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Chris Martenson:  Welcome to this Peak Prosperity Podcast. I am your host, of course, Chris Martenson, and today I am really pleased to have Mike Maloney as our guest.

Mike is the founder and owner of GoldSilver.com, one of the leading precious metals dealers worldwide. What I particularly appreciate about Mike’s organization is that it focuses on investment education and literacy as much as it does on bullion sales. As with Peak Prosperity, GoldSilver.com embraces a mission to build awareness of the unsustainable macroeconomic forces in play and helps concerned individuals take prudent actions today before an increasingly likely currency crisis occurs.

Welcome, Mike. It’s a real pleasure to finally have you on as our guest.

Mike Maloney:  It is good to be here, Chris.

Chris Martenson:  Let us start at the beginning. Here we are. We are in the middle of an entire sea of fiat printing. We have got the Bank of Japan doing their part. We have got the United States and Europe going its own way; loaning money into existence. There is money, money, money everywhere. I am looking at the markets. We have all-time new highs just blasting higher on the S&P 500. The Dow is in new record territory as well, and gold and silver are languishing. How do you connect these dots?

Mike Maloney:  Well, part of it is manipulation. I originally questioned the people at GATA, the Gold Antitrust Action, but they have some very sound evidence and once you start, anybody that looks at the evidence from then on knows that gold and silver markets are manipulated, which is a great thing. It is what has provided the opportunity for people. If it was not manipulated, gold would have been in the $3,000.00 an ounce range for the past 10 years and it would have been plenty of supply that would have come to market. The same thing with silver; silver would have been $30 or $40 back in the year 2000, and it was only $4. Keeping it suppressed causes it to be less profitable to mine, so less new supply comes to market. Just when everybody wants it, there is not enough, and it causes the price to go higher.

What most people do not understand is that the price of gold and silver are not determined by how much gold and silver is being sold. It is how many gold and silver IOUs are being sold. And you can write as many IOUs, futures contracts and options, as you want. Those are unlimited. The supply, though, of physical gold and silver is quite limited, and so when people actually start asking for it and they want the physical, then there is a divergence of the paper price versus the physical price, and we are seeing that right now.

We are in a back-order situation with all of the suppliers. Spreads are going up. Silver eagles cost about fifty cents over spot more than they normally cost because all of the suppliers have had to raise their price to try and find the supply/demand equilibrium that the markets are for. The markets are there to try and find a supply/demand equilibrium, so then price is the arbitrator. Price rises; that draws more supply and reduces demand. Price falls; that reduces supply and increases demand.

So the price discovery mechanism that the markets are what is supposed to ensure that things are in equilibrium. We have this broken system where there are a few big players that manipulate the market, and it always shows up when shortages start developing in the physical market. You know that the price of gold and silver right now are too low to be realistic. And the good thing about that is that it cannot last.

It is possible we could see one more dip significantly lower than where we are right now. It is possible that you could see silver drop to $21, but it is going to be very short-lived. Then it is on up from here. I have a feeling, though, that we are more likely going to break to the upside.

Chris Martenson:  Interesting on the supply/demand side; you are on the front lines of that. GoldSilver sells a lot of bullion, and so I am wondering what you are seeing. If I was just looking at the markets, I might presume that gold and silver are just being sold, and sold relentlessly. Is that what you are experiencing at the physical side of the story?

Mike Maloney:  What we are experiencing is that there is not enough of the public, the small investors. It is big investors that are buying right now. There are big people that know what is up and they know – like the Cyprus event – the banks have finally shown their hand. They have shown who they really are. The banks, the IMF, the Bank for International Settlement, the European

Central Bank, all central banks, they feel that all of the currency in existence is theirs, not ours and that they are giving us this privilege of using it temporarily. They are loaning it to us. But it actually belongs to them. And they just showed their true colors in Cyprus when anybody that had a bank deposit had lost part of it. It was taken by the banks. They called it tax. It is just outright theft.

This Cyprus-type event, this kind of crisis, is coming to a country near you pretty soon. This was just a test to see if people would tolerate it and they did. It has gone through and it did not cause the entire world financial system to collapse, and so they tested it on one of the very smallest members of the European Union, and they were able to do this where they actually steal from the people to bail out the banks, which they have always done. We have had taxpayer backed bailouts forever.

So people are getting ready for this. I was on a speaking tour. I had a couple of engagements in Australia, and then we went and did some filming in China and came back. So I was out of the country for three weeks while the Cyprus event was happening. But as soon as I got back, I purchased some more. I have a precious metal dealership, but I also privately invest in precious metals, so I do not like to have excess cash sitting around. And so as soon as I got home, I got more cash out of the bank and into a private holding that is at a depository where it is segregated under my name only. It is not part of the financial system. The vault that it is in is a private vault that is not under the jurisdiction of any banking law, the IMF, the BIS, the Federal Reserve.

Chris Martenson:  Okay, I want to start with why it is that you prefer not to hold cash at this point in time. You have been a big force for financial literacy through your speaking events, your books, the tour you just went on, and videos. You have this new video series out, a really excellent production quality I have to say, called Hidden Secrets of Money, that takes viewers back in history as well as around the world with you as you explore money. Give us a summary of the key takeaways, and in the process, why it is you really do not want to hold cash here.

Mike Maloney:  I think cash is the most dangerous investment that you can have, and people need to realize that they are always invested. Even if they have moved everything from stocks and bonds to cash, then they are invested in cash.

If they spend that on real estate, then they are invested in real estate. So if you have a positive net worth, you are invested. If you have a negative net worth, you are invested on the wrong side of debt.

Because in debt, you can invest in either side of it. You can buy somebody else’s debt and hold it as an investment, such as a bond or a mortgage or a loan that you fund. But I have been saying now for about a decade that in this decade that we are currently in, 2010 to 2020, there will be a currency crisis, and it will be the greatest wealth transfer in the history of mankind.

I do not know if you have heard people say this is the greatest wealth transfer in history, but that was something I wrote in my book back in 2005, when I read that there was a guy named Larry Bates that wrote a book called The Great Economic Disorder back in the 1990s. He said that wealth is never destroyed; it is merely transferred. When I read that I went oh my God, that means that this is the greatest wealth transfer in history.

You know, we have a situation since 1971 where for the first time in all of history all of the worlds’ currencies would be fiat currency unbacked by a physical asset. They have tried this thousands of times before. It has never worked once. And so Nixon unwittingly – he did not know that when he unpegged the dollar for gold that he was actually removing all currencies on the planet from gold because the Bretton Woods System plugged all the currencies to gold through the U.S. Dollar. So severing the ties between the dollar and gold, it began this grand experiment where all currencies on the planet would be fiat currencies simultaneously.

Now I mentioned that fiat currencies have always failed. There have been thousands of them, but it has always been localized. It is one country at a time. So whenever you have a monetary system imploding, the wealth transfer is massive. It is one of the most massive events that can happen in all of finance. It is hard to see how the wealth is transferred. Some country might end up in a hyperinflation, and everything appears to be going up, and real estate is going from being sold in the hundreds of thousands of dollars to the hundreds of trillions of dollars. So is the stock market. It all goes up.

Usually in these events, though, gold and silver rise faster than anything else because people are trying to get out of the failing currency and into the currency that the free market has selected as money over and over again for the past 2,600 years, since gold and silver became money in Lidia in sometime between 680 and 630 B.C., when they were minted into coins of equal weight. That is when gold and silver finally became money, when they became fungible, interchangeable.

So that is when I came up with the saying this is the greatest wealth transfer in history, because I went oh my God, this is going to happen all over the planet simultaneously. [Used to be that] when you had a currency failure in one country, you could rush to gold or silver or another currency. This time it is going to be gold and silver, and that is it.

Chris Martenson:  Because where else do you go? I really like this concept of wealth transfers because it removes some of the mystery. A lot of people think inflation is a mysterious force; it is kind of hard to put a face on it that you are going to blame for it. But really it turns this processing to just a simple accounting identity where all you have to ask is, if somebody is going to lose, your next question is, who gains?

So let us talk about some of these wealth transfers. I am sure everybody is familiar with the transfer from savers to, say, banks and debtors. So these record low yields that savers get on their deposits, sometimes 0%, that is a loss. Where did that loss transfer to? Or we can just look at record profits that the banks have been turning in. It is really an accounting identity. It is that simple of a transfer.

We have an extraordinary wealth transfer from lower classes to upper classes, but that is within a society. I would submit there is also a huge wealth transfer or theft going on from Cyprus holders to the rest of Europe, or from Greece to Germany, or however we want to look at this. But it really simplifies it to think about it that this is just a gigantic wealth transfer.

Mike Maloney:  You know, one thing, people suddenly got all up in arms about a potential 6% and 10% haircut, and they should have accepted it, the first proposal. Because what actually happened was a lot worse than the first proposal. The first proposal was that everybody under $100,000.00 would lose 6% and everybody over $100,000.00 worth of deposits would lose 10%, and they ended up losing, I believe, 10% and 40%. Am I correct? One bank, the depositors lost 10%, and the other bank 40%.

Everybody got in an uproar over that, but nobody gets in an uproar over the central banks targeting 3% inflation. That compounds out to 34% of your wealth that they are confiscating every decade. People got mad because it happened all at once and they could see it. One day their bank account said one thing; the next day it said another thing. With this insidious confiscation known as inflation, this is the inflation tax – you do not see it because the number on your bank account might say that you could make a deposit and if there is no fees or anything on that deposit, $100,000 deposit a decade ago still stays $100,000. Except gasoline went from $1.25 to near $5. Measured in gasoline, you lost 75% of that $100,000, but it still says $100,000.

So the central banks targeting this 3% inflation rate is a wealth transfer from the public to the financial sector. They get to create the 3%. If you look at the growth of the currency supply, over the long term, it pretty much matches the inflation that we go through. If you look at it over the short term, something called velocity of money is more responsible for inflation than deflation than quantity. But over the long term, when you measure in 10- and 20-year periods, what you see is that inflation pretty much goes up with quantity of currency.

Chris Martenson:  A lot of people are saying that the Fed’s policies are not inflation. They do not see it in the inflation numbers and it is not direct money printing. Although I do not know how else to characterize $85 billion a month in new credits that show up in the system. But so far the argument has been that it really has not been inflationary. Do you agree with that? What is the explanation for what we are actually living through?

Mike Maloney:  Yes, I absolutely agree with that. I see with the newsletter writers that they only have the ability to see one half of this story. One newsletter writer will point toward base money and say there is always inflation, and we are all doomed because they are all going straight into hyperinflation. Another newsletter writer will look at velocity of money and say, oh, the velocity is collapsing so we are going to go into deflation. Another newsletter writer will look at the credit aggregates, which may have fallen, and he will be writing, oh my God, deflation is happening and we are all doomed.

The Fed triples base money, basically, and they give it to the banks to put on their balance sheets, and very little of it has leaked out to cash in circulation. If you take a look at of the excessive financial reserves, it has the extra $2.2 trillion that the Fed has created over the past couple of years. Two trillion of it is parked. It is not circulating. It does not contribute to velocity, other than that this portion of the currency supply has a velocity of zero. So when you add that $2 trillion to the $3 trillion that exists, and you measure its velocity, it pulls velocity way down. It does not add to inflation until it starts to circulate.

What Ben Bernanke has been doing is trying to make insolvent banks look solvent. Every banking institution, from the first time they make their first loan, is basically insolvent. Our banks have gotten so leveraged out that they were very, very dangerous. In the Crash of 2008, it was a very precarious situation. To keep banks from failing all over the place, he had to create a whole bunch of currency and give it to them as a gift, basically. Shove it under their balance sheets.

But what people do not realize is that the assets that the Fed buys when it creates currencies are assets that pay interest. They are assets like, they bought Fannie Mae and Freddie Mac; those are mortgages. That means that the Federal Reserve, a private corporation that has the legal authority – not the moral rights, but the legal authority, because everything they do is very immoral – to create currency out of thin air and buy something with it.

They are buying up real estate property. This is pretty immoral. They buy U.S. Treasury Bonds. What is a U.S. Treasury Bond? It is an IOU that the Treasury writes. Lend me a trillion bucks; I will pay you that trillion back over a decade plus a trillion worth of interest. So they write this IOU. But who pays back the IOU? The taxpayer pays back that IOU in the future. We pay future taxation to pay the principal and the interest on that bond that the Federal Reserve bought with a check that is written on an account that has a zero balance. The currency is created when they write that check.

Every dollar in existence, whether it is created by the Federal Reserve or whether it is created by fractional reserve lending, those are basically the two places that currency comes from. Federal Reserve and the banking system and every dollar has interest due on it. Every dollar in existence is basically a promise to tax the populations in the future, because it is all pyramided on top of base money. Base money is all owed back to the Federal Reserve because we have to pay off the bonds that created it.

The taxes that we pay today pay for some of the prosperity that we enjoyed when the Treasury issued the 30-year bond under the Reagan administration. We are paying off the prosperity we enjoyed under Reagan. So that means that your children will be paying – depending on the bonds – 10, 20, 30 years into the future for the prosperity that we are currently enjoying now. That is a completely corrupt, immoral, evil monetary system. Got any comments on that?

Chris Martenson:  I agree with all of that, and I am interested – you mentioned that you have these three sets of newsletter writers that might be looking at the velocity of money or money aggregates or credit aggregates. You have painted a part of the picture where you say, maybe they each have their hand on the elephant, but they are not seeing the whole elephant. What is it that they are missing in this story?

Mike Maloney:  They are missing that because the vast majority of what the Fed has created of base money, because that is parked and does not circulate, it neutralizes the inflation by causing velocity to drop. Velocity quantity went up by the same amount that velocity fell. So one neutralizes the other, and you do not see big consumer price inflation. But you know consumer price inflation is only one way of measuring inflation.

I believe when I was writing my book this got cut out of my book, but I had come up with a measurement of inflation that I called CUPP inflation, Currency Units Per Person. Because eventually the dollars that have been created that are parked on banks’ balance sheets right now will leak out into circulation. In fact, some of them will do what you have seen, by shoving this currency under the bank’s balance sheets. If the banks do not want to use that to fund home loans and consumer loans, they can use it for loans that they sort of trust, where they think they are going to get paid back. One of the places that takes loans is their proprietary trading desk. There is margin. So you have just seen the stock market yet inflated by the Fed shoving all of this excess currency under the bank’s balance sheets. It only took the printing of $2.2 trillion dollars to get us here, to get us where the stock market is setting new records and people are going hallelujah, the stock market is up, the economy must be fine again.

Even inflation-adjusted by the CPI (consumer price) index the government uses, the stock market is still tremendously down from where it was in the year 2000. So we have had a completely lost decade, but people do not tend to look at the value of things; they look at the price. So everybody is screaming hallelujah, the economy is back.

Ben Bernanke did this, but when you but this currency on the bank’s balance sheets, they can use it in overnight loans and so on to themselves. They can use it for margin money in brokerage accounts for individual traders. In a brokerage account the way the rules work, the banks almost never lose. They get to basically foreclose on you. It is called margin call, long before the banks are in danger. So it is a very good type of loan for them to make. So we see a situation where the liquidity for paper assets has gone up. They were tried.

The problem is, any man-made currency system cannot last. When I was writing my book, I put all of the different currency crises in a spreadsheet. This was back in 2005. Everything that I could identify in the United States – I was looking for some sort of cycle if I could identify one. And what I found was that there definitely was a cycle. I was amazed at the scale of this cycle. Every 30 to 40 years, the world has an entirely new monetary system. We had the classical gold standard before World War I, and then the gold exchange standard between the wars that was very different than the one before the wars. Before World War I, [money] was fully gold-backed. In between the wars, we had the Federal Reserve, where it became legal to lie and commit fraud, and it was 40% backed. Then we were on the Bretton Woods system from 1944 to 1971, where the backing of the currency with gold fell from about 40% down to about 8% because there was no reserve ratio specified. Then in 1971 we went on the dollar standard.

All of these have been man-made currency systems that cannot account for all of the forces in the free markets. They start out working just fine, but as time goes along, there is misallocation of capital. There is underinvestment in one sector. There is overinvestment in another, especially when you have got somebody like Ben Bernanke and the FOMC committee, people with a level of arrogance to where they think that they know better than the free market and they think they can determine interest rates. This is what causes the currency system to eventually implode. Cracks develop and the whole thing falls apart because they do not have all of the information the free market has. The free market has the information of every transaction that went on in society. They think that they can control this, but they cannot. The free market always ends up winning.

Alan Greenspan tried to reflate the stock market bubble when the NASDAQ collapsed and he accidently created a real estate bubble. Ben Bernanke is trying to reflate the real estate bubble, and he has got stocks going back up, when what needs to happen is, there are these long wave booms and busts and once something gets overinflated you have got to let that sector take a rest. When something goes into a bubble it is supposed to deflate and stay deflated for a while.

If you look at the history before and during the existence of the Federal Reserve, what you see is there were more frequent little crisis and inflations and deflations before the Federal Reserve. But after the Federal Reserve the swings became very, very violent. We had things like the Great Depression and the stagflation of the 70s and that crisis. People do not realize that we had a dollar crisis in 1979 and 1980, and they do not realize how close we came to losing the dollar in 1980. Gold was in a runaway and they got control over it.

Actually, I wrote a piece about the Hunt brothers. The Hunt brothers were the scapegoat used to save the dollar, and the Hunt brothers were responsible for capping the price of gold. They had a disproportionate share. More than 50% of the COMEX silver was theirs, and it gave the COMEX the authority to go to the CFTC, the Commodities and Futures Trading Commission, and get permission for a rule change. On the 21^st of January 1980, that rule change went into effect. It actually went into effect the Friday before, the 19^th, at 5:00 p.m. when they closed.

So when they opened, the rule was liquidation orders only. So you could not open a new futures contract. You could only close out old ones. You could settle futures contracts that were already in existence. That means there are no new buyers coming into a market, so that is putting a rule in place that says, until this rule is lifted, the price of silver can only fall. It can only go down. That was the rule. Price of silver will go down.

I hear people say, oh, the Hunt brothers; yes, they tried to corner the market and drive the price of silver up. They drove the price of silver up to $50.00. If you talk with Jeff Christian of CPM Group, one of the entities that audit all of the precious metals sector – the mine supply, the refineries, where it is being sold to the jewelry sector and so on – Jeff Christian has been doing this since the 70s, I believe, and so he is very respected. I was interviewing him, and I do not believe the Hunt brothers drove the price of silver to $50.00. I asked him, and he said at most they may have added 75 cents to $1 to the price of silver. It was the public changing their preference.

But the point is, the day the market opened and there was liquidation orders only on silver, the traders on the Commodities Exchange used to stand around in what they call “pits.” It is a circle of guys screaming at each other and doing hand signals. News travels around these places quicker than lightning. I would guarantee you that within just a couple of minutes, the gold trading pit found out what had been done to the silver traders and they said if they can do that to silver, we are next. There is no other explanation for gold peaking on the same day that silver did and starting to fall. Gold was rut. Paul Volcker was involved in some of these decisions. Why is the Chairman of the Fed involved in these decisions?

Chris Martenson:  I used to examine all of these things purely from an economic/monetary standpoint, and I have done all of my tour of looking at velocity and aggregates and credit and stuff like that. And it is still important, but I think I have learned something since, which is that where for you and I and most people listening to this Podcast, money is a real tangible thing. If you have it, your life is one way. If you do not have it, your life is a different way. It has very real impacts. But for central banks’ money…

Mike Maloney:  You are referring to currency, right?

Chris Martenson:  Yes. Currency, or money, or money digits in the bank – does not matter.

Mike Maloney:  Money is gold and silver; everything else is currency.

Chris Martenson:  Okay.

Mike Maloney:  You need to watch the first episode of Hidden Secrets of Money.

Chris Martenson:  All right; I will get my terms right. I am talking about currency. So see, what Japan is doing they are trying to remove the trust that people have in the money – the currency they are holding in their bank accounts. They just want people to start spending again. The theory is, this elevates everybody, because if we can just get currency moving again, our economy recovers and then everything sort of recovers. And the issue I have with that is that fundamentally what Japan has done is they have targeted trust.

My concern relates back to something you said earlier. Bernanke – we have a central committee setting the price of currency, setting interest rates. They have the hubris to do that, but it goes beyond that. They are targeting housing. They are targeting stocks. They think they know the price of everything and what it should be. My problem is that I do not trust that they have any idea what they are actually doing. Because what they are doing is social engineering, not monetary engineering.

Mike Maloney:  Yes. They do not have any idea. Only the market knows what it is doing, because the market sort of has a brain, but the brain is made up out of all of these separate little pieces of knowledge. They are just connected together through transactions. The market balances things automatically. These men – somebody comes up with an economic theory. Some people go, oh, yes, that is a good idea. We suffer from these good ideas for centuries.

We are paying the price. I believe we live in a modern Dark Ages and we have no idea how much better things could be had we left the markets alone to determine price and determine what money is. If you leave the free market alone, our prosperity will be a far higher level. Yes, they are doing social engineering over there. What they are doing is they are doubling down on what they have proven does not work. They keep on proving that it does not work, so they try twice as much of it.

You have a bubble that deflated, and you have got Japan – the economy there is trying so hard to deflate, and for some reason deflation is tagged as bad; inflation is pegged as good. There is a balance in there, and it is called savings. What they are doing is they are creating a disaster the level of which they cannot conceive.

Chris Martenson:  I assume they are doing all of this simply to rescue the banking system. The banking system needs inflation, I understand that mathematically I can pencil it out. People do not need inflation, and in fact, if you look at Japan’s situation, deflating makes a lot of sense. They have an aging population that is actually shrinking. There is no logical reason you should say this a right candidate for inflation and we need it in order to achieve societal aims. Let us be clear. The banking system needs inflation.

So then we have to ask the question, are we running a money system for our benefit or for the money systems benefit? Is the tail wagging the dog? I submit it is. That is the story where we are at. So the frustrating part for me has been it is just clear as day that that is what is happened to me. We have got excellent materials out there, such as Hidden Secrets of Money or the Crash Course. There are explanations that say, here is what is going on, and yet we look at gold and silver just absolutely going nowhere for the past couple of years. When does this all turn around in your mind? What are you looking for to say this changes?

Mike Maloney:  It is going nowhere for the person that has no patience. I started investing in gold in October of 2002. The stock price was $315 an ounce. Today it is $1,550 or something like that. So for me it has gone somewhere. I have patience. Yes, it hit a peak in August of 2011 and it is still below that peak, but it is in consolidation, because before that it rose dramatically from 2008 – it was below $800 an ounce in the Crash of 2008. So in October of 2008 I do not know exactly what the price was, but it is up over double what it was in 2008.

I am up about 550% since I have been investing in gold and silver over the last decade. I am very happy with that. All of these people that want to badmouth gold, I tell them I am up 550%; are you? Because all of these people that jump around from one stock to another, I have just been investing in gold and silver only. I have had the patience to wait through these consolidations.

The consolidation from late 2003 – there is one little peak where it went over, but for the most part in 2003 to 2005, gold went sideways. Then it peaked late in 2005 and it went sideways to nearly 2006 or mid-2006. And another one in 2007; gold hit $1,100 and it did not break that until 2009. So actually in the fourth one of these sideways consolidations, it fits perfectly in a trend channel. If you look at the long-term