Mike Maloney: The Rollercoaster Crash

Precious metals sank to 5-year lows during this past week. The long painful price decline that began at the end of 2011 still continues unabated. Holders of gold & silver are understandably wondering if their faith in precious metals has been misplaced.

In this week's podcast, we invite Mike Maloney back on the podcast. Mike is the owner of one of the largest bullion dealers in the US, GoldSilver.com, and one of the top minds we know of on monetary history. In this wide-ranging interview -- which announces the release of a new educational video, The Rollercoaster Crash, which kicks off Season 2 of GoldSilver's excellent video series Hidden Secrets of Money -- Mike lays out the rationale for an approaching global reset of the existing fiat currency regimes, and why asset-backed currencies are highly likely to return in our lifetime:

History shows that whenever there is a problem with the currency, whether it is big inflation, hyperinflation, or deflation, people go back to safe haven assets. And we should be going into a deflationary episode that is overreacted to that causes big inflation or hyperinflation, which causes a breakdown of the current global monetary system, the global dollar standard that is now the longest-lived of these artificial monetary systems and has developed a bunch of stress cracks and is in the process of imploding right now. There is going to be before the end of this decade, most likely, another emergency meeting of a bunch of finance ministers and economists to try and hash out another world monetary system. It is just history repeating, and it is a natural consequence of a man-made, artificial manipulation of the free market.

But if this debt-based currency system has to evolve, switchover to some sort of asset-based currency system or currency system that is a free market thing, I am fine if the free market selects Bitcoin or if it selects gold or silver again like it has for the past 2500 years -- it keeps on selecting gold and silver as the optimum money. I am fine with whatever the free market picks. And I believe it will lead to greater prosperity. But we are in for some short-term pain. The good news is that for somebody that is properly positioned, it can be the best thing that ever happened to you because of this enormous wealth transfer. If currency a fails, its price measured in gold goes to infinity.

Today, there is about $200 worth of gold, investment-grade gold, per person. And there is about $40,000 worth of other liquid financial assets that compete in storing purchasing power. And so those liquid financial assets such as cash, stocks, and bonds, the problem with them is that their purchasing power can evaporate. It is something that is just based on trust. And if just 10% of those liquid financial assets come chasing gold, gold’s purchasing power has to rise 20-fold.

Click the play button below to listen to Chris' interview with Mike Maloney (78m:22s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/mike-maloney-the-rollercoaster-crash/

Chris, thanks for having Mike Maloney on; he's another one of my favorites.  I can't agree more with you about the high quality of his Hidden Secrets of Money videos; they are a real contribution to helping people understand money (or, rather, "currency") in all its obfuscation.  My son actually "discovered" Mike's videos on-line a year or so because they were trending, and proceeded to "teach me" about debt-based money!
Kudos, Mike, for your good work!

Some thoughts after listening to the podcast.
The wealth transfer concept is great.  I'm thinking what I should put in the denominator for all these various asset classes.  I'll have to listen to that part again and maybe I'll get inspired to come up with some charts.

If we are entering a highly deflationary period prior to the great overreaction by the central banks, the whole "end of the dollar" event will be preceded by an exceptionally strong dollar, which might be surprising to someone who just hears the "gold will prevail" theme that Mike likes to talk about most.  I'm glad to hear he recognizes that gold will drop substantially if that occurs.  He clearly doesn't believe that gold is deflation-proof, which I agree with.

The use of the dollar as a reserve currency is not impacted by the currency used for trade.  As I've said before, the "reserve currency" means what currency central banks use to store their reserves, NOT what currency that businesses use to trade.  If your personal savings are in gold, while your income and expenses are in dollars, then gold is your "reserve currency" and dollars are your trading currency.  Even if you are paid in dollars, and pay your rent in dollars, you can easily still have your savings in gold.

And if we're entering a strong dollar period, the use of the buck as a reserve currency should increase, not decrease, at least during this period.

If you are a debtor, sound money is the last thing you want.  If you are a creditor, sound money is Nirvana.  Changing to sound money, like every major change, will create winners and losers.

From what Mike says, demographics predict that real estate is entering a long period of decline.  This aligns with what Martin Armstrong is saying.  If true, one would expect that Japan will see this decline before we will, since from a demographics standpoint, Japan is much further along.

My sense is that Mike feels if he could only impose a sound money system, the "free market" would then fix everything.  I'd like to point out that the "free market" has consistently voted in favor of credit since the beginning of time.  If we imagine that some arbitrary system of "sound money" can abolish credit - and by extension the credit cycle - well that just seems unlikely to me.  A truly free market will always end up voting for credit, just like it always does.  Credit is not some banker-imposed nightmare, its what we all want, at least most of us anyway.

Humans love windfalls, credit, bubbles, the prospect of easy money, and especially ponzi schemes.  And if the market were truly free, we would probably vote for them every single time.

At least that's what history suggests to me anyways…

Thank you Chris & Mike for the podcast.  Hearing your voices reminds me that there are still some "adults" who prudently advise fiscal restraint when a "Weekend at Bernie's" mentality pervades our  monetary policies.

I totally agree with Dave on the free market aspect of money. As far as anyone should be concerned, credit money is the most direct manifestation of the free market. Despite the fact the Fed has power to manipulate interest rates, credit money is still rooted in personal freedom to take out loans in order to create money. Contrast that to any non-debt based money, and you have to have some third party entity that issues the amount of money that it thinks there should be in the market. Even if there was a large marketplace for a myriad of different currencies, you would still be subject to the same inherent problem - not to mention the sheer amount of work you have to put into keeping track of each individual currency, and having to maintain a balanced portfolio. 
Mike's overall outlook is a good one, but there are some inherent problems with it. I think he over-emphasizes base money, and actually calls this "helicopter money." I strongly disagree with this being "helicopter money," which I define as issuing debt-free money - or what Steve Keen calls "QE for the public." This did NOT happen, and is the reason why private debt is still so high. Keen has shown that private debt is the ultimate driver for deflationary pressures, and he calls for a "modern debt jubilee." On the contrary, I don't see how increasing only your base money will de-stabilize your currency at all. Base money is largely economically inert (with the exception of banks using it to speculate), so until it is lent out to the public, it doesn't affect money in circulation. Therefore, I stand by Keen's belief that the federal government can temper a lot of these problems simply by large scale fiscal stimulus and issuing debt-free money. Whether or not they do this is to be seen, and will be a difficult move politically. 



You might want to try YouTube to watch the videos.  I tried without success to get the videos to play on hiddensecretsofmoney.com, even after completing the free registration.  There must be a way to get them to work there, but I couldn't figure it out in a reasonable length of time.

The best book for understanding aspects of money that are generally ignored by virtually all finance/economic theory camps is "Debt: the First 5,000 Years," by David Graeber, which explains that currency/money developed to pay debts and manage credit, not the other way around.
To understand Dave's point about exchange-trading money (which can be sticks of wood, shells, scraps of paper, etc.) and reserve money, I suggest Fernand Braudel's magnificent 3-volume history of early capitalism, particularly volume 2 "The Wheels of Commerce."  I realize suggesting 1000+ pages of reading doesn't go over big in today's "wow, this article is over 300 words long, forget it" world, but it's one of those case of "you get what you pay for," 

I would also highly recommend David Hackett Fischer's "The Great Wave: Price Revolutions and the Rhythm of History" which covers what has happened in history when demographics, resource depletion, devalued money and labor surpluses collide.

2,000+ pages of reading here, but your understanding of currency/money/credit will be revolutionized by these three works.

My next 2-parter on the USD describes why we might see another leg up in the USD as Davefairtex mentioned… the eventual re-set will be ugly, and little financial 'wealth" will make it through the wormhole, but we'll probably have quite a roller-coaster ride before the ultimate crisis.

Call me picky.

I get the point Mike is trying to make, but wealth is not a constant.  It's not like the law of conservation of energy, where it only changes from one state to another.

Wealth is destroyed in war.  Wealth is consumed (energy, food).  It is reduced through mismanagement (erosion, rust).  Heck, the passage of time alone reduces the quantity of some forms of wealth, while increasing the quantity of other forms.

The great pyramid in front of which Mike gives part of his presentation is an excellent reminder of this.

Today, we seem to be trying our level best to reduce the absolute quantity of wealth, while at the same time increasing the quantity of claims on wealth.


Charles, why does there HAVE to be a wormhole? What will happen if the federal government institutes large scale fiscal stimulus a la a REAL helicopter money drop? This would essentially be to the effect of a debt jubilee as the public would use this money to pay down debts. I mean, sure this would be terrible for creditors, but I think if push comes to shove, this would be on the table for Congress. Even if it wasn't, I think this would at least offer a viable solution… 

I would see your point more readily were the helicopter money to be debt-less… but what are the chances of that?  If congress voted to give us a bunch of money, say via a retroactive tax rebate… they would simply have to borrow that much more… i.e. do that much more deficit spending to make up for the budgetary hole.  National debt rises, and the wormhole gets that much closer.  
Unless this was debtless money being created… you are only describing the socialization of debt, i.e. moving deck chairs around on the titanic… you can pay off your car loan, but the national debt would rise an equal amount.  Make sense?      

Edit;  Sorry, I hadn't read far enough back in the string to realize that some of these points had already been sussed out… good discussion

I couldn't disagree with this statement more;

I'm glad to hear he recognizes that gold will drop substantially if that occurs.  He clearly doesn't believe that gold is deflation-proof, which I agree with.
I am not saying that Gold could not take a quick whack lower.. it could.  What I am saying is that this idea.. that Gold would be hit in a generalized deflation, presupposes that today's price actually represents the supply vs demand balance for Gold today.  In other words.. if today's price for Gold was set by a physical trading market, and there were not numerous signs that suggested stress, I would agree with Dave and others who promote this idea. 

But the price of Gold today is not representative of the balance of physical supply vs physical demand.  So for me, this blows the theory Dave proposes above right out of the water.  Here is the best piece I have found written lately that helps explain;


London's LBMA and New York's COMEX Gold Markets In Collapse

That title is a strong statement to make. Indeed.

However, as discussed in 2014 and again in January of this year, with daily gross trading turnover at the LBMA (London Bullion Market Association) in January of ~ 200M oz. of gold per day, it was inevitable the world's pre-eminent physical gold and silver pricing platform in London would fail due to Gresham's Law and we can now see from available information that it is collapsing.

Gresham's Law predicts that the introduction of debased (or 'bad') money will drive more valuable (or 'good') money out of circulation leaving only the debased, and ultimately worthless, money or claims circulating.

Many will chuckle at the proposition of Western gold market failure and note that the price of gold has gone nowhere. If the markets are in collapse due to lack of available of gold, then where is the price action exploding to the upside? Well, digital gold and silver are still available in copious (infinite) amounts and continue to trade on both the LBMA and COMEX exchanges - you can have as much digital or virtual metal as you want on these digital exchanges. There is no shortage of virtual metal and thus the virtual price that most investors follow won't move up. The bullion banks have always sold-down this virtual gold price when it has risen.

The telling of the story is instead in physical metal availability and so we look first to the LBMA - the primary global 'physical' exchange. The LBMA indicates in it owns market guide that its primary gold trading contracts, unallocated spot market contracts which are claims for spot physical gold (ownership right-here, right-now), give the holder just an unsecured claim for physical gold. This has allowed the creation and trading of non-existent gold to the point that the London spot physical gold market trades 200% of the global annual gold mine production of gold - each day.

Looking to the availability of vault gold in the physical market in London (with a special acknowledgement to the important research by Ronan Manly and Koos Jansen of BullionStar.com), we can see below that outside of the holdings of the Bank of England (official sector holdings) and ETFs and other funds in London, there are approximately 6 tonnes of privately-held gold potentially available to the spot market. It may be argued that the official sector holdings held by the BofE or gold from Switzerland can be made available to market by leasing but the 6 tonnes of Privately Vaulted gold in the graphic below tells another story.

The 'Unaccounted' Privately Vaulted gold (gold potentially available in size to the spot market) has declined from 1,651 tonnes in 2011 to 6 tonnes this year. During this period, physical gold has been predominantly moving rapidly to the East where it has been bought by Asian buyers.

To meet the market requirements in Asia, Western gold has been refined in Switzerland into 99.99% pure kilo bars from Western 'London good delivery' bar format. The gold vaulted in London would be logistically more difficult and costly to move to refineries in Switzerland so we can therefore infer that this gold would be the last available gold to be refined in Switzerland and sent on to Asia. The consumption of these London stockpiles tells us now that the readily available Western gold is gone. Sure, smaller amounts of leased gold can be made available from central banks or surreptitiously from the ETFs and other funds to the market but the rapid decline of London's gold vault holdings tells us that there has already been a landslide in the London gold market.

To give a sense of scale of this event we can estimate the open interest of spot claims by using a 2x to 3x multiplier of the daily gross turnover as exists in other physical materials (commodities). For ease of calculation, if we use the 200M oz daily turnover of January 2015, that translates to an open interest of 400M to 600M oz or ~ 13,000 tonnes to 19,000 tonnes of gold. That's versus 6 tonnes of Privately Vaulted physical gold in London outside of the BoE and the various gold funds.

The New York COMEX gold market tells a similar story. The ratio of open interest contract claims on gold vs. registered vaulted physical gold available to settle trades in NY COMEX warehouses has increased now to a 300:1 ratio. Even on this non-physical exchange with numerous escape clauses in the COMEX Rulebook to allow cash settlement, the gold has virtually disappeared with only 150,000 ounces remaining in the registered accounts available for delivery against the 300x larger open interest claims in this market.

John Exter, who was a former Federal Reserve official, called gold 'power money' or the ultimate form of debt settlement as gold stands alone as nobody else's promise (compare our debt-based fiat money system where all money starts its life as debt). Because of gold's integrity as money and as an asset it has always existed as an unappreciated indicator of the unsoundness of central bank monetary profligacy and government fiscal deficit policy. The suppression of the gold price by pricing physical gold with the exchange of virtual gold will reach its limit with lock-up of the London and New York gold (and silver, platinum and palladium) exchanges when the metal completely disappears.

Savers and investors will then move to other real goods to secure their wealth as this age of fractional reserve trading and central bank monetary sophistry ends - a story of fiat money failure that been repeated over the last 300 years in the West. A monetary and bond market crisis will signal citizens calling the government and central bankers' bluff, once again.

Over the past few days, the London 1-week GOFO rate (LIBOR minus the gold lease rate) has suddenly surged to - 0.30% and the 1-month rate to -0.23% both from positive values signalling physical market stress. We will know whether this is meaningful with time, however the broad story has already been told - the gold is, in broad terms, gone from London and New York.

A final note: We've seen NATO, Russia, China and Iran become much more active militarily and geopolitically over the last 24 months. Are they getting ready for the next phase which is a Western financial crisis and then military conflict (as historically favoured by politicians to deflect attention from the crises they've created) instead of reforming the system? It looks like it from this vantage point.


I don't see how the national debt matters at all. The US government is a monetary sovereignty, which means it issues currency. Every other entity is a user of currency, therefore, you cannot think of the federal debt as the same thing as personal debt. To illustrate this point, let me ask you a simple question - what happens if the fed just rolls this debt over repeatedly? Let's say Congress issues debt-less money, which then in theory increases our national debt. Well, then the treasury can issue more debt to pay off existing debt. When you issue your own currency and you owe yourself currency, it's a non-issue. 

Were the money issued to be debt-less… that would be an interesting way to create a true jubilee.  My point was that with the FED in place, the idea of debt-less money would probably not get much traction.  If I were the FED owners… I would view the idea of debt-less money as a very, very dangerous idea.  
I do not agree that national debt does not matter… not at all.  Even at very low interest rates… the cost of financing that debt eventually rises to consume the entire "budget".  Then what?  Wormhole is what.    

I have to agree with CHS that a thorough read of Fischer's "Great Wave", would do everyone a great service. Given war, immigration, currency manipulation, and demographics, currently, there are uncomfortable signs that the proverbial lump is poised to hit the fan, again.Mr. Maloney's austerity suggestions are timely and sound, but is he telling us PP'ers anything new? Debt isn't going away any time soon and I don't see any slow down in deficit spending (the Canadian government just announced  it is estimated it will cost $1.2 billion to settle the 25,000 Syrian refugees in Canada). What's happening with the $85 million a month of MB Securities that the Fed has on their balance sheets? Mrs.Yellen doesn't want the auditors any closer to the books than is necessary and seems quite comfortable to let the real inflation rate erode what little savings are left in most of the boomer's pockets. A quick read of Akerlof and Shiller's book confirms that P.T. Barnum's ghost is still haunting the credit card issuers and mortgage brokers as Wall Street continues to stoke the wealth gap. Complexity spawns ignorance and human nature spawns stupidity. "The best we can hope to do is to break even. Unfortunately, we never break even." (1st and 2nd law of thermodynamics). Maybe when Hell freezes over, we'll have a chance (third law of thermodynamics). Sorry, it's snowing outside and I'm feeling a little irascible! I think I'll go pay off my Visa card with my MasterCard, so I feel better. 

What exactly is this wormhole that you are talking about? Can you explain to me what it means and what events are going to transpire during said wormhole? 
The fact of the matter is that the national debt is nothing but a measure of federal spending that had to occur IN PLACE of private spending. It is not actual debt in the sense that the money needs to be paid back, for reasons which I have already stated. So, let's say that Congress massively increased public spending and skyrockets our deficits, piling onto our national debt. What would happen is that the federal reserve would need to buy a large chunk, if not majority of these treasury bonds (what is left over after institutional investors buy them). This will then massively expand the Federal Reserve's balance sheet. Interest on this debt would then result in more debt being issued by the treasury, which would then be bought by the Fed. This, in itself, has no real life impact as it's simply digital currency exchanging hands in between branches of the government and "pseudo-government." The numbers may be staggering, but it has little effect on the actual economy. Why? Because all the federal reserve has to do is press the delete key, and get rid of all its assets. If that were the case, then the treasury would owe them anything, and this cycle is broken. 

The ONLY caveat to this is the fact that by virtue of such large fiscal stimulus, you MAY bring on inflation, depending on how much economic output is actually stimulated. The more debt that is purchased by institutional investors, which means the general public, the less inflation would occur as it simply shifts spending capacity within the existing economy. However, if significant amounts of debt needs to be purchased by the Federal Reserve, then you have freshly digitized currency flowing into the economy into the hands of end-users, which may cause inflation. But, you would only see inflation if the production of goods and services are not also increased. However, with what we are seeing in today's world with increasing automation and large excess productive capacities, inflation may be less a risk than it has been in the past. 

A large number of people see borrowing another $10 trillion (heck, make it $100 trillion) as the solution, especially at low rates of interest.  This is essentially following the Japanese model of monetizing debt and keeping zombie loans and institutions alive via injections of more borrowed money. 
But few address what's happening in Japan. the economy is still stagnating, despite endless fiscal and monetary stimulus, and now tax receipts cover the interest on the national debt and not much else. 

The next solution is to write off all that govt debt, but what most people tend to forget is that this sovereign debt is somebody's asset. Wipe out the debt, wipe out the assets and the income streams propping up pensions, 401Ks, etc.

there is no free lunch, and that's the wormhole–in my view.


You're right in that one person's debt is another's asset. But, they don't have to write off ALL government debt. Simply what is owned by the Federal Reserve. Let the people keep their assets - pensions, 401k, CDs, what have you. There is a lot of room in the system for fiscal stimulus before inflation (may or may not) rear its ugly head. 


Read "Fiat Money Inflation in France".

Could it be the existing money-less societies studied haven't progressed in the modern sense because money was not adopted due to mystical reasons and other societies did develop money from barter and became Europe and America.   It is well known that in prisons certain items develop into being used as money after being traded in barter fashion (the other side of a barter transaction can be a service like knocking someone off in prison).