USA’s Day Of Reckoning – Hidden Secrets Of Money 7 – Mike Maloney
Transcript Published On: December 1, 2016 By: Nick Giammarino
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Jim Rickards: We’re going to have another catastrophe sooner than later. It will be bigger than 2008 but the next one is going to be strike 3. We’ve had two warnings, they’ve been ignored, the third time its game over.
Mike Maloney: We are entering a period of financial crisis that is the greatest the world has ever known, the wealth transfer that will take place during this decade is the greatest wealth transfer in history. Wealth is never destroyed it is merely transferred and that means that on the opposite side of every crisis there is an opportunity. The great news is that all you have to do to turn this crisis into your great opportunity is to educate yourself. I believe that the best investment that you can make in your lifetime is your own education. Education on the history of money, education on finance, education on how the global economy works, education on how all of these guys, the Central bankers, the stock market, how they can cheat you, how they can scam you.
If you learn what is going on and how the financial world works you can put yourself on the correct side of this wealth transfer. Winston Churchill once said, “The further you look into the past, the further that you can see into the future.” This program is all about creating your own crystal ball, being able to gaze into the future, being able to change this crisis, the greatest crisis in the history of mankind into your great opportunity…
Hi, in the last episode of “Hidden secrets of Money” I spoke with Harry Dent about deflation and the reason that we both feel that it’s absolutely inevitable. In the bonus feature I talked with Harry about some of our differences and he believes that it’s going to be a long drawn out deflation, I believe it’s going to be a very short-lived deflation followed by potentially a hyperinflation and the reason is something we’re going to talk about in this episode and it’s velocity of currency. And that is all controlled by psychology.
I’m very fond of saying that the economy is both psychological and psycho-logical. It runs in waves and circles and those waves and circles are very logical because of the psychology that’s going on behind it, and that psychology controls the velocity of currency.
Now, I like to teach through the looking glass of history so I’m going to read you a little bit of my book because there is a perfect example of this in the Weimar Hyperinflation. And after I’m done with the book we’re going to come back and we’re going to look at some data so that you get a full understanding of what velocity of currency is and how it affects you. So on page 16 we have,
“At the beginning of World War I, Germany went off the gold standard and suspended the right of its citizens to redeem their currency the Mark, for gold and silver. Like all wars, World War I was a war of and by the printing press.”
“The number of Marks in circulation in Germany quadrupled during the war. Prices however had not kept up with the inflation of the currency supply so the effects of this inflation were not felt. The reason for this peculiar phenomenon was because in times of uncertainty people tend to save every penny and World War I was definitely a time of uncertainty.
So even though the German government was pumping tons of currency into the system, no one was spending it yet. But by war’s end confidence flooded back along with the currency that had been on the sidelines and the ravaging effects worked their way through the country as prices rose to catch up with the previous monetary inflation.”
“Just before the end of the war the exchange rate between gold and the Mark was about 100 Marks per ounce, but by 1920 it was fluctuating between 1,000 and 2,000 Marks per ounce. Retail prices shortly followed suit rising by 10 to 20 times. Anyone who still had the savings they had accumulated during the war was bewildered when they found it could only buy 10% or less of what it could just a year or two earlier. Then all through the rest of 1920 and the first half of 1921 inflation slowed and on the surface the future was beginning to look a little brighter. The economy was recovering, business and industrial production was up but now there were war reparations to pay. So the government never stopped printing currency.”
“In the summer of 1921 prices started rising again and by July of 1922 prices had risen another 700%. This was the breaking point and what broke was people’s confidence in their economy and their currency. Having watched the purchasing power of their savings fall by 90% in 1919 they knew better this time around. They were smarter, they had been here before. All at once the entire country’s attitude toward currency changed. People knew that if they held onto their currency for any period of time they get burned. The rise in prices would wipe out their purchasing power. Suddenly everybody started to spend their currency as soon as they got it. The currency had become a hot potato and no one wanted to hang onto it for a second.”
Now, on the next page I talk about the front page of the New York Times 1923 and I reference some information there and I just happen to have a reprint of the front page of the New York Times from 1923 and there is an article here about the German hyperinflation. But what I find more interesting than that is the entire paper is this wonderful time capsule, and if you replaced the names and dates, and names of countries and so on in most of these articles it will all be pertinent today. You’d think that you were reading today’s newspaper. But when it comes to this article on the German hyperinflation it talks about this paper mills pumping out 45 billion Marks per day.
Now, this is the February edition of the New York Times, by November those paper mills were pumping out 500 quadrillion Marks per day. So now we’re going to take a look at velocity and how it could affect us in the future. So this is me, now I developed this keynote presentation to make understanding velocity easy. Most economists make it sound really complex and people don’t think they can understand it, but stick with me, I think you’ll enjoy this. When you’re measuring velocity you’re measuring the number of times each unit of currency changes hands.
I’m going to have lunch and I’m going to pay the waiter, I’m going to tip him a buck. And then he parked in the red zone that morning so his car got towed, he’s going to have to take a cab home and he’s going to pay that cab driver that same dollar when he gets to his destination. Then later on that day the cab driver is going to have to fill his cab with gas and he’s going to use that same dollar again as part of the payment to pay for his tank of gas. So that dollar was used in one, two, three transactions. It had a velocity of three that day. In other words one dollar, bought three dollars worth of goods and services.
Now, we’re going to kick this up a notch and we’re going to call this a country of 10 people, this economy of just 10 people and their currency supply is $1. That’s the only dollar that exists and it circulates once, and so you’ve got $1 times a velocity of one equals a GDP, the heath, the size of the economy is $. If it circulates twice it’s 2, 3, 4, 5, 6, 7, 8, 9, 10. So $1 times a velocity of 10 or 10 transactions equals a $10 GDP, the health of that economy. Now, if you expand the currency supply we’ve given each one of these peoples $1. If they all make a transaction there has now been 10 transactions but each dollar was only involved in one of them, so it’s a currency supply of $10 times one transaction each equals a $10 GDP.
So even though you’ve got 10 times the currency supply the economy has the same vibrance, there was 10 transactions that equals $10. Then we have a second transaction, a third, a fourth. This could be a healthy economy, it could also be an economy running into hyperinflation. Keynesian’s, that’s the type of economists that are running the modern day economy believe that you can create a healthy economy by changing this figure here, the size of the currency supply. So the Fed Reserve thinks that by adding currency to the economy that they’re going to be able to stimulate it and make the economy grow. And the thing is, it isn’t the quantity of currency it’s the amount of goods and services that are created in that country that determines the country’s level of prosperity.
So if you just add a bunch of currency all it’s going to do eventually is drive up prices. Velocity will slow at first and that’s what we’re seeing now, well, the same thing happened in Weimar Germany. This is the entire hyperinflation from the beginning of World War I in 1914 until the end of 1923, and most economists are attracted to this big hyperinflation on the end. But one thing I discovered when I was writing my book is that there is almost always a pre-hyperinflation hyperinflation. And we see one here, where there is this rise of prices and quantity of currency and then it levels off for a little while and then rises again.
And this has to do with the psychology. This is the time where I said those people had been there before and experienced that. I’m going to zoom up on it and so here you see the currency supply increasing, so they’re doing monetary inflation but prices stay level and the price of gold actually drops towards the end of the war. But as soon as the anxiety is lifted from the population and they start feeling better, all of that currency comes out of hiding and people start making transactions and velocity picks up and prices and the price of gold especially just rose dramatically, and then leveled off some 16 times higher than they were originally.
Notice that the currency supply is growing at a certain rate, the prices are delayed and then bam, they rise to meet it and exceed it and then stabilize to account for that quantity of currency. Now, back to this original chart here, what I find interesting is that during the war it lagged, and then it caught up and matched the currency supply. But then as they kept on printing, velocity started to exceed the currency supply. So prices started to rise faster than they were printing currency and that’s the end game for a hyperinflation. The big lesson here is that the people who owned gold and silver instead of the national currency came out relatively unscathed or even made huge gains in their purchasing power.
Now this is the U.S. currency supply from 1918 until today, and we’ve created all of these currency but we haven’t seen any ravaging inflation yet, and that is because velocity has fallen to compensate for the creation of currency. But there will come a time when the psychology of the country changes and you will see after this short term deflation where velocity falls even further you will then see the velocity pick up and prices will rise and I believe that we will go into a hyperinflation, because they’re going to create more currency than this. And that currency is going to be sitting there. And velocity would have slowed and slowed and slowed to compensate it until something changes psychologically.
Mike Maloney Speaks to Jim Rickards
Mike Maloney: The beginning of every hyperinflation looks like everything is okay again. The economy gets better, velocity picks up and that’s the really danger point and nobody can see it. As velocity starts picking up.
Jim Rickards: Of course there is a name for that, it’s called money illusion which is before the inflation really kicks in and either gets extreme to turns into hyperinflation, there is this feel good period where you know, there is more money around and unemployment is dropping and people feel more prosperous. The prices haven’t quite skyrocketed yet, it’s all illusory because it will go away once the price level adjusts. But there is that kind of you know, period in between and it is a feel good period but it doesn’t last very long.
But you’re making a very good point which is a lot of people assume that inflation is the function of money supply or money printing, and that’s not right. It’s a partial function of money supply but the other part of the function is behavioral, has to do with velocity which is just a psychological phenomenon. You know, do you feel good, do you want go off for dinner, do you want to take your friends? You know, do you want to take your vacation, or do you want to stay home leave your money in the bank and watch TV?
Those are two different states of the world, based a lot on your confidence and how you feel. Both things have to come together to get the kind of inflation the Fed wants. Now, here is the problem, they can make the money supply whatever they want. They are certainly printing trillions of dollars, we understand that. So far they have not been able to bend the velocity curve, they have not been able to get you and me and everyone else in America and around the world to spend more money.
But let’s say they do. They change the psychology, they change the behavior, once you change it, it’s very hard to change it back. It’s not like throwing an on/off switch, I mean it’s taken years for the Fed to kind of try to inject an inflation scare, try to get some inflation. But what if it actually comes, what if inflation goes from one percent to three percent in a matter of six months, and stays there and looks like it’s going to three and a half percent? Well, the next stop is 10%. It’s not … The Fed thinks they can dial it back down to two and a half which is what they say they want. But what they’ll find is once that velocity, once that behavioral genie is out of the bottle they won’t be able to get it back in. it’ll take off, it will take on a life of its own.
What’s the Fed going to do? You know, raise interest rates to 10% with unemployment at 7%, I mean, people will go down and burn down the Fed. I mean, there are limits on what they can do but the point is, once it starts, and you’re exactly right, it’s a feedback loop, it feeds on itself, the Fed thinks they can control it. They’re wrong, the behavioral aspect of it will be out of control and like you say it we will be on our way to 10% if not worse.
Mike Maloney: It seems like all of these bright minds that want to run things none of them trust the free market mechanism.
Jim Rickards: Oh I think that’s right, they will talk to you ad nauseum about the failures of the free markets without realizing that most of the so called failures are actually the result of misguided government policies from prior times. I’ll give you a classic example, 1998 was a warning, that’s you know, started in 1997. Capital F lost an emerging market, started in Thailand, there was blood in the streets in Jakarta and Seoul, made its way to Russia. Russia imploded, took down the hedge fund long term capital management. I was associated with that so I had a front row seat on that disaster. And finally the world built a firewall around Brazil and Brazil did not collapse although it would have been the next domino to fall.
Now, there was a clear cut lesson, capital markets came within hours of complete closure. And I was there, I sat with Peter Fisher who was head of open market operations at the Fed, his associate Dino Kos on the phone with Bill McDonough, president of the Federal Reserve Bank of New York. Gary Gensler was there from the treasury, all the lawyers, all the bankers on Wall Street, we were trying to hold this together. Now, we did bring it in for a soft landing, so the world has kind of forgotten about that episode. But it was extremely close and extremely delicate. We were literally hours away from shutting down global bond markets and stock markets. Now, what lessons were learnt? Well, the lessons that-
Mike Maloney: Well, that cascades into the credit card not working and the gas not coming out of the pump.
Jim Rickards: Correct that’s right. There would have been a global bank holiday and we were hours away from that. Now, it didn’t happen so everyone was like, “Oh no big deal it’s fine, you know.” But there were some lessons that should have been learnt, banks should have been broken into smaller units. Derivatives should have been banned, et cetera. There were things that should have been learned from that, instead what did we do? We did the opposite, we repealed Glass/Steagall which allow banks to be hedge funds. We revealed Swaps Regulation which allow them to create Swaps and derivatives and all kinds of other things that had never been done before.
We repealed the net capital rule for broker/dealers on a set of 15 to 1 leverage, you were allowed to have 30 to 1 leverage which Lehman had on the day it went down. We implemented Basel II which allowed banks to use more leverage. We did the exact opposite of what we should have learned in 1998. Is it any surprise that 10 years later we had a bigger catastrophe almost destroyed capital markets again? And now here we are not learning the lessons again. We haven’t done anything we need to do so therefore we’re going to have another catastrophe sooner than later. It will be bigger than 2008 but the next one is going to be strike 3. We’ve had two warnings, they’ve been ignored, the third time it’s game over.
Rick Rule: I don’t see any particular difference between my outlook and yours. Certainly a situation where society owes more than it can pay and where it has to default, either honestly or dishonestly, is deflationary. Debt liquidation-
Mike Maloney: Honestly being just a default we are bankrupt, we can’t pay you dishonestly inflating the debt away.
Rick Rule: Exactly, exactly. Honestly would be to say to bond holders, “Yeah that’s right, we said we’re going to pay it back and we’re certainly going to pay it back with interest. Well, too bad so sad, times are tough, we lied. Stronger to follow, right?” Say to guys like me, “You’re 60? Yep, I know you’re supposed to get social security when you’re 62 or 65, the truth is, we don’t have the money so you’re not going to get it.” That’s the honest way.
I think the yield to politician is very low with regards to the honest way. So I think that we’re going to have deflationary scares and I think we’re going to have deflationary events. I think we’re going to have asynchronous events like long term capital management and things like that, that will initially have deflationary outcomes. But I suspect like you that the demand for the public will be for the big thinkers to solve that problem and solve it in the only way they know how. Which is to fill every crack even the Grand Canyon of currency.
Mike Maloney: So how is this all going to play out? You know I don’t know exactly but what I do know is that the longer this goes on the bigger it’s going to be. And I wrote about some of the possibilities in my book and this was written before the crisis of 2008. And so in here I refer to Ben Bernanke that I’m going to change that to just the Federal Reserve or Central Banks for you right now. So, “The day of reckoning will come when millions of baby boomers reach the age where they have to take mandatory distributions from their IRAs. As they find that the investments they were counting on for their retirement, their homes and their IRAs full of mutual funds, have actually lost value that the amount of stuff that they can buy from the proceeds if they sell their home is actually less than when they bought their home.”
“And as they realize that their dream of a comfortable retirement was just that, a dream. All those boomers will get scared and pull in their horns. They will stop spending, they will start selling off their assets and the greatest stock market crash in history will unfold as more and more boomers panic and sell. I believe this will also be accompanied by the greatest real estate crash the world has ever known. This perfect storm of bankruptcies and foreclosures will cause the currency supply to contract as the giant credit bubble pops and all those big spenders become big savers.”
“When people save their currency it stops circulating, the economic engine runs out of oil and the whole thing locks up. This is every Central Bankers worst nightmare. This is real deflation and the world’s central Bankers are about to discover the true scale of the horrors of a credit bubble implosion. When this happens the Federal Reserve will once again send out its armada of money bomb dropping helicopters, but this time something will be different. Something will have gone horribly wrong. The bombs will have been diffused, the Fed will try pumping the banking sector by buying up every kind of debt they can get their hands on but to no avail.”
“They will go to the extraordinary measures that they had said they were prepared to go to. They will buy every mortgage, mortgage backed security and any other type of debt that panicky investors and banks are trying to sell, but nothing good will come of it. They will start buying stocks to buoy the stock market, but retail sales will continue to plunge. They will try broad-based tax cuts but it won’t jump-start the economy. They will work with foreign Central banks to buy each other’s debt but the global economy will continue to plummet. People will finally see through the veil. They will see what Dorothy the scarecrow, the Lion and the Tin man saw, that the Wizard of Oz is really just some dopey old guy frantically pulling levers.”
“Remember when we talked about how during World War I, the Germans increased their currency supply by 400% yet there was no price inflation because of the public’s anxiety over the war and the uncertainty of their future. Imagine the anxiety 75 million baby boomers will feel as they approach retirement only to find their homes and their mutual funds are now worth next to nothing. The nest egg, ladies and gentlemen has just cracked. When they get their tax rebates are they going to buy that new big screen TV and the latest cell phone? I think not. I think they’re going to save every dime they can get their hands on just like in Germany during the war.”
“But there will be a point at which a threshold is reached, for each income class it will be different. It will be the point where they feel that they’ve finally got enough saved for retirement. For some it will be $100,000 for others it will be one million dollars and for others still it will be ten million dollars. The Fed knows there is a point where they’ll finally feel safe enough to replace that aging computer and maybe get that new TV. At this point the boys of the Fed will buy enough government debt to fund tax rebates for all the taxes in the previous year. But still nobody will buy that new car. The threshold the Fed is looking for will not be reached, then in not so quiet desperation the Fed will say, ‘Screw the Helicopters, send in the bombers.’ And as the shadow of millions of stealth currency bombers darken the skies, currency will begin to fall like rain in the desert.”
“As Joe Six Pack and John Q, get tax rebate checks in the mail for all the taxes they paid during their entire lifetimes, fear will be temporarily alleviated and some of that currency will come out of hiding just as in Weimar Germany. Prices will rise quickly and dramatically as all that stored up currency energy is released. In a panic the Fed will call back the bombers but it will be too late. There is nothing they will be able to do to stop it now because the hyperinflation will have already began. The Dow will begin an invisible crash of epic proportions and gold prices will shoot to the moon.”
“If you were wise enough to moor your boat in the safe harbors of gold and silver and other commodities, you will weather the storm. It won’t be pretty but at least you’ll be safe. At this point, confidence in the currency will fall faster than it can be created. Cost of living increases for government employees and the costs of all government projects, the subcontractors, the labor, the materials will all skyrocket. And each time more currency is created to pay for the increases the value of the currency will fall even faster.”
“In times like that, governments have only two choices, shut down the government and all of its projects and services, send everybody home without pay, turn off the printing presses and wait for the free market system to discover price levels that account for the quantity of the currency in the supply. Or print the currency into oblivion. Governments have always chosen the latter. But the stored up energy of excess currency creation doesn’t have to take place within the United States and it doesn’t necessarily have to be in the future. In fact there is an abundance of stored up currency just waiting to be released right now.”
“As I mentioned earlier, all the dollars we send overseas to other countries to buy their goods and services are now sitting in their bank accounts just waiting to be spent. Eventually the world economy will lose faith in the U.S. dollar and will want to dump it by buying up goods. And as all those dollars come flooding back into the U.S. it will of course cause the prices of those goods and services to rise. And could and probably will trigger a scenario much like the one I’ve just finished describing. Throughout history economists have suffered from what I like to call this time syndrome.”
“This time they’ve become masters of the economic universe. This time they’ve figured it out. This time they’ve tamed the economy. This time they’ve mastered the art of infinite currency amplification. This time a Fiat currency will work. History gives this a probability of zero. Each time we sail toward economic doom, the greatest financial minds in the world were at the helm.”
Do you really think we should continue letting them steer the ship? I think not, it will be nice if we started listening to people that have been right rather than the people that have theories. And it will be great if they would allow the free market to work, but that’s not the way it’s going to happen. The people that have the theories will continue to rule and we will vote for people that don’t know what they’re doing.
And so, the best that we can do is try to protect ourselves and even you know, potentially benefit from government and economists’ stupidity. And so, the way you do that is by learning as much as you can about what’s happening and developing your own opinions on what is coming at you rather than being reactionary. And you can do that by watching some of the bonus feature. Just click the info button and we’ll see you in the bonus feature and until next time, until the next episode, see you there.
BONUS FEATURE – https://goldsilver.com/blog/what-happens-when-a-currency-dies-bonus-feature-hidden-secrets-of-money-episode-7/?utm_source=youtube&utm_medium=card&utm_campaign=ep7descbox
One of the most important things is how to prepare for all of these. So that you can be able to see through that economic veil and understand what’s going on when things start to shift.
Mike Maloney Links:
See this next:
Mike Maloney and Harry Dent Discuss DEFLATION http://globalcurrencyreset.net/mike-maloney-harry-dent-deflation-transcript/