Mike Maloney: The Coming Wealth Transfer
History may not repeat but it sure does rhyme. Mike Maloney has studied monetary and financial breakdowns throughout history and concludes that there's nothing new or different happening this time, except its global and far more massive than any other time in history.
Worse, there are echoes of 1911 where a series of diplomatic blunders and national pride and intransigence combined to create the still largely inexplicable start to WW I.
Chris Martenson: Well it’s global this time, right? This is — there’s nowhere to hide. (…) What has happened when we’ve tried to print our way to prosperity before? What has happen? Why has it happened and what have been the consequences always been?
Mike Maloney: Whenever you try to print your way to prosperity it transfers well from the masses to the few. The few being the people running the game and then also the hucksters that are very nimble, the con artists and so on. You see these people get rich during the Weimar Hyperinflation. There were quite a few of these fancy salespeople that got rich; they didn’t stay rich once things stabilized again.
But it creates such a topsy turvy world that the normal person that does not know how to operate under these weird economic conditions cannot possibly keep up with things and wealth is transferred away from those people to the people that are very good at observing what’s going on that second and adjusting to it. But the one thing that I see as a constant throughout history is that gold and silver eventually do an accounting of all this — the financial — you know financial finessing that the governments are doing.
And when it does that it — there is a transfer of wealth to the people that own gold and silver. And so — it’s very rare moments in history. This does not happen often. But it’s a great opportunity and I’ve just — you know if you look at gold right now the public’s opinion of gold is quite low because it’s been going down for three years.
But if you look at it in a longer timeframe and I started investing in gold in 2002 and by early 2003 I started investing in silver and if you look at it from the year 2000 it’s still the best performing of the assets. It’s still out performed the Dow and S&P and real estate.
And I will continue, myself, to accumulate on the way down I see this as an opportunity. And if it goes lower than it is right now, you know nobody has a perfect crystal ball. So it may have already put in its lows. But I just accumulate every single month and I will continue doing that because I see that as the only sure thing in this crazy world of currency creation.
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Mike Maloney: The Coming Wealth Transfer
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Chris Martenson: Hello and welcome to this Peak Prosperity podcast, I am your host Chris Martenson. As we watch the world’s central banks try increasingly risky and bizarre monetary experiments the question always forms, I get asked this a lot, “Is there anything that I can do to protect myself from the potential, if not inevitable consequences of those actions”?
Now consider Japan’s central bank is now openly printing enough money to buy 100% of all new debt issued by the government and billions of dollars of stocks each month, right? And they will continue these efforts until morale improves or people lose faith in their yen currency and begin buying more stuff than they need at increasingly faster rates each quarter without any regard for the fact that they are both demographically aging and fewer in number with every passing year. We are living under a regime of financial repression and it’s global and larger than ever than anything attempted before.
Now to help us make sense of this I can’t think of anybody better than the man who paid for and produced the absolute gem of a series called The Hidden Secrets of Money, if you haven’t seen it, Google it and start watching it; it’s fantastic. Mike Maloney is the founder and owner of Goldsilver.com from which I guess I should reveal I recently bought a couple of boxes of silver eagles from and we don’t have any other arrangements to disclose but I am a customer of Mike’s excellent establishment. So Mike, it’s so good to have you back on the show.
Mike Maloney: Well thanks for having me Chris.
Chris Martenson: So let’s begin here. Historically speaking you know you went to a lot of locations, you reviewed a lot of history, you looked at how the world has been operating around this concept of money and I know you have a fine point to make that the stuff we call money today is not money, its currency. But historically speaking from a monetary standpoint tell just how unusual are these times that we’re living in?
Mike Maloney: Well things like this had happened in specific locations around the world at specific times but nothing like this, nothing anywhere close to it has happened globally all at once before. Right now the things that the world’s central banks are doing are building energy that will some day be released in most likely a catastrophic failure of the currency systems.
Chris Martenson: Yeah that’s — I think that’s a perfect way to put it. They’re building energy — its potential energy. It’s kind of like in 2008 we could have hopped off maybe the fourth rung of the step ladder but I think we’re 15 rungs up a step ladder today.
Mike Maloney: Exactly. I mean if Alan Greenspan hadn’t liquefied the markets because he was afraid of the Y2K bug and then in the wake of the crash of the NASDAQ and 9/11, you know, he created the real estate bubble that then the Federal Reserve supposedly saved us from disaster.
They keep on creating these monsters, these bubbles and then they brag that they were the ones that killed them, that controlled the monster. And every time they do that they just set the stage for another bubble. The next big bubble to pop is going to be the bond bubble I believe. But they’ve pushed — with all this currency creation they’ve pushed real estate back into a — it isn’t as big a bubble as it was back in 2007, but it is a bubble nonetheless. And the stock markets with trailing PE’s of 26 and stuff like that, that we are back up into a stock market bubble that is nowhere near where it was in the year 2000. But these smaller echo bubbles of real estate and stocks are going to be popping along with the bond market and I think we’re going to see something that the world has never seen before.
Chris Martenson: Well it’s global this time, right? This is — there’s nowhere to hide. This isn’t like you’re in Austria in 1918 or something like that and you decide to duck over the border because you know there’s a printing experiment coming you don’t approve of. There’s really nowhere to hide at this point and this is — my favorite definition of a bubble is this: A bubble exists when asset prices move beyond what incomes can sustain. So when I look at the prices of bonds right now they are priced for perfection. I mean my goodness a junk bond market that trades with a five handle, meaning it’s in the 5% range. In fact, it dipped briefly into the 4% range, right? It’s just extraordinary; so you’ve mentioned though that we’ve been here before historically so take us down one of those paths. So let’s imagine we’re in, pick one, it could be Austria 1918 through the 1923 period, it could be I don’t care where. What has happened when we’ve tried to print our way to prosperity before? What has happened? Why has it happened and what have been the consequences always been?
Mike Maloney: Whenever you try to print your way to prosperity it transfers wealth from the masses to the few. The few being the people running the game and then also the hucksters that are very nimble, the con artists and so on. You see these people get rich during the Weimar Hyperinflation. There were quite a few of these fancy salespeople that got rich; they didn’t stay rich once things stabilized again. But it creates such a topsy turvy world that the normal person that does not know how to operate under these weird economic conditions cannot possibly keep up with things and wealth is transferred away from those people to the people that are very good at observing what’s going on that second and adjusting to it. But the one thing that I see as a constant throughout history is that gold and silver eventually do an accounting of all this financial finessing that the governments are doing. And when it does that, there is a transfer of wealth to the people that own gold and silver. And so — it’s very rare moments in history. This does not happen often. But it’s a great opportunity and I’ve just — you know if you look at gold right now the public’s opinion of gold is quite low because it’s been going down for three years. But if you look at it in a longer timeframe—I started investing in gold in 2002 and by early 2003 I started investing in silver and if you look at it from the year 2000 it’s still the best performing of the assets. It still outperformed the Dow and S&P and real estate. And I will continue, myself, to accumulate on the way down; I see this as an opportunity. And if it goes lower than it is right now, you know nobody has a perfect crystal ball. So it may have already put in its lows. But I just accumulate every single month and I will continue doing that because I see that as the only sure thing in this crazy world of currency creation.
Chris Martenson: So this is a part I really want to — I want to harp on. I’ve been talking about this and harping on it elsewhere for a long time because it’s a tricky concept; so I don’t think we can go over it too many times. When historically speaking here’s the historical analog I see and I’d love to get your view on this. What happens is there’s a cycle that happens, governments form, they have that wonderful they’re in the East creation moment, everybody is happy, high ideals and then some form of hardening sets in and you become these big bureaucracies and through that process what typically tends to happen is that somehow it becomes entrenched in the government. And I’m not talking about just the US government; this happened many times all across the world all different cultures.
But what happens as I see it is that they begin to promise too much because it’s easy to do that and nobody wants to take pain today; they’d rather take pain tomorrow if possible. So pain tomorrow is always inflation in the future rather than deflation today; so printing becomes — it’s just a human habit and it seems easy so you want to print your way to prosperity. So we see this over and over again and now we’ve got some extra sophistication on this story because you can actually go to the Chicago School of Economics to get a PhD in this. So there are economists now who will come and whisper in your ear if you’re a government bureaucrat and say “Listen we know you’ve got too much debt on the books and it happen for good reasons, right? You had a war to fight and then another one and then two and then you wanted to cut taxes; we understand. So you got here and now you have too much debt on the books. And you need to get out from under that. Fortunately I work for your central bank so here’s what we’re going to do. We’re going to create a regime of what’s called financial repression and here’s how it works. Consider your 300 million people in your country or 320 in the US right now. They’re your captive audience. So they have savings, they’ve worked hard, they’ve produced, they’ve played by the rules, they’ve put their money into a variety of instruments, they’ve put them into 401ks, they’re in stocks, they’re in bonds, the currency that they’ve got in the bank. And to help you get out from under your debt burden we’re going to engineer this regime of what’s called 'financial repression' and it has just a few pillars. The first, the most important pillar is we have to engineer negative real interest rates. So that happens when the interest rate that somebody can earn on a safe investment —a deposit in a bank, it’s a treasury bill; that rate of interest has to be less than the rate of inflation. So the good news is we can control that rate of interest; we can drive that to zero if we need to, that’s fine. As long as the rate of inflation is more than zero this works and here’s how it works. While somebody is earning zero percent on their money but inflation is two or three percent there’s a loss of purchasing power. Now we’re going to pretend and we’re going to tell these people that purchasing power just disappeared, it’s like a law of nature. It’s like 'Oh a comet went across the sky, there’s gravity', you know? 'There are things.' But it’s not a law of nature.
What happens when somebody is earning zero percent and inflation is two or three percent they are losing purchasing power and it’s being transferred to somebody else" and you mentioned that transfer word before, right? "So that transfer is a known function but the only way this works is A,) the people can’t know what we’re doing and B,) if they do find out they can’t escape it so here’s how we prevent them from escaping. We create capital controls so that they can’t duck over the border as it were and get out of the country." So things like FATCA, the act that makes it so onerous for foreign banks to sign up US customers, they just don’t do that anymore. That’s a form of a soft capital control; they exist all over the place. Try as a US citizen going to somewhere in the country and not having the IRS and treasury follows you; it’s impossible, right? So Caesar has got his fingers all over this story.
And then the second thing in that control story is they can’t have an out, they can’t buy something that escapes that banking system theft of purchasing power so gold is a traditional — I’ll just use gold as the metaphor for this, but gold is the traditional way that people would look at the system and go “I need to be out of that system” and that’s what I did, just like you did back around 2002 was my first gold purchase, 2001 somewhere in that zone. And that was my way of saying “Wow I need to escape from what I see coming”.
The cornerstone of that policy then is that A,) you have to create negative real interest rates, B) you have to put the capital controls in place, C) you have to make sure the price of gold is contained so that it doesn’t give people a way out. To me its fascinating, Mike, that the down leg in gold that started in 2011 coincided perfectly with the largest program of quantitative easing that was ever initiated by the Federal Reserve. How do you see all that?
Mike Maloney: Well I don’t think that’s just a coincidence, but your analogy of all of these pillars that you talk about are absolutely correct and so I see this as a Berlin Wall or a leash on any wealthy US citizen, anybody that has any means whatsoever. There’s an exit tax if you want to leave the United States and denounce your citizenship. You’re going to have to give up half of your net worth basically to the IRS to leave this country. We’re the only country on the planet that — well with the exception of Eritrea which is a very small country that hasn’t got the technology to track their citizens—we’re the only country that taxes our citizens based on our citizenship, not the location in which they live. Any other country if you move from France to New Zealand, you pay New Zealand taxes, you don’t pay French taxes. But here what you’re going to do is you’re going to — if you’re a US citizen you move to New Zealand, you’re going to pay New Zealand taxes first and then you get to deduct those from your US taxes on your US tax return. So we have a leash on our citizens that’s stronger than — and this invisible Berlin Wall that’s higher than any other country on the planet. People think that we’re free but we’re instituting those — you talked about FATCA, the capital controls that we are doing right now it’s pretty darn scary.
One other thing I’d like to point out though is under what I would call a natural monetary system you know gold and silver evolved as money. It was something that was free market and it was a natural evolution of trying a whole bunch of different things and gold and silver came out the front runners because they have the best combination of attributes to make them money. But under a natural monetary system you do have negative interest rates basically or you’d have a mild constant deflation because man gets better at everything he does; so you don’t have to pay any interest rate. You’re making an interest rate at zero just holding your money under your mattress or in the bank because everything is slowly getting cheaper; it’s just a natural mild inflation as we innovate, as we become more efficient.
The financial repression that is going on now and the engineering of gold going down I do believe that gold is manipulated. I don’t — every time that there’s a drop though I do not see that as a major manipulation. Gold is manipulated over the long term and there are key times when it is pushed down. Like for instance after the Swiss gold referendum, gold dropped but then bounced. Well there was a whole bunch of people shorting gold and once the shorting went — once it’s dropped a certain percentage then everybody rushes in to cover their shorts and lock in their profits. And that is probably what caused the big bounce. One thing about most of the gold community that talks about manipulation every time gold drops they say that it got crushed down. Sometimes it’s just because it went down; other times it is real manipulation. The Federal Reserve and the world's central banks are looking like you talked about that it wasn’t just coincidence that gold peaked and started falling sort of right on cue with QE.
But with the big pop in gold that we had just the other day you never see a gold bug crying manipulation to the up side, sometimes this is just market movements.
Chris Martenson: Well you know what you call market movements I am ascribing to this idea that we are in the grips of speculators; not just in gold, not in silver, not just in oil, not in corn, not in options on Walmart stock. I see this everywhere now so there was this whole shift that happened where — and this is again around the theme of what happens when speculators arise. And you mentioned this historically as something that’s seen over and over again. And I’ve read accounts from Roman times where when Rome was busy debasing their coinage, they discovered much to their dismay that many people were spending more time being hucksters, charlatans, speculators, otherwise figuring out how to feast off of the profits that were to be had from a debasing currency rather than producing something of worthwhile value. They would spend more of their time figuring out how to sort of game the system; so what you’re describing I call gaming the system. I see it over and over again. So when somebody decides to step into the gold market, the silver market, the oil market, I don’t care what market at the most thinly traded hour of the day and either buy or sell in mass quantities that blows out respectively either the Ask or the Bid stack to the point that a new price is established, that’s price manipulation. It’s just speculation, golf claps for them, I think they did a great job. But what they're not doing is helping us find legitimate price discover; so that’s happening, right?
Mike Maloney: Yes.
Chris Martenson: So we have the speculation that’s just going crazy, right? But on the fundamental side you have little lonely voices like me and you and other people going “Hey did anybody notice that China bought 100% of world mine output last year and did you see that”? You know there are these fundamental parts of the story which what I’d love to get your perspective on is from a macro perspective first. That flow of real wealth which is gold and silver, which is oil, which is good stuff. The flow of real wealth from west to east—is that real in your mind? And if so, does it have an endpoint?
Mike Maloney: It’s very real. This transfer of wealth from west to east this is also something that goes along — some people believe in the east/west cycle, some people don’t. This is a cycle that shifts roughly every 500 years from east to west and back. If you look at the Dark Ages, China was developing gun powder and already printing on paper where you know, in Europe monks were scribing out books and so on. So this is a very real thing but you know you brought up that China was buying, but on balance the world’s central banks are net buyers of gold and this is a very important thing. There aren’t many central banks selling gold these days, they’re all buying. And this is at a point where a lot of the public is giving up and selling right now, that’s sort of a sad thing. The one thing I worry about though more than my personal wealth is you know even if you do accumulate any wealth or are able to protect your wealth with gold and silver, are you going to be able to keep it if the political landscape changes?
Throughout history when there’s a great economic crisis what you see happen very often is that there’s a big change in the political landscape and it’s almost always for the worse. And this is I think the main thing that we need to wake people up about.
Chris Martenson: This is a huge concern of mine because first of all I thought 2008 was the perfect time for us to have looked in the mirror and said “Well yeah we’re going to sort of pin this on sub prime”, but honestly sub prime mortgages those were the pin that popped the bubble; what was the bubble? The bubble was that we were growing our credit at twice the rate of our underlying income, GDP. So total credit market debt in the United States growing at 8% a year; underlying GDP growing half that rate, that’s a problem, just a math problem. So that would have been a great time to go “Hey maybe borrowing at a faster rate then your income is growing is a bad idea”; that would have been a perfect moment to say “Wow where were the excesses” and we might have noted that “Oh gosh 2007 40% of all US corporate profits were in the financial arena, maybe that’s too high where historically that’s been at 8%. So maybe we need to do a lot of skinnying down of our financial industry."
Instead we said “Eh nope what we’re going to do is we’re going to see if we can encourage more borrowing so that we can keep that particular charade going for a little bit longer”. My concern is that seeing how we failed to notice the most obvious diagnosis of our predicament back then, which was I can summarize it in three words “Too much debt”. That was easy, like anybody, like a sixth grader could have worked that out on a napkin with a crayon and somehow as a nation we couldn’t face that. So this brings me to your concern, which is that when this next bubble bursts, and by the way it’s global and it involves bonds and it involves equities, it involves all sorts of things. There’s just a general reset that has to happen. I’m concerned that those who are in power are going to use that as an opportunity not for introspection, not to point out how they might have had some culpability or made a few mistakes along the way. But instead to say, “It’s that guy over there. It’s Putin, I’m sure of it. It was that guy; it’s Russia. Gosh darn it, it was Russia. No, it was China, it’s that guy, Premier Xi, that’s the guy”, or something, right? They’ll just point their fingers because history is full of that, isn’t it?
Mike Maloney: Yes, I mean you can see it happening right now. It’s interesting too that you know World War I we’re at the anniversary right now and it’s — there was a bunch of animosity and hatred building up and then a shot was fired in relatively the same area of the world. Crimea is close to Hungary, Austria and Serbia and so we’ve got this very eerie repeat of history going on and now you see all this political posturing and the thing is I don’t think there’s a single listener here that hates any particular person in Russia unless they’ve got a particular opinion of Putin. But I don’t hate anybody over there; I’ve been over there, they’re very nice people. It’s a very warm country. They’re taken advantage of by their political leaders, but you know what, so are we. Our political leaders lie to us and they’re — I think that all political leaders are just so full of testosterone and so territorial and they do all this posturing and stuff and then they send all of our young men to get killed because of the beliefs of very few people. And it’s really just a shame and very scary to see this all repeating right now.
Chris Martenson: I — I have the same sense that there’s no one thing that you can put your finger on. I’ve read a bunch of books about World War I and every author tries to say it was that and so everybody sort of points back to the Arch Duke getting shot, right?
Mike Maloney: Right.
Chris Martenson: But honestly you know 10 years before and 10 years after that moment you could have shot all the Arch Dukes you want, you wouldn’t have gotten World War I. So what happened was there were enough pressures collected at that point that that was the final grain of sand on the sand pile and you got the slump that we call World War I as the sand pile failed. So I have that same sense that there’s a growing collection of pressures like for right now I’ve talked to so many people, Mike, and I said “What exactly is our beef with Russia”? And nobody can really explain it. To the people that are not just buying CNN going “Oh Putin is a bad man because he’s got troops in Ukraine”. Like look if the United States had a growing insurrection of fascists on its border, all of a sudden Canada went crazy on us and decided to go — put little SS insignias on their sleeves and there were a whole bunch of English speaking people there who we cared about. Of course we’d intervene. You know from Russia’s perspective it's like "you went half way around the world and bombed this country called Iraq for weapons of mass destruction that didn’t exist. This is on our border and we’ve been down this road before, we know what happens when fascists get control in this part of the world; it’s not cool," right?
So it’s completely understandable from any objective perspective that Russia has an interest in what’s happening on its border, right? But we in the United States have taken this hard line position of saying “No this is all Putin’s fault. Anything that happens there is obviously Putin’s fault”, personalizing it. Personalizing it further with putting sanctions on his closest circle of advisors, “It’s you, it’s you, and it’s you. We’re going to freeze your accounts, freeze your travel”. And we’ve done all of that and here’s the thing that bothers me Mike, I can’t find anybody who can explain to me why we’re doing that. What is the compelling interest of the United States in Ukraine that would justify creating that level of tension with an obviously still fairly well armed nuclear super power. Have you run across the answer to that yet?
Mike Maloney: No, but I can give you an opposite perspective on that. Take a look at the encroachment on Russia of the NATO countries. They’re feeling like we’ve got them surrounded. I do know that we were trying to influence the government over there and convert yet one more country over to our side basically.
Chris Martenson: Yeah. The last one, by the way.
Mike Maloney: And so you know they’re sort of drawing a line in the sand and saying that it’s none of our business. So you know I don’t know where all this is going; I just know that people do need to protect themselves and learn as much about it as possible. I tend to stick with more of the fundamentals and I’m not up on all the latest news. There’s just too much to keep up with these days.
Chris Martenson: That’s true.
Mike Maloney: One of the things that is amazing is you know we just hit our — we hit 18 trillion dollars of debt and it came about 15 days earlier than expected because we spent 100 billion dollars in just the last month and this was a month with record levels of national income from taxation.
Chris Martenson: Yeah and that’s a personal milestone for me because when I first started blogging about the US national debt it was about half this amount, it was just over nine trillion; so I’ve been over here squawking about it for a full doubling. By the way what’s interesting is that doubling happened in less than 10 years so that tells me how fast it’s growing.
Mike Maloney: Right and it’s absolutely unsustainable. These things cannot grow faster than the GDP of the country forever.
Chris Martenson: Well isn’t that interesting; you know you said how people protect themselves. This is the part — this is the core of what I wanted to talk to you about. You mentioned before that historically there are these things called wealth transfers, they happen because most of the people are not really paying attention, which makes sense right? You’re farming, you’re producing, you’re working, you’re living your lives, your kids are in school, you’ve got your head down, you’re doing what you’re supposed to do, you’re keeping up your end of the contract but things are changing. Speculators notice it, the nimble people notice it, the people who are close to the system they know exactly what they’re doing because they’re architecting the wealth transfer and then this wealth transfer happens and you said that gold and silver, or particularly gold I guess more particularly has been a way of protecting yourself in wealth transfer. Now here’s the question: In times past gold has always been money, today I would — I would have to struggle to find people who would call gold money. Would gold still be a useful way to protect yourself in a wealth transfer?
Mike Maloney: Well when fiat currencies are failing will they be calling gold money then? I believe that they will. Gold has always been money. It’s — you know there’s 6,000 years of history that says that gold and silver are the predominant form of currency throughout history and it’s only been the past 43 years that we’ve been on a global fiat standard and there is no time before that in history that this has worked out. Fiat currencies have always failed. So I believe that the same thing is going to happen this time, especially when you see the recklessness of the world’s central banks. The only thing keeping it all together is that it’s coordinated recklessness. It’s not one of them doing it so much more than the other that it triggers a complete collapse which would cause a domino — first I do believe you know, I said in my book that the dollar would be the short term beneficiary of problems with the Euro and we’ve been seeing that.
I said in my book that there would be the threat of deflation to which Ben Bernanke would overreact and do a big helicopter drop of currency and that would cause a big inflation and we’ve seen the reflation of the markets and we’ve seen bonds and real estate and stocks go back into bubbles. And then I said next there would be a real deflation, that’s basically the popping of the bond bubble that we’re talking about, a contraction of the currency supply. And then I said after that the world’s central banks will probably print and print and print until they see deflation start to give way but at that point it will probably accidentally print us into a hyper inflation. I just don’t think that the confidence in fiat currencies is going to last because it does this stealth wealth transfer. And it transfers wealth from the poor and the middle class to the people in the financial sector; all the people that are riding around in limousines and work for Goldman Sachs and all these other companies and the government. Eventually when enough people see that that’s what the game is that they’re playing the people will finally stop playing the game. And just as you and I have done they will cash out, get off the grid basically.
And that should be the point that the government should fear most. The thing that I see though is that when everything really hits the fan at that point it’ll be — the spot price of gold and silver may be low but you won’t be able to get any. And so in 2008 we saw a tremendous divergence of the spot price and the price of delivered physical gold and silver in your hand. And it was a very, very large difference. It was very difficult for the dealers to find any gold or silver available for all the people that wanted to purchase. And that day is coming again. The people that wait until that day are just going to be out of luck. The people that were in gold and silver earlier are going to be able to sell at far, far higher prices then the quoted spot price. The quoted spot price in these p
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