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  • I'm Mike Maloney, author of "Guide to Investing in Gold and Silver". It's the world's number-one

  • best-selling book on investing in precious metals.

  • It's available in eleven languages.

  • And in my book, I said that we are on a wild rollercoaster of a ride,

  • and that we would first see the threat of deflation, followed by a helicopter drop,

  • and that would be followed by big inflation.

  • And that has happened. There was the 2008 crisis...

  • We're seeing the base money around the planet being hyper-inflated right now

  • while all of the credit aggregates are collapsing, and so it's sort of netting out

  • to zero inflation or just slightly positive inflation, even though

  • base money around the planet is just taking off like a rocket.

  • But it would then be followed by a real deflation

  • and then followed by hyperinflation.

  • So I think it sort of looks like this:

  • we've got the markets going up in the real estate bubble in 2007,

  • and then we had the threat of deflation, which was the 2008 market crash, and the big

  • helicopter drop of currency, and you are here [laughs].

  • And then I think that we're going into something like this,

  • and it'll be followed by the world central banks overreacting.

  • People, you know, some people say I've been calling for hyperinflation, hyperinflation, hyperinflation...

  • There isn't any time that I can find, in all of history,

  • where a population that's all on one side of the boat, when you have

  • a nation of debtors,

  • what has to happen is that you go into a deflation first,

  • allowing the banks to foreclose.

  • The public, in general, is on the losing side of the bet.

  • 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 guysthe 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, that 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 crisisthe greatest crisis in the history of mankind

  • into your great opportunity.

  • Well I've been traveling overseas quite a bit,

  • but I'm on my way home now to speak at an event in California, finally.

  • What I've been trying to make clear is the fact that this rollercoaster crash

  • that I was talking about in my book, and that I've been predicting since 2005,

  • is playing out right before our eyes.

  • One of the things I really like about speaking at live events is the chance to interact with people and sort of

  • get my finger on the pulse of what they're thinking.

  • And lately, it's become pretty obvious

  • that for a lot of people, it's difficult to grasp why I think deflation

  • is coming before big inflation, or even hyperinflation.

  • So here, I'm going to break down four of the biggest reasons that I see deflation coming first.

  • The first one is simple:

  • The overreaction to the 2008 crisis has caused a credit / debt bubble, and all bubbles pop.

  • So, I talked about hyper-inflating base money. This is, this *is* hyperinflation right here.

  • Inflation and deflation is either an expansion or a contraction of the currency supply,

  • and prices follow the inflation or deflation eventually.

  • Now, most of this currency does not circulate. It's sitting on banks' balance sheets and what's called

  • excess reserves.

  • You know, if you look at the years leading up

  • to this crisis, this red line is reserve balances.

  • The white line is how much of it is excess,

  • and here we have Alan Greenspan's response to 9/11.

  • Look at the scale of how big this emergency is compared to 9/11.

  • But what is Ben Bernanke afraid of, and now Janet Yellen has inherited this legacy?

  • Well, one of the things that happened in the 2008 crisis is that banks

  • froze up and wouldn't lend to each other. They were all scared to lend to each other,

  • and our system is such a fraud,

  • that at the end of each day, they all have to be able to borrow

  • digits from each other that were created from nothing

  • just to keep the whole smoke-and-mirrors game going. They all have to do this interbank lending

  • to keep things balanced.

  • Well, if one bank won't lend to another and they don't have any reserves, the whole system freezes up.

  • Now, if you've got all these excess reserves that are on their balance sheet

  • and you pay them interest to keep the reserves there and not

  • use this as a basis of fractional reserve lending,

  • they're going to be liquid. This basically prevents

  • bank runs *by* banks *on* banks. It's not a public bank run with the

  • the public lining up at the doors.

  • It's a bank run where one bank is trying to

  • get their currency out of another or won't lend to another,

  • and so this keeps things liquid. Right now, what this has done though,

  • the banks get to use this stuff in the middle of the day.

  • And so, you see the use of margin in the stock market going to record levels.

  • You see the stock market going to record levels. Things like – I follow collector cars

  • they've been going astronomical. The number of 10-million-dollar cars out there now

  • is just absolutely insane. And there are cars now selling for *30* million dollars.

  • Wine collections, artit's all going ballistic at this point.

  • And all bubbles pop.

  • This is the average price of a new home divided by the median annual household income.

  • Normally, 3, 4 times your income is about what you can afford with a house.

  • When you drop interest rates, the affordability goes up, so people pay more for a house.

  • But interest rates don't stay in one spot forever; they *have* to revert some time or another,

  • and all these people are going to be trapped. Every bubble pops; that's a bubble.

  • We are in for something big again, and this time it's going to be more horrific than the

  • crash of 2008, simply because the response to 2008 created a lot of stored energy.

  • And then when the market crashes, that energy is released in the opposite direction. That previous chart

  • of the hyperinflation of base money, well, we're going to get a reaction from all of this.

  • Whatever bubble you're in, the opposite happens of what

  • is of greatest benefit to the most people.

  • Right now, if we went into big inflation or hyperinflation,

  • the average Joe Six-pack would get rewarded for mass stupidity.

  • They're all out on credit; we're in a credit boom, we're in a bond bubble;

  • those bubbles have to pop. And the popping of a credit bubble is deflationary.

  • It's deflationary... and history's crystal- clear on that. A lot of the gold bugs say,

  • you know, the Federal Reserve and central banks, they're creating money, which they are, unprecedented;

  • but, they're actually inflating to fight the deflation that started to set in the late 2008, early 2009.

  • And if you look back at history, as you say, every major debt

  • and financial asset bubble in historythe railroad bubble of the early 1870s that peaked,

  • followed by deflation;

  • you know, the auto and farm bubble and tractor bubblethat's actually a tractor bubble

  • that caused the Great Depression. It was farms failing

  • and it was smaller local banks failing that caused the Great Depression and high unemployment.

  • Deflation. Because the deflation has to root out

  • the massive debt, and the financial assets that get over-inflated. And it's good

  • if we bring down the cost of living, if we restructure debt, if we bring financial assets down;

  • it actually improves our standard of living long-term. But it is painful when it happens.

  • People don't –

  • people think that the Federal Reserve can prevent deflation; that they control the money supply.

  • Most people don't realize that the Federal Reserve controls *base* money

  • only; and it's an incredibly small portion ofit's so tiny! – right,

  • and all they do is influence the rest of the economy with interest rates and reserve balances and such.

  • Well, you know, some people say

  • the strategy didn't work. Well no, it did work: we would have been in a depression,

  • just like the early '30s. We were going there: banks were melting down, financial institutions; *major*

  • Fortune 100 companies were failing, like AIG.

  • We would have imploded because once you have that much debt and

  • leverage and things go wrong, it just builds the other way. Like you say, you

  • get a bubble on one end, you get a crash. Bubbles don't crack; they burst.

  • So we were going into that, but governments said no, we will do

  • whatever it takes: Mario Draghi, you know, Ben Bernanke...

  • and they created trillions of dollars to fill the hole.

  • Well, all that does,

  • it's like taking more drugs

  • to keep from coming down. I mean a drug addict can keep taking more drugs until it kills them.

  • Or until they just fall down and get dragged into detox. It's [the] exact same thing.

  • Debt, especially when it's extreme, is a financial enhancing drug:

  • it gives you more than you deserve, makes you feel better in the short-term.

  • And, but when it's over, you have to go through a detox, as they would call it:

  • a debt detox. And that's where you get deflation.

  • This is the demographics of the United States back in the year 1940,

  • and it's broken into five-year age groups.

  • And what I'm going to show you here is the baby boom and one of the reasons

  • that we're going into this deflationary scenario,

  • and we're also in this swing from individualism to collectivism.

  • This is a pendulum, a cycle that just goes back and forth throughout time.

  • And this is the greatest threat to your well-being and the well-being of the economyand, freedom.

  • We're going through a period where this demographic

  • is going to cause some huge problems. So,

  • here we are in 1950 and you can see the beginning of that baby boom taking off: 1960,

  • 1970, and this wave

  • now, the reason I've got this broken up into these different colorschildren

  • are the ultimate consumers: they consume everything, they produce nothingexcept

  • a quality of life for their parents; you know, a big reward

  • as far as seeing them grow up and so on.

  • But economically, children are an economic loss. They consume economic energy.

  • What you're seeing here is this wave coming into

  • working-age. The green area is sort of a break-even area;

  • that's when

  • people are getting a job and it might be a minimum-wage job or something like that, and

  • uh, might be sharing an apartment with a few other

  • people. And then, as you get into the yellow area you start to become a net positive

  • for society. You're paying income tax, you're producing more than you consume,

  • and then you get into what's called the maximum spending demographic.

  • The maximum spending demographic is ages 45 to 54.

  • And this group lives in the largest houses of their lifetimes; they're driving the most cars of their lifetimes;

  • they're sending their kids off to college; they're spending A LOT. Then,

  • the kidsthen they become empty-nesters; that's the maximum saving demographic.

  • Once the kids are gone, off to college, they go, "holy moly, we didn't save anything!

  • We want to retire in five years or ten years!" And so they start saving. And then,

  • you get to the point where they retire and

  • they become maximum social burden demographic, I call it, simply because

  • they're liquidating assets; they're pullingthey've got their stocks and their savings

  • and each year they're going to liquidate some of those to live. And the only

  • driver that inthe economic driver is

  • the medical industry; they drive the medical industry. So economically,

  • the maximum social burden group is a net loss for

  • the prosperity of society, the prosperity of an economy.

  • And so, I'm going to go back again and

  • you can see that that maximum social burden group almost didn't exist in 1940.

  • And there's a lot of people of that working age and maximum spending age

  • supporting the few people that were of the maximum social burden category.

  • And then we get the baby boom sweeping through and

  • in the '80s and that stock market boom of the '90s and all the way up to 2000,

  • that yellow area that really drives the economy

  • was growing every year. Now,

  • we have an economy where it's supposed to grow at about 3%

  • or it's going to stall; we have, we

  • inflate the currency supply at about that rate and...

  • but now, after the year 2000, we've got 2010,

  • the peak of the maximum spending demographic,

  • and from now on it's sort of downhill.

  • Maximum savers, they do help drive the stock market,

  • but look at that maximum social burden category and look at what happens next.

  • So we are going into this time period right now.

  • Now, the reason there's no children on there is they haven't been born yet.

  • But if you look at... you know, when I first presented this a couple of years ago,

  • birth rates have been falling for quite a while now, and they've been

  • falling at an even greater speed since the crash of '08.

  • And if you look at the data from the Great Depression, birth rates just fell off a cliff

  • in the Great Depression. And so you have less people, less

  • people of the younger age

  • coming into this demographic to support the people that are retiring.

  • They didn't have the pill during the Great Depression.

  • Contraception was something that was not within most people's reach.

  • So here it is automated, and you can see that big wave sweeping through there.

  • And if you could imagine data for the children,

  • it would be a much lower rate. And if we do have a big economic pullback,

  • you're going to see that really reduce.

  • So we're in, most likely, some very serious trouble here. Because all of our social programs

  • and the way the economy and the society is set up,

  • everybody is expecting to be able to retire at a certain age and live fairly comfortably

  • off of the rest of us, off of the government.

  • Any comments on this,

  • these different age groups: maximum spending demographic,

  • maximum savingsyou've got the same model we do.

  • What is unique at this time in history

  • and it's the main topic of my most recent bookthat's why I call it the Demographic Cliff.

  • This is the first time in most wealthy countries

  • there's a few exceptions; let's call it Sweden, Switzerland, and Australia, countries like that

  • that have a larger millennial or echo boom; but almost every other country

  • has an echo boom that only comes up

  • near the same heights or is much smaller [like Germany and Japan] – oh, okay, so this

  • echo boom here is what you're talking about

  • so my question to people is, whatlike you say, it is a pyramid.

  • Each generation has been larger and more wealthy

  • to help pay off the debts or the accumulation from an aging generation before them.

  • What happens when the millennial is having to support a generation that's actually larger than them?

  • And what happens when there's not enough for them to drive

  • house prices back? I've got a model now for housing that says,

  • people spend the most on housing at age 41, but then when they die,

  • at age 79 or 80 on average, they become sellers.

  • So I have to subtract the dyers from the buyers, and when I do that,

  • baby boomers are going to be dying at higher rates than the millennials are going

  • to be buying. At some point there's going to be net negative demand for housing.

  • Everybody thinks, oh, we're going to need more housing for them. No

  • not when a smaller generation follows a larger. So, for entitlements, that's huge;

  • There is no way

  • this next generation in the US, nevertheless in Japan or Europe where they're much smaller,

  • can even hope to pay the entitlements [that have] been promised the baby boomers; it's a fairy tale.

  • And, housing will never be the same.

  • We saw the Bob Hope generation

  • come out of World War II, the first middle-class generation in history,

  • where the average person could buy a house on a mortgage.

  • That was not the case in the Roaring Twenties, even; only the [affluent?] could do that.

  • That so that was a big boon for housing; and housing went up, the Depression went away.

  • Then the baby boom comes; unprecedented numbers.

  • All of our lifetimes, housing's gone up with a few exceptions here and there.

  • Housing is going to do well to go sideways for the coming decades, nevertheless go up much again,

  • because of this generational shift. We've never seen this in history.

  • So now that we've covered three of the major components for deflation,

  • I wanted to show you one of the real biggies here.

  • And this one is the convergence of cycles.

  • There's a whole bunch of cycles. The first one is the wealth distribution cycle,

  • and I want to use my own family as part of a demonstration of this. This is my father.

  • He's right here, he's about the age where he enlisted in the army

  • to fight in World War II. He fought in the Battle of the Bulge;

  • he was among the troops that liberated Dachau.

  • Here he is in the mid '50s;

  • he was manager of an auto parts store that sold high-performance equipment.

  • And here's his tax return from 1955;

  • this would have been, he would have been filing this about a month and a half after I was born.

  • And so, what you see here, is that he's a store manager in Salem, Oregon,

  • and his income was about 9600 bucks,

  • and he paid about 1160 bucks in tax,

  • for an effective tax rate of about twelve percent.

  • And you say, well,

  • he only paid 12% because he didn't make very much, so he's in a really low tax bracket.

  • But wait!

  • This is median home values, this is US Census Bureau data, and here we have 1950 and 1960,

  • so we're going to Oregon, 1950... a median price single-family home

  • was 6800 bucks, and in 1960 it was $10,500.

  • So, I'm going to say probably 8500 dollars as a happy medium there.

  • Today, in Los Angeles where I live, a single- family median price home is 360,000.

  • Now, he was making enoughmaking 9600 bucks he was making 1100 bucks more

  • than the cost of the average home in Salem, Oregon.

  • So, a auto-parts store manager would have to be making

  • 360- to maybe 420,000 dollars,

  • and then paying only 12% tax on it, to equate to the same amount. And it's part of this

  • wealth distribution cycle. This is the amount of national income that the top 1% earns,

  • and back in the '20s, the end of the roaring '20s,

  • it was above 20%, of the national income, was going to the top 1% of the income earners.

  • There's a trough here in the '70s where it got down to just 9%, but it's back up to 20%.

  • And so, you know, in this area, the middle class was doing better,

  • butand paying less taxesbut, on the trip there, was the Great Depression, right here.

  • So, getting back to that is going to be a very deflationary, painful thing.

  • This, we've already seen the baby boom demographic, but I just need to show you one thing here.

  • You recall that the maximum spending demographic drives the economy.

  • The maximum social burden puts deflationary pressure on the economy;

  • they sell their stocks, bonds, and real estate to survive,

  • and they don't produce anything.

  • But what I want to point out is that

  • there's about 6 times more people driving the economy here in 1940 than there are

  • putting deflationary pressure on it.

  • And when you watch this wave go through,

  • the drivers are always more until just the last couple of decades here,

  • and now the people putting deflationary pressure on the economy

  • exceed the number of people driving the economy.

  • So if you could chart this out,

  • with time on that axis and the energy going into the economy on this axis,

  • the curve would probably look something like this.

  • And I believe that we are right about here, right about now.

  • And now for the next cycle in this big convergence, the stock market cycle.

  • This is the S&P 500 P/E ratios. A P/E ratio

  • is the price of a stock per share,

  • divided by the annual earnings of that company per share.

  • And if you're paying somewhere between 10 to 14 times annual earnings,

  • that's fair value. Anything under 10 is undervalued,

  • 14 to 20 is overvalued, and anything over 20 is bubble territory.

  • And here comes the dataand what is important here

  • is that when the stock market goes into a bubble,

  • without exception, it has to visit undervalued before a new bull market can begin.

  • Except for this time, the bubble, biggest bubble in history in the year 2000.

  • And when it popped, we went down to fair value and bounced back up into a bubble.

  • Do you really think that a new bull market can begin from here? That we're not going to

  • visit extreme under-valuations? I don't think so, I think that we *have* to visit

  • extreme under-valuations before a new, solid bull market can begin.

  • And now for probably the biggest factor in this convergence of cycles:

  • This is Nikolai Kondratiev.

  • He's a Russian economist that Lenin commissioned to prove that capitalism wouldn't work.

  • He went away for a couple of years to do his studies and came back with his findings,

  • that capitalism was the superior system and would work marvelously well,

  • but it would always suffer from these long-wave, boom-bust cycles

  • to which he gave the names of seasonsof spring, summer, autumn, and winter.

  • We'll come back to this in some other episode and really dig into it.

  • But for now what you need to know,

  • is that the winter is the deflationary season; the last winter was the Great Depression.

  • And they used to call this the 50-year cycle, but lately it's gotten stretched out and takes longer.

  • Now, I believe, that it's got to be the length of a human lifetime.

  • And the reason is that the winter is deflationary,

  • and the people that were old enough to be of working age and have young families,

  • that lost the house, lost their job, lost the family farm;

  • they become very emotionally scarred. And they become very risk-averse, and very very frugal;

  • and in order to make all the same stupid mistakes that we made in the Roaring Twenties

  • that led to the Great Depression, that generation has to die off.

  • Well, they *have* died off, and we *have* made all the same stupid mistakes.

  • So this is very deflationary, should it happen. And here's the supporting evidence:

  • this is interest rates, and what you see here is that they go right along with the cycle.

  • This is wholesale prices in the US, and again, they go right along with the cycle.

  • Until the point the Federal Reserve decides that what we really need is constant inflation.

  • This is one of the biggest cycles of all. It's hard for people to see, though; this East-West cycle

  • takes about 500 years for the pendulum to swing each direction, and 500 years back.

  • It's innovation and prosperity, swinging from Asia, to Europe and North America, and back.

  • And in the Dark Ages, China was developing gunpowder.

  • Then, China stagnated while we had the Renaissance and Industrial Revolution.

  • So, ingenuity and prosperity does flow back and forth; and right now,

  • you should be able to feel

  • that the Western economies are stagnating and have sort of stalled,

  • while the growth in the Asian economies over the last 20 years has been mind-boggling.

  • And so this is very deflationary for the West.

  • And here is probably one of the most deflationary cycles of all:

  • this is household debt as a percentage of disposable income.

  • And alarm bells should really be going off

  • when people owe more than their disposable income: anytime this exceeds 100%.

  • But I believe that this is also a cycle; and that if we had data, if we could go back further,

  • it would probably look like this.

  • And what's interesting is that this reflects the seasons of the Kondratieff wave,

  • of spring, summer, autumn, winter; spring, summer, autumn, winter;

  • And we're going into a winter and that's very deflationary.

  • The next cycle you've seen before; we learned about this in episode 2. But it's the shift

  • in world monetary systems: the classical gold standard, the gold exchange standard,

  • the Bretton Woods system, the US dollar standard,

  • and there's something that's coming next; these usually coincide with major wars.

  • But whatever this next shift is, it's going to be chaotic,

  • and it's probably going to be a little painful; it's not going to be pretty.

  • Right now, and we learned in Episode 3

  • how countries are abandoning the US dollar standard at a blazing rate right now;

  • it's developing stress cracks, and it's going to implode.

  • And here's the thing, is that that is going to be happening

  • with the convergence of all of these cycles.

  • We have the East-West cycle; we have the baby boom demographic;

  • we have the wealth distribution cycle; household debt as a percentage of disposable income;

  • the stock market cycle; the Kondratieff wave; and the shift in world monetary systems.

  • And the thing about all these cycles is that they have all peaked,

  • and they're starting to descend, which is deflationary. Deflation, deflation, deflation, deflation, deflation

  • and that is all happening at the time when the world monetary system

  • is developing stress cracks. It's about to implode

  • and it's going to be extremely chaotic.

  • These things are all going to make it even more chaotic.

  • So that's the convergence of cycles and all of these things are the reason

  • that I am expecting deflation before big inflation or hyperinflation.

  • But just as I said in my book, any deflation is probably going to be short-lived.

  • This is the nightmare scenario for every central banker,

  • and all of the world's central bankers are Keynesians.

  • They believe that they can print their way to prosperity,

  • even though they have proved that you can't, time after time;

  • all it does is cause a wealth transfer. When all of the world's central banks

  • start printing their currencies into oblivion simultaneously,

  • what you will see is a wealth transfer where the vast majority becomes very poor

  • and just a few people become very rich. It's horrible for the economy.

  • But Japan is the prime example that it does not work.

  • You can't print your way to prosperity.

  • And here's what you can do: educate others. Protect yourself from what is coming.

  • And please, share these videos with everybody that you can.

  • And until the next episode, thank you very much for watching.

  • You can do stuff now

  • to be ahead of this, and be positioned right, when this happenscause this is inevitable.

  • This *is* going to be the first time that we have an economic event of this scale that is global

  • a small percentage of people are going to make a fortune and do very well

  • and most people are just going to not know what hit 'em.

I'm Mike Maloney, author of "Guide to Investing in Gold and Silver". It's the world's number-one

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