‘The Matterhorn Interview’ – July 20:Our whole financial system is an illusion

Friday, July 15, 2011
By Paul Martin


The book author, financial commentator and entrepreneur Mike Maloney talks in this exclusive interview with Lars Schall for Matterhorn Asset Management in Zurich, Switzerland about: inflation/deflation, the flaws of the current monetary system, the upcoming rollercoaster ride in crude oil, and the biggest bull market in gold and silver ever.

By Lars Schall

Mr. Maloney, is a massive financial/economic storm ahead for us that will express itself basically through these four phases: a short-term deflation – inflation – a huge deflation – a hyperinflation?
Mike Maloney: Yes, I absolutely believe so. I think related to the recovery of the stock markets, we got something going on in the United States that I refer to as a “Dead Cat Bounce“ – this is an old stock market term that goes back to the crash of 1987, where a stock market trader, when he was asked about the crash, answered: “Even a dead cat would bounce if you drop it from a high enough point.“ This means if a stock is so ridiculously overvalued, then when its bubble pops and it crashes, it goes down a certain amount and then investors come in to start buying what they think are good deals, because it’s now at half of what the stock was previously selling for, but they aren’t measuring the fundamentals: is this stock really a value measured in things like of P/E ratio (price-to-earnings ratio) and dividend yields?- the fundamental measurements of whether the stock is a bargain or whether it is overvalued. They aren’t looking at that. They just look at the price and they come in thinking they are scooping up deals only to find out later that the stock still needs to fall to go back to fair value. So those people that buy cause the stock to rise, then the stock runs out of steam or energy and it starts to roll over and decline again.Well, entire economies are doing the same thing. We were in a bubble that was a worldwide bubble. It’s a credit bubble that has caused all these other bubbles in other asset classes like stocks and real estate. Those bubbles have begun to pop, but by any measure of reasonable value the stock markets and the real estate are not done of falling yet. We’re still in a bubble. The crash of 2008 was just a speed bump on the way to a major accident. In the United States and many, many other countries around the world we are now in this “Dead Cat Bounce.“ The Federal Reserve for example created a whole bunch of currency. For the bailouts they’ve created more than a trillion of dollars of base money – base money is the currency in circulation, the paper dollars and the deposits that the banks have at the Federal Reserve, which are redeemable in paper dollars. These are not the dollars that the banks create with fractional reserve lending, which magnifies the money supply, but the Fed more than doubled the amount of base money, it went from 825 billion to 2.2 trillion paper dollars.

What did that?
Mike Maloney: Well, we had a short-term deflation, and when Ben Bernanke, the Chairman of the Federal Reserve, created all that currency, that currency went to bailout the banks, and the banking sector let the stock market rebounce, but now the stock market runs out of steam again. Not only in the United States, but also in Europe and other places, because the stock markets are since the year 2000 – and especially since the fall of 2008 – increasingly linked with each other – if we go down, they follow. So we had the threat of deflation when the markets crashed, and I wrote in my book “Guide to Investing in Gold and Silver“ before all that happened, that to this threat of short-term deflation Ben Bernanke would overreact, create a lot of currency and that would cause mild inflation, which we had now. And now we should go into a real deflation, a contraction of the currency supply. That means there will be less dollars and probably less euros in existence.That will be a true deflation. The prices start to fall, and even though prices fall everybody has less currency. So the economy slows down. And that is then Ben Bernanke’s greatest nightmare. What I said in my book is that he will try to print his way out of this true genuine deflation – and you can already see this with this QE2, with which they are buying U.S. tresuries directly from the government and creating the currency that didn’t exist to pay for the treasury notes. That is a sign that the Federal Reserve is doing emergency panic measurements. There is something fundamentally wrong with the global economy, and all Ben Bernanke is doing is that he is putting wall-paper over it so that the people don’t see it.

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