experience a comfortable bed and a pair of shoes in his lifetime, We went from that to having all this stuff around us.
We've got refrigerators and TVs and great bed to sleep in and apartments, cell phones and computers and we can get on a plane and fly anywhere we want in the world.
So we've got like a thousand times more stuff per person.
But the same amount of gold per person.
Shouldn't gold actually be buying a thousand times more stuff?
And then why doesn't it?
Well, the reason is because we came up with all these other alternative liquid financial assets such as cash, bonds, stocks, and so on.
And so they each dilute each other's purchasing power and compete for purchasing power.
But the result is that the ratio is about $40,000 worth of liquid financial assets per person on the planet compared to just $200 worth of investable gold.
And so in the coming crisis, I do see people flooding toward gold.
And if just 10% of that currency seeks gold, the price has to rise 20-fold to fulfill supply and demand.
Right.
Well, and certainly as people see the value of fiat currency dissolving, there will be a desire.
You know, like when the ship goes down, you grab anything that floats, and in that metaphor, gold would have to float.
Not the best metaphor I've ever used, but I think people can get the idea.
So the degree to which people can convert fiat currency into gold, in other words, a politically controlled pseudo-money currency into something that traditionally has been the store of fairly constant value over time, It seems like wouldn't people want to do that sooner rather than later?
Or maybe during the time of deflation would be a better time to do it?
What do you think the timing would be for people who've got limited assets?
I think one of the things you're going to see is as we take this deflationary dip, if gold goes under Yes, you're going to be able to buy futures, contracts, and options at those prices.
But what happens is physical gold that requires some blood, sweat, and tears to get it out of the ground and refined and mint it into a coin or a bar, and the gold that is actually quite limited, where there's 1 300th the number of ounces available to the number of claim checks that have been sold on those ounces.
That gold, we've experienced this as a dealer several times, where the spread goes up.
Recently there was a shortage of United States Silver Eagles, and the premium that we had to pay over spot to the suppliers more than doubled.
And so, yes, silver took a big dip in spot price, but Silver Eagles actually stayed the same or went up a little bit.
We saw the same thing happen back in 2008.
So I have a feeling that for right now, and you might see gold going down, and there may be opportunities to actually buy physical gold, possibly under $1,000.
You could see silver maybe even down at $7,000.
I have no idea.
But the thing is, we're in this short period where we're at the back half of the eye of the storm.
The first half was the crisis of 2008.
And the other half of this storm is going to be many, many times worse.
And we have this opportunity.
I have a feeling it's probably going to be over with within a year or two to accumulate.
And I just keep on accumulating a position along with, you know, I don't want to be an alarmist, but I also have several months of emergency food supplies.
I do that because it's just prudent.
I live in an earthquake area.
You've seen what happened during Katrina.
There are natural disasters.
It's basically like buying fire insurance on your house.
I've gotten myself and my family enough food.
I do believe during the deflationary dip you should have a little bit of a higher cash position also.
I maintain Plenty of cash outside the bank.
I could probably get by for six months on cash that's outside the banking system.
In Los Angeles here, there's a private vault service where you can get safe deposit bucks that don't fall under banking law.
So they won't be closed if there's a bank holiday or something like that.
And so, yeah, I'm preparing for something that has a bell curve of probabilities, where what's most likely going to happen is something in the middle.
But you want to make sure that you are prepared for the tail risks, because once in a while, something like that does happen.
Yeah, well, certainly when you build a house, you've got to build it for the extreme weather that you're going to be facing.
And I completely with you, I strongly recommend people having at least a couple of months of food and water supplies.
What's the worst case scenario?
You eat it over time should nothing happen, you know, and given the price of groceries, that's still a reasonably good investment.
It gets close to its expiration date in 20 or 30 years, and you donate it to a charity and replace it.
Right.
Yeah.
Right.
So if I understand what you're saying, Michael, correctly, there is going to be some variation, of course, in the price of gold in the short run, but compared to the potential upside, if, as you say, 10% of people attempt to take, or 10% of assets, particularly currency assets, try and find a safe haven in gold, the relative variation is not as important, though not unimportant.
It's not as important as the potential upside should this kind of crisis hit again.
Correct.
What I'm betting on Isn't that gold is going to do any specific thing.
It's that central banks are going to do a specific thing.
They will continue to debase and dilute the currency supply.
And what you've seen is gold has gone from 250 up to 1900, and it's at 1100.
But these are just the noise.
It's the jogs on the way up to the moon, where it's really headed.
How do you measure?
People look at the price of gold.
Somebody just was talking about assets deflating, and he said, well, gold deflated from $1,900 to $1,200.
So that seems like deflation of an asset.
But if you look over the long term, what is really happening?
Gold used to be our money.
And what has happened is we stopped using gold as money and we came up with digits that somebody can create in a computer or print.
And we entrust them to keep the supply limited on those so that they have purchasing power.
But because there's politics and politicians that want to promise you free stuff, They don't maintain that control.
They continuously do deficit spending.
They create currency to fund that deficit spending.
That dilutes the currency supply.
And does it cause prices to rise?
Or does it cause the purchasing power of the dollar to fall?
If you look at it in this other frame, that it's actually the currency falling and not prices.
Businesses are just doing what they can to stay in business.
They're constantly trying to figure out Where prices have to be to be able to pay all of their employees and make a profit so that the business owner can live.
And it's a game that they shouldn't have to play and they wouldn't have to play it under a fixed monetary system.
But basically, the value of the dollar has gone From one twentieth of an ounce of gold to one eleven hundredth or twelve hundredth of an ounce of gold.
So it's the dollar falling.
It's not gold going up.
Now, I said that gold zigzags in this purchasing power range.
The actual amount of stuff that you're able to buy with an ounce of gold should go up.
I mean, the wealth transfer that occurs, it should go up just exponentially.
It should be an enormous event.
If some of those trusted liquid, those alternative liquid financial assets start going bad, just like the mortgage-backed securities went bad in 2008, they evaporated.
There was a period of time Where, you know, here's all these home mortgages that are backing this security, and there was a point in time where you couldn't sell it to anybody.
It had no value.
Right.
Except the Fed.
When that happens and people want to get rid of these alternative financial assets and go back to gold, the actual purchasing power of gold, which is what matters, it isn't the price, it's how much real estate can you get for it, how much of a business can you buy for it.
It's the other things in life, the groceries and the next car you're going to buy and the next house and so on.
That's what matters when it comes to the purchasing power of gold.
Right.
And that is important to remember for people, of course, who...
My mother's side of the family comes from Germany, and the details of the Weimar Republic and the hyperinflation sort of filtered down.
You know, if you read about Roman history, the history of the French Revolution, and a variety of others.
Zimbabwe, you know, there's still those people floating around with those Zimbabwe dollars who show up at libertarian conventions saying, ah, you see, this could happen.
And it can, and it will.
I have a stack of about $40 quadrillion on my desk and give away.
You just keep unfolding it with the zeros.
They just go on and on.
When I speak at an event, I make everybody in the audience a 100 trillionaire.
Very nice.
I give them away.
So, I really recommend for people, thanks a lot for your time, Michael.
It's really, really important for people to understand this, that the book, Guide to Investing in Gold and Silver, Protect Your Financial Future, we'll link to it below.
You almost can't invest in something better about what's coming up.
Of course, at goldsilver.com, you can, of course, buy the gold.
And you do physical delivery if people prefer that, too.
Is that right?
Yeah, we do physical delivery.
We open accounts at Brinks Security in Hong Kong, Singapore, Salt Lake City, Toronto.
I believe we've added Dubai and London.
And so we can open a storage account for you and have it stored at the location of your choice.
And we can put it in an IRA. Right.
Okay.
So it's really, really worth, you know, I'm a donation-based life form.
So for me, the asset maintenance of my listener's wealth is quite important to me, as I'm sure it is for you.
And I really, really thank you for your time today, Michael.
It's a really great pleasure.
And just a reminder, yeah, please go to goldsilver.com and check out the book.
We'll link to it again below.
And it's a really, really sound investment in your knowledge base because...
Eventually, your wealth is not even fixed.
It's not a material thing.
It is to do with the amount of knowledge that you have.
And I think your wealth is going to be in need of some knowledge shields in the future.
I think everyone's is.
So I really thank you for your time today in helping people to understand these issues.
Well, thank you.
It's been a pleasure speaking with you.
And keep up your good work pressing for libertarianism, Austrian economics, and freedom.
