First of all, the Wave Principle is not a perfect forecasting tool. But in my opinion it is light years ahead of fundamental econometric modeling used by economists, who can but take past and present data and extrapolate it into the future without making any allowance for change in public mood.

Politicians make the same mistake. Three years ago in Australia the incumbent Prime Minister John Howard got away with all sorts of alleged untruths, yet people still voted for him. The current leader of the Opposition Kevin Rudd could not even get runner up to then leader Mark Latham, whose demise was swift. Today if John Howard walked on water people would not vote for him. Kevin Rudd is a god. What changed? John Howard is, in the opinion of many, one of the most astute politicians of all time. Yet he cannot understand what has happened. That is because he does not understand the science of socionomics.

All that changed was the public mood, as it had to. Socionomics teaches that human crowds, which take on a personality of their own, as distinct from the individuals who make them up, progress through history in waves of optimism interrupted at times by waves of pessimism. Like that worm that has to pull back before he can move forward again, we must suffer setbacks before we can progress further. And once the trend changes, that phase has to complete before it can change back again.

Remarkably, the public mood has a pattern to it. Even more remarkably, we see the same pattern everywhere in “nature.” It is the “rhythm of the universe.” What the (Elliott) waves do is record that pattern, which is first reflected in the share market. Because the patterns repeat themselves over and over, we can use the Wave Principle as a forecasting tool. In my opinion the best there is, but not perfect.

There are waves within waves within waves. We call this fractal patterning. So whether we are looking at today’s action on the share market or a chart for the last one hundred years, we see the same pattern.

We often say that the waves follow form, not the clock. Many times a wave count can tell you where the market is going, but how long it will take is a separate judgment. More often than not, because the waves are indicating future changes in the social mood, a technician will be early with a forecast rather than late. But ask those who got wiped out in 1987 if they would rather be six months early or a day late.

Economists did not even label the last Great Depression as such until 1933. Yet the share market told them it was coming in 1929.

The most basic pattern in the Wave Principle is five waves up corrected by three waves down. The larger the degree of the wave, the longer it will take to change trend. For example, a five wave structure that unfolds in hours might turn over in minutes. But a wave of larger degree will take longer.

A wave of very large degree (we call it Supercycle degree, which subdivides into five waves of Cycle degree, which subdivide further into five waves of Primary degree, etc.), which began in 1932, is coming to an end right now. It has taken 75 years for five waves of this magnitude to unfold. The three waves needed to correct that advance before we can go forward again will take back a huge portion of the gains made over those decades. Probably somewhere between 50% and 80% (1929-1932 resulted in a 90% loss for the Dow Jones index).

Nothing is more certain than that the correction will occur. But how long will it take for the trend to change from optimism to pessimism? Clearly a structure so large will not turn around in minutes or even days. It is more likely to take years for the new force of pessimism to supplant the unrealistic (built on credit), often euphoric optimism entrenched over decades. Fifth waves often extend, especially in commodity markets, thus making the likelihood of calling the top prematurely more likely.

In the present case, as early as March 2004 it was technically possible to count five waves as complete. But we all know that the market kept on extending. Options for the market to keep repeating this phenomenon are reducing each time it happens. It is possible that Wall Street indices can mount yet one more push higher, but the case that the Dow peaked on October 11 is getting stronger by the day. And we now finally have an important economic fundamental in play that has been missing in all the corrections of the last three years, namely a contraction in consumer spending, which is exacerbated (but not caused by) the “subprime” debacle. (That the debt bubble has not burst before this is truly remarkable).

The question investors must decide each time a correction occurs is: “Is this the big one?” And which would be worse – to exit early and miss out on profits, or to stay in too long and get wiped out with losses? Those who choose the latter are usually quick to deride the former while the going is good. But they rarely get out at the top. I have many clients who would give anything to have taken my advice to get out in 1987, which they ignored. They have never recovered.

A wise old sage once told me: “Always leave a little bit in it for the next guy, and you will never go broke.”

It’s like deciding whether to build a house on an earthquake fault line. You know “the big one” is coming, but you don’t know when. Do you go ahead and build anyway and hope that it is some time off? Or do you play safe?

All I can say is we have had warning tremors already. The correction in 2004 was the first one. The August 2007 dip was the most recent, apart from the correction underway now. One of them is going to be catastrophic. There will be no second chance for those who stay in too long.

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In my July newsletter I suggested the above report was probably heralding the end of one of the greatest bull markets in history. I referred to it as “the final party.” As it turns out, I was only a matter of days early.

I have continued to draw attention to the eerie parallel between 1987 and 2007. In 1987 the Dow peaked on August 25 and fell 20% over the next two months. It then fell a further 23% in one day on October 19. This year the Dow peaked on July 19.

All through 1987 I was warning of a stock market crash. Nobody listened. After the October crash people were literally lined up at my door begging for help. It was too late.

The most likely months of the year for a stock market crash are September and October.

In my September newsletter I have even used a chart that shows the similarity between 2007, 1987 and 1929. Could this one be the worst since the last Great Depression? Absolutely. The title of my book is “How to Profit from the Coming Great Depression.”

Why am I so pessimistic?

Well, actually I am not a pessimist. On the contrary; take another look at the first three words in the title of my book. The greatest bargains for a century will soon be available to those who have followed the strategy I have been recommending for years. To be forewarned is to be forearmed.

The reality is that most investment advice you receive through the media and the economists and brokers they quote is not only wrong; it is completely back to front. Neither economic fundamentals like supply and demand, interest rates, inflation, etc. nor geopolitical crises have any influence on the price of shares, houses, gold or anything else. In fact, it’s the other way around. But that’s another story. Neither does central bank or government policy.

As explained in my August newsletter, human progression throughout history has to be interrupted by periods of regression (going backwards). Just like the worm that has to pull back before he can go further forward. Our flawed money system exacerbates this phenomenon. The current debt mountain is unprecedented in history. The only thing that has delayed its collapse is belief that “they (the Fed and Uncle Sam) won’t let it happen.” Once that belief is shattered, Humpty Dumpty will have his great fall. And that belief is currently being put to the test by the “global credit crunch.”

It is no coincidence that this borrowing and lending crisis has arrived at exactly the time that the waves that reflect the change from unbridled, unrealistic optimism to all-pervasive pessimism suggested it would.

The first wave down in the 2007 bear market for stocks lasted a month, from July 19 to August 16 in the Dow.

The first rally lasted until one day after Labor Day.

The next wave is likely to be the longest and strongest. It will probably put an end to the belief that what we have seen so far is “just another correction.” Half way down wave 3 is what we call the “point of recognition.”

If you’re not up to speed on all this, you need a “crash” course.

Graham Dyer

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The most common belief by gold bugs seems to be that everyone will flock to gold as the ultimate hedge against inflation, international crisis, currency collapse and all other things apocalyptic. The latest global credit crunch may well be the trigger that finally brings about the demise of the US dollar, and when everyone finally loses faith in paper money, stocks, bonds, real estate, governments and central banks, gold will be the one last haven of security. Better to buy it now before the price explodes and we are talking about gold in terms of thousands of dollars an ounce instead of hundreds. The Fed will try and print their way out of trouble, which will cause hyperinflation, and Uncle Sam will be happy because his skyrocketing debt will cost less to service. The only asset of real value will be gold, which is finite. Panic driven demand will push the price beyond anything we have even thought of.

Sounds familiar? Only problem is I think it’s dead wrong. If you want to pay the current price of around $660 an ounce, by all means do so. But I believe you will be paying three or four times too much for it.

Don’t get me wrong. I am a gold bug at heart. Yes, I can see the day when gold will be thousands of dollars an ounce. But not before it falls to less than $200 an ounce.

In my book and newsletters I have used charts to explain the main reason for my bearishness on gold in the short to medium term. Every five wave move is corrected in three. Waves follow form, not the clock. Gold has been in a bear market for 27 years since its $875 high in January 1980 and it is far from over. The $740 high in May 2006 was only wave B. Not until wave C is complete can gold enter a new bull market.

Now what about the likely economic backdrop to the technical picture I have painted? Well, the title of my book is “How to Profit from the Coming Great Depression.” So that probably indicates where I see the economy in the future.

Every depression in history has been accompanied by DEFLATION, not INFLATION! (Another one of my blogs deals with this subject).

The technicals and the fundamentals match. Gold does not like deflation. In a deflationary period, cash is king. So what if the US dollar falls against the euro or the pound or the yen? Why will that concern you if you earn your income and spend it in US dollars? You will only be directly affected if you are transacting in those other currencies. Yes, eventually import prices might rise. But for quite a time that will be more than offset against discounts everywhere as shopkeepers try desperately to keep the doors open. With each price drop your dollar buys more. Why would you want your money in gold, which pays no interest and is falling in value?

Don’t worry, when I think the time is right to buy gold I will be screaming my lungs out (well, maybe my keyboard). But that time is not now. Even in the near future I can see gold falling below $500 an ounce. And yes, this should coincide with a rally in the US dollar.

And don’t forget: In 2001 I was screaming out my recommendation to buy gold when every man and his dog had cast it to the scrap heap. The gold price rose from not much above $250 an ounce to almost $750. I am not always bearish on gold. It’s just that, like any other asset, there is a time to buy it and there is a time to sell it. Now is not the time to buy it, in my opinion.

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The “subprime” debacle in the last few weeks seemed to come from nowhere to suddenly infuse panic into financial markets from stocks to mortgages to hedge funds to banks to precious metals to consumer spending. Of course, as I have explained in my newsletters and daily updates (and in my book), it did not come from nowhere at all. Blind Freddy should have seen it coming. Nor was it sudden. It took a lot longer to happen than I ever imagined.

As at the date of writing (August 18), central banks around the world (the European ECB panicking the most) have tipped hundreds of billions of dollars into “the system” to try and combat the sudden fear of and thus freeze on lending, even from one bank to another. And now the Federal Reserve has lowered its “discount rate,” which is the desperado last resort that banks can turn to for loans if there is nowhere else, by 0.5%. Will this work? Will this stop the hemorrhaging in the credit markets which threatened to send mortgage rates through the roof and stock and other financial markets into a dive, not to mention the economy?

In a word, NO!

There is a mistaken belief, which is very widespread, that “they” (which usually means governments and/or central banks) can take whatever action is necessary to stave off any monetary or economic disaster that threatens. The belief (hope) is that we could never have another 1930s style depression because we have so many “safety nets” in place and authorities are so much wiser and the global economy is so much stronger than it was 75 years ago and technology advances, China, India, blah, blah, blah.

That is all nonsense. And very few people who believe that pipe dream can back it up with any facts, figures or even any historic evidence or economic fundamentals.

Before I explain why “they” cannot stop an out-of-control speeding locomotive, let’s look at a couple of recent examples that demonstrate just how powerless governments and central banks are in the face of a stampeding herd once the public mood turns sour.

Example 1
At the beginning of the 1990s, against all odds, first the Japanese stock market, then the property market in Japan, then the Japanese economy, went into freefall, and were to remain at or near the bottom of the abyss until this day. Share and property markets fell 80% and the Japanese economy has been in virtual permanent recession, if not depression, accompanied, notably, by deflation, for the better part of two decades. How this could happen, when in 1990 Japan was the post-war “modern-day economic miracle of the world” (like China today, take note) is another story that I have not only written about but strongly predicted back in 1989. The important thing here is how powerless “they” proved to be in trying to not only prevent it, but to fix it once it broke.

The Bank of Japan lowered interest rates to zero. The Japanese government spent trillions of yen on (mostly useless) infrastructure. Did they succeed in getting the economy moving? No. Did they succeed in getting people to spend again? No. Why?

Example 2
Immediately after Thanksgiving Day 2000 the US economy “hit the brick wall.” It was like magic. As if overnight the public just stopped spending. No-one noticed that this happened nine months after the stock market started falling, but that too is another subject.

The point is that the then chairman of the Fed, Alan Greenspan, panicked. On January 3, 2001 the Federal Reserve dropped short term interest rates by 0.5%. The effect was immediate. The S&P 500 spiked up 5% in one day. Yee-hah! The Fed won!

Did it? Over the next 18 months the Fed lowered interest rates a further twelve times in a row, not stopping until the Fed Funds rate got to 1%. Wow, that must have sent the stock market soaring. How much did it rise? The S&P 500 FELL 44%! Why?

The reason is that governments and central banks are followers, not leaders. Any action they take will have at best a temporary effect and any short term “reaction” by the public will always be fully reversed. At worst it will invariably add to the debt mountain which was the underlying fundamental cause of the problem in the first place.

Why is this? Socionomists know the answer. The most powerful force on this earth is the living, seething mass of humanity that moves backwards and forwards, up and down, like the waves in the ocean. Periods of optimism produce growth. But like the worm that has to pull back before he can move any further forward, these periods of progression must be interrupted by periods of regression (backwards). There is nothing that central banks or governments can do about it. And our flawed money system only exacerbates the problem.

The remarkable thing is that collective human behavior has a pattern to it. Mainstream economists ignore this patterning and thus have a wonderful record of getting it wrong. They did not even label the last Great Depression as such until 1933, four years too late to save people from financial ruin. They cannot see this one coming either.

The title of my book is How to Profit from the Coming Great Depression. Focus on the first three words and you may realise it is not a pessimistic tome. Read that and you will understand what I am talking about.

I reiterate that central bank intervention will not prevent the catastrophe that will flow from the “subprime mortgage crisis,” no matter what form it takes. Subprime is only one symptom of the underlying cause. Only the Wave Principle can explain that real cause.

(These comments are based on my daily update for Monday August 20, 2007).

Happy wave watching

Please feel free to leave your comments about this article below.

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Okay, so let’s you and I invest $1,000 each in May 1989. You put yours into Japanese shares (buy the Nikkei index at 34,000) and I’ll put mine in the bank. Let’s assume that you have taken the advice of your broker or adviser to “buy and hold for the long term. Even if the share market falls, it will always rise to a new high in the long term.”

Let’s say that over the next 18 years, to May 2007, I earn 6% per annum interest. (Note that the cash rate in Australia was 18% in 1989, but I want to be generous here). Dividend yields on Japanese shares are notoriously low, and I am probably being overly generous again (by about 50%), but let’s assume you earn 1% per annum in dividends on your Japanese shares. And let’s say you hold your shares right through until now. That is, when the Nikkei fell below 8,000 points in 2003 you didn’t sell in panic, because “shares will always rise in the long term.” Let’s say the Nikkei is 17,000 points today. We’ll ignore tax and inflation for the purpose of this exercise (if only we could).

How do we compare? My $1,000 is today worth $2,854 with compounding interest. How did you fare?

Your shares are worth $500, but you have earned $321 in dividends, which I have compounded for the sake of the exercise.

So I put my money in the bank and made 185% profit in 18 years. You put yours into the equivalent of today’s Australian share market and lost 18% in the same period. Are you still sure you want to rush back into the share market? Are you sure that cash in the bank is such a bad investment? Are you going to keep listening to the “cash is trash” merchants who are simply talking their book (vested interests)? Or will you use your neo-cortex to override your emotion?

I rest my case. Just because all the “experts” say “cash is trash” does not mean that it is. It depends when you invest. There will be a time when the share market will be a fantastic investment. At that time I will be recommending it “with my ears pinned back.” Yet at that time nobody will want to touch shares. Shares will be a dirty word. Aren’t humans funny creatures?

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Only problem is there’s a dam upstream that has a crack in the wall. This dam spills over into the river when it overflows. And it happens to have been built right on an earthquake fault line. The crack appears to be getting worse, but only very slowly. And there have been tremors in the area. Everyone knows about it, but strangely, each tremor only seems to make the locals even more complacent about the inevitable “big one” that is coming. There is no doubt the dam will collapse and flood the river in minutes if (when) there is a serious earthquake. And everyone knows it is coming. But when? Nobody knows. And the longer it takes the further away it seems.

If you are in the creek bed when the dam breaks, you will have no chance at all. You will be swept to your death. And you will have little or no warning, except the frequent tremors.

How long have you got? It could be one day. It could be a year. No-one knows. All you have is the tremors for signs and the knowledge of the risk.

Will you risk it? Only you can answer that.

That’s exactly what it is like being in the share market at the moment. Because the walls of these markets have not burst yet, despite the evidence of many cracks, complacency reigns supreme. Unsustainable debt threatens to cause collapse all over, but the solution is to just stick more Band Aids™ over it and keep the blinkers on.

The longer time goes on and “the big one” still doesn’t arrive, the more we are tempted to go back and buy shares (pan for more gold). Yet now there is even less time until “the big one.”

Should you do it? Only you can decide. But I will try and re-paint the picture for you so that you know the pitfalls as well as the opportunities. You need to make the decision with the front part of your brain called the neo-cortex, which is the conscious, rational, logical thinking part. But when it comes to investment decisions, the neo-cortex is powerfully overridden by the larger limbic system of the brain, which is driven by impulse and emotion, not logic or common sense. You are not even aware of the unconscious urge you have to herd with others, to “follow the crowd.” Without even realizing it, most times you buy or sell shares or property because “that’s what everyone else is doing.” And although purveyors of investment products, with a gun held to their head by regulators, pay lip service to the mantra “past performance is no guarantee of future results,” the reality is that that is totally ignored, by both clients and their advisers, so powerful is the limbic system of the brain. People tend to invest in whatever was hot yesterday.

Here’s another way of looking at it: If you are in a herd of lemmings rushing to jump over a cliff to your death, should you leave it until the last minute to separate yourself from the herd, or should you get out when you first realise what lies ahead? And should you be tempted to go back?

But your challenge as an investor is nowhere near as difficult as the gold prospector’s dilemma. You have a fantastic aid to help you in your decision. Even if you do not understand socionomics or Elliott waves, you have one simple rule that anyone can follow. When in doubt, always fall back on this one: Buy when prices are low, sell when prices are high.

Please feel free to leave your comments below about this article.

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This sort of advice often goes along with the “Cash is Trash” mantra. Of course, if it were a realtor urging you, the “advice” would be quite different.

So, is it true? Do shares always rise in the long term?

That depends on what you mean by long term.

Ignoring dividends, if you had bought the Dow Jones index in 1965/66, do you know how long you would have had to wait to get your money back? Nearly seventeen years! That’s right. The Dow first touched 1,000 points in January 1966 and then fell back. It never got back to 1,000 points until October 1982.

If you had bought near the top in 1929, do you know how long you would have had to wait for stock prices to get back to pre-crash levels? Twenty-five years! Yep, it was 1954 before the Dow put in a new high.

Apparently in the previous century there was a 43-year period during which Wall Street failed to reach a new peak.

More recently, in Australia, if you bought shares before the October 1987 correction, you would have had to hold them for a whole decade before they reached their pre-crash level again (apart from one fleeting touch in February 1994).

If you bought the Japanese Nikkei index before its peak in December 1989, you would still be down 50%, seventeen years later!

Wall Street’s NASDAQ index is still about half what it was more than 7 years ago.

Does that answer the question?

Yes, shares will always rise in the long term. But you need to understand what is meant by “long term.” Most who parrot the mantra never give it a thought.

Far better to know where the stock market is according to the Wave Principle, and to have the socionomic insight.

If you have not read my book or my newsletters, then here’s a tip: Investing is simple. Just remember one rule – buy when prices are low; sell when prices are high.

Where is the stock market right now? High or low? So what should you be doing? Then why aren’t you? It’s human nature to do the opposite, isn’t it? Why is that? Why does that leave you in danger? How can you avoid the mistakes that most investors eventually make?

Don’t you think you need to understand the socionomic insight and the Wave Principle?
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Is this true? Are Uncle Sam’s Treasuries safe? Well, if you don’t mind lending your hard-earned savings to someone who already owes $9 trillion and has no chance of ever paying it back, I guess you could say they are safe.

Bonds are only safe because people (including international investors, even central banks) think they are safe. When it comes time for Uncle Sam to repay his loans, he simply borrows some more (issues new bonds), often from the same people. The lemmings love them. If that’s not a gigantic Ponzi scheme, what is? If you or I tried it, we’d be behind bars! But the scheme survives because people believe in it, as they do the fractional reserve banking system..

Just like money in the bank, technically bonds are a very unsafe investment. But whilst ever the public maintains confidence in the confidence trick that both represent, you should not lose too much.

But this brings up the main factor to consider when buying bonds. Creditworthiness is one thing. But the market risk is of even greater concern. And whatever I have to say about Treasuries here is doubled, tripled, quadrupled and more when it comes to junk bonds (lower than investment grade).

(Note: If you do not understand how bond prices rise when interest rates fall and vice versa, please read Chapter 5 of my book “How to Profit from the Coming Great Depression.”)

Investing is so easy. You only have to remember one rule: Buy when prices are low; Sell when prices are high. It’s that simple. Yet it is human nature to do the opposite. When an asset has been on the bottom for years, nobody wants to touch it. Once it has doubled in price, everybody wants to buy it. Crazy, huh? But that’s why a study of crowd behavior (socionomics and Elliott Wave patterns) is far more important than a study of economic fundamentals.

So, where are bonds now? Like stocks, they are near record high levels (interest rates near record low levels). So what should you be doing – buying or selling? I told you it was simple.

The last time I recommended buying bonds was in 1989, when the yield on the Australian 10-year was 14%. It has since been below 5% and is still below 6%.

Today if you buy 30-year US bonds, you are locking in less then 5% per annum for 30 years. In 1981 you could have locked in 15% per annum. And you could have sold them along the way for a huge capital profit. Yet today they are infinitely more popular than they were in 1981, when bonds were a dirty word. That’s human nature.

“The 13 ¼ percent bond due in 2014 that the government sold on May 15, 1984, returned an annualized 24 percent. The S&P 500 returned 13 percent, including dividends, during the same period.” Courtesy Bloomberg.

Clearly the most important thing is not so much what you buy and sell but when you buy and sell.

The junk bond market is a disaster waiting to happen. With investors desperate to get a better yield, they have been prepared to ignore risk, with the result that the spread between government paper and junk is near a record low. Investors are clamoring for junk yet it is clearly the worst possible time to be doing so. Along with private equity and hedge funds, associated junk bonds are going to be the greatest disaster since the dotcom crash (unless the housing crunch beats it to the punch).

But with countries like China and Japan owning hundreds of billions of dollars worth of US Government paper, is there no risk that panic selling could break out at any time even in the “quality” market, causing a collapse in bond prices and a corresponding escalation in long term interest rates around the world? A persistent inverse yield curve has been warning of trouble ahead for many months. Does the fact that this has been ignored mean that the trouble will not occur?
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Inflation and deflation are due more to mindset than anything else. Let me explain.

Whether you realize it or not, you are infected with inflation mentality, which goes back to at least the 1970s. I can illustrate that for you:

Let’s say your favorite loaf of bread at your local store costs $3 today. If you go back to that same store in ten years time and are able to buy a loaf of bread identical to today’s, how much will you pay? Will it still cost $3 or will you pay more or less than $3?

Did you answer more? Why? Because you are conditioned to assuming that prices will keep rising. You would not have answered that way in 1937 and you probably would not answer that way today in Japan, where prices have been falling for many years.

What’s wrong with that? It’s true that inflation erodes the purchasing power of money, but as long as your income keeps up, rising prices are not the end of the world, are they?

There is a consequence of inflation that is far more sinister than the erosion of purchasing power and you are not even aware of it. Inflation sucks you into debt. Let me illustrate that for you as well:

Your car is three years old and you want to replace it, but you would rather wait another year. The new model costs $25,000, but you expect it could be $30,000 in a year’s time. Will you wait another year and save up a further $5,000 cash, or will you go into debt and buy it now? You will almost certainly borrow and buy the new auto now, won’t you? Why? Because you expect the price to rise. You go into more debt because of inflation. And you are infected with inflation mentality, which is the cause of the crazy, unsustainable debt bubble today. When you borrow that money from the bank, it is injected into the economy, increasing the money supply and fuelling yet more growth in consumer spending and thus the economy (and probably prices).

Now let’s reverse that situation. Let’s say you believe the price of that new auto you want will be lower next year. Say $20,000. Now will you be in such a hurry to buy it? No. You will almost certainly wait. And let’s say in 12 months time you expect the price to fall even further in the following 12 months, say to $15,000? Chances are you will make the old jalopy last yet another year.

But you will not be the only person thinking this way. Everybody will be putting off buying a new car. To such an extent that auto makers, who have failed to increase sales, even by slashing prices, have to scale back production and lay off employees. And if auto workers lose their jobs, will they be able to spend as much on shoes and clothes and restaurants and gadgets? No. But stores need cash flow to pay their rent and wages, so “50% off” sales appear everywhere. But even they do not work, and retail stores also have to shed staff. And the more prices fall the more the consumer expects them to fall, so the more they put off buying everything that is not absolutely urgent. And so the economy begins to contract and unemployment rises, all because of deflation mentality.

The lifeblood of an economy is consumer borrowing and spending, which is fuelled by the ready availability of money. When the mindset changes from inflation mentality to deflation mentality, people not only stop spending. They stop borrowing. In fact, reckless abandon changes to conservatism, and they even try and speed up the repayment of loans they already have. This disappears money from the economy back to the banks from whence it came, and so reduces money supply.

And thus the economy spirals down into a deflationary recession or even worse. Every depression in history has been accompanied by deflation, not inflation.

In the 1930s, was there any shortage of goods? Not at all. Stores were fully stocked. Was there any shortage of manpower? Hardly. Unemployment reached 25%. So what caused the depression? What was in short supply? Only one thing. Money. And the only way money comes into existence is by way of a loan from a bank. When people are reducing their indebtedness rather than increasing it, money supply shrinks and the economy contracts. Interest rates can be reduced to zero (as in Japan in recent years), but if people lose the courage and the capacity to take on more debt, they will not borrow. This is called “pushing money on a string.”

In my book How to Profit from the Coming Great Depression one entire chapter is devoted to this subject of deflation. You will learn why the coming downturn is inevitable and what you can do to escape the most serious consequences.
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Every day countless millions of transactions are facilitated with money. Why do we need money? How does it get into “circulation?” Who puts it there? Who creates money? And on what basis? Is it the government? If not, why not? Who is it? And how do they know how much to “print?” What if they add too much or too little to the economy?

Three chapters of my book How to Profit from the Coming Great Depression are devoted to these questions. Most people are shocked when they first learn about our “fractional reserve” money system, which has sewn within it the seeds of its own destruction.

First of all, we need money because the barter system is too unwieldy. If you are a building contractor and I am a potato farmer, and I want you to build me a house, how am I going to pay you? How many potatoes can you and your family eat before they go rotten?

Clearly we need something that represents both houses and potatoes. But note that that does not make money a resource in itself. It is merely a vehicle for transferring the value of resources from one person to another. There are natural resources, both under the ground and above it, and there are human resources – labor and intellect. Put these together and man can produce. But although money may be used to value and transfer these resources, money is not a resource itself. Those who control money really want the resources that money represents.

Centuries ago things like gold and silver were used as money, before we had notes and coins like today. Remember the old western movies where highwaymen would hold up the stage coach and people would have to hand over all their valuables? Why, on earth, would people carry their gold and silver with them? Because they had nowhere else to put it.

This created an opening for the goldsmiths, who were the forerunners to our modern day bankers. They built large, secure vaults and allowed people to deposit their precious metals in these safes. In return they gave people “receipts” confirming the amount of gold held on their behalf. In time people began trading with the receipts rather than the gold. Today these receipts are called banknotes.

But that’s not all the goldsmiths did. They even paid interest to those who had deposited gold in their vaults (e.g. 3%), but then lent the gold out to others (in the form of more receipts) at say 6%. That’s how they covered their costs.

In time the goldsmiths noticed that nobody ever came back to collect their gold, and not all being honest, began to lend out more in new “receipts” than was represented by the gold in their vaults. In time there was ten times as much “money” in circulation as there was gold in the vaults.

That’s exactly how our money system operates today. For every dollar you deposit in a bank, the bank lends out about ten dollars. Money is created by banks – out of thin air! All money comes into existence by way of a bank loan. Less than 5% of it is ever converted to notes and coins. Most of it is never anything but a balance on a computer at the bank.

A hundred questions come to your mind. Right? They are all answered in my book.

Why do I say the system has sewn within it the seeds of its own destruction? It has a use-by date. That is why we have an economic depression at least once each century. It is not a question of if the system implodes. Only when it implodes.

Let’s say you borrow $100,000 from the bank (which takes security over your real estate worth $150,000). But you have to pay back $110,000 with interest added.

Where does that other $10,000 come from? You will have to get it from someone else. Where will they get it? What’s the only way money comes into existence? They will have to borrow it from a bank.

Can you see how in our debt money system it is not possible for everyone to pay their debts? Some have to go bankrupt. And as money is sucked out of the system in interest by the banks, money supply is reduced. The only way it can be replaced is with more borrowed money. So debt must rise exponentially. Can you see now why we have a debt bubble and why there is no solution to it other than a massive purging, with all of the horrific deflationary economic consequences, not to mention social dislocation that will come with it?
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