Debunking “The Biggest Scam In The History Of Mankind”

A reader forwarded this video on to me.  Apparently it’s gaining quite a bit of traction online.  The video is called “The Biggest Scam in the History of the World – Hidden Secrets of Money”.  Provocative, huh?  As you can likely guess, the video is about Federal Reserve conspiracy theories, the evils of fiat money and of course, how you can buy gold from the person who made the video.  The video is extremely well done, very convincing, provides lots of historical data and believable claims, but right off the bat I started to see some rather serious errors in the narrator’s claims.  Here are just a few from the first few minutes of the video.

In the first two minutes the narrator says:

“The modern banking system creates currency far faster than trees can grow”

I’m being a real stickler for details here, but technically the banking system doesn’t actually create the currency.  Banks create loans which create deposits.  The deposits can be drawn down to access paper currency, but that paper currency is actually created by the US Treasury who processes orders for it from the Fed system so they can supply it to the US banking system when bank customers need it.  You can read about the specifics of this process here.

Moments later he says:

“Treasury bonds are our national debt”

Right.  But the national debt is also part of the private sector’s savings.  If your grandmother owns a T-bond then the government has a liability and your grandmother has an asset.  When discussing a credit based monetary system it’s best to understand both sides of the ledger.  Otherwise, you’re missing half the picture.  A credit based monetary system can be extremely unstable at times, but just looking at debt levels won’t tell you much about that.  There’s much more to the accounting here.

Seconds later, he describes deficit spending as such:

“[deficit spending] Steals prosperity out of the future so it can spend it today”

The US government has run budget deficits for the majority of its history.  Just to put this in perspective, can you imagine what someone like this narrator would have said back in 1945 when the deficit was over 25% of GDP?  Do you remember how the government “stole” all of our prosperity back in the 1940′s?  Or did the USA undergo a massive economic boom over the 70 year period since then during which it became, by far, the most prosperous and wealthy nation mankind has EVER seen?  A little common sense should make you question the claim that government spending (which has happened for hundreds of years during an extraordinary American wealth boom) necessarily steals future prosperity.  Yes, government spending can have negative ramifications and isn’t necessarily always good, but there’s a bit too much hyperbole in the claim that deficit spending “steals” future prosperity.  That’s just not true in all cases.  The extremely high deficit from 1945 should make that abundantly clear.

deficit

Next, he’s explaining QE and states:

“This process is where all paper currency comes from”

As I described above, this is wrong.  Paper currency doesn’t come from QE.  Paper currency is supplied to the US banking system when bank customers have demand for it.  This comes from the US Treasury and the Federal Reserve, but really has nothing to do with QE.  QE does result in more bank reserves in the system, but bank reserves and paper currency aren’t precisely the same thing.  For more on QE please see my primer.

Moments later he defines money in a very peculiar way so that it doesn’t include anything that doesn’t serve as a store of value.  According to his definition money is a store of value, medium of exchange, unit of account, portable, durable, divisible and fungible.  He then claims that gold fits this definition.  But gold doesn’t fit this definition!  First off, you can hardly use gold to buy anything in the real economy.  Try going into Wal-Mart with a bar of gold.  They’ll tell you to piss off.  Better yet, try transporting all your gold around with you where ever you go.  Gold doesn’t even fit his own definition.  In fact, it fails almost completely in money’s most important function – as a medium of exchange.

Of course, most of our dollars don’t serve as a good store of value.  In fact, holding paper currency or even bank deposits is a pretty dreadful way to try to maintain your purchasing power.  Does that mean bank deposits and paper currency are not money?  Of course not.

The video then goes into a money multiplier explanation claiming that banks lend out deposits and reserves.  Anyone who actually understands banking knows this is wrong.  Heck, even Fed employees have written about this in recent years as the crisis and QE has clearly proven that the money multiplier concept is totally false.

By this point you should see what’s going on here.  I didn’t watch the rest of the video because it only took 5 minutes to see a whole multitude of errors.  In essence, the video is just a sales pitch for gold and an anti government agenda.  If you’re into that kind of thing then fine, but you’re being misled so be careful listening to people with such an obvious political agenda….

NB – It’s also interesting to note that the creators of this video are ultimately selling you a product.  They’re selling you gold and silver as seen here on their website.  And they’re using fear to drive you into that product.  But look what they want from you.  After countless hours of video trashing fiat money they’re asking that you pay THEM with…US DOLLARS.  If this whole thing doesn’t set off a great big red flag for you then I don’t know what to say.  Good luck?

 

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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Comments

  1. I was suspicious by the fact they might be bias. Can anyone recommend me some good books on the economy and how it works, either on a global scale or the UK? I am unfamiliar with a lot of the terminology so nothing to advanced.

    • A good book regarding Gold, and economics in general, is: Gold Bubble: Profiting From Gold’s Impending Collapse by Yoni Jacobs. This is a great book for outlining the fraud that Gold has become over the past 10 years, and outlines why it is destined to collapse to under $700/oz.

  2. Cullen – why don’t you address this video properly instead of dismissing it after 5 minutes? I think your views are threatened by this explanation. To quote Jim Rickards on what he thought of Michael Maloney’s video:

    “You know for years before I got involved in really studying gold and some of the things
    I write and talk about today I was a monetary economist for decades, you know
    in your video you talk about the primary dealers, I was chief counsel and chief credit officer
    for one the largest primary dealers for ten years so I had an inside seat on the Treasury market and have had the privilege of working with several former Vice Chairman of the Board of Governors: Johnson and David Mullins going back to the 80′s and 90′s so I’m very immersed in what you’re talking about I thought it was extremely accurate, extremely clear, I didn’t think you were stretching on any points it was is really like something out of a PhD course except that it was very easy to understand…”

    Jim Rickards has better qualifications than you and he is applauding the video. Review the whole video. Respond.

    • I actually went up to 10 minutes. But sure, I’ll go back and watch some more just for you.

      -At 10 minutes he says the “true definition of inflation is an increase in the money supply”. This is Austrian economics nonsense. This is just purely wrong. Inflation is rise in the price level. There is ABSOLUTELY no hard and fast rule that says the money supply will lead to price increases. That’s just wrong. You can easily have a deflation with a rising money supply so it’s really not helpful to define inflation as an increase in the money supply.

      In the next section he goes off on some rant about how the Fed is committing fraud by collecting the interest on US govt bonds. What he doesn’t mention is that the Fed remits interest on the bonds BACK to the US Tsy at the end of each fiscal year. That actually reduces the federal deficit which is something Maloney complains is too high through the video. So he’s just flat contradicting himself here.

      Then he goes on some constitutional rant stating that the current system is unconstistutional. This is total nonsense. The Fed system was created via Act of Congress. It’s not unconsistitutional at all. This is just political nonsense.

      Then at 16:40 he says that this system benefits the govt and bankers the most because they get “to spend the money into existence first”. But in the last section he said “92-96%” of the money supply was created by banks when they make loans. Loans create deposits. Banking 101. Who gets those deposits first? The borrower! So he once again proves he doesn’t understand basic banking.

      Then he goes off on the usual nonsense about how the Fed is “owned” by the banks because they get a measly 6% dividend from the Fed. If you look at the Fed’s 2012 annual statement you can see how ridiculously misleading this claim is. They paid EIGHTY EIGHT BILLION back to the US Tsy and just 1.6B in dividends.

      Total distribution of net income 90,516
      Dividends on capital stock 1,637

      Interest on Federal Reserve notes expense remitted to Treasury 88,418

      http://www.federalreserve.gov/publications/annual-report/files/2012-annual-report.pdf

      I could keep going, but almost every line in this video has basic errors in it. He’s just selling you fear and nonsense. There’s really no reason for anyone on the planet to watch this video for anything other than a good laugh. Sadly though, I am sure his phones are ringing off the hooks from lemmings who want to buy gold from him.

      • “-At 10 minutes he says the “true definition of inflation is an increase in the money supply”. This is Austrian economics nonsense. This is just purely wrong. Inflation is rise in the price level. There is ABSOLUTELY no hard and fast rule that says the money supply will lead to price increases. That’s just wrong. You can easily have a deflation with a rising money supply so it’s really not helpful to define inflation as an increase in the money supply.”

        What an Austrian economics nonsense? Did You ever heard about The Quantity Theory of Money? http://en.wikipedia.org/wiki/Quantity_theory_of_money
        Till 1930 at least, inflation was an increase in the money supply.

        How the money is created in UK see http://www.positivemoney.org/

        “If you look at the Fed’s 2012 annual statement you can see how ridiculously misleading this claim is. They paid EIGHTY EIGHT BILLION back to the US Tsy and just 1.6B in dividends.”

        What about 16 trillions of dollars, big banks were secretly given years before?
        http://www.sanders.senate.gov/newsroom/press-releases/the-fed-audit

        The video only tells the true, which is inconvenient for government and also finacial advisors.

      • Well, in my opinion a general rise in prices is a symptom of inflation – not inflation itself. This can come from an increase in money supply (which would have to be ridiculously huge) or an increase in economic activity or worse both. The Fed is not likely to cause either of these things to happen. The power of the Fed is widely overstated; at best they do not harm the economy and at worse they cause some misallocation of resources. Buying gold for any of these reasons is just plain stupid.

        • Inflation is the “push” of money through an economic system, not merely the same as the increase in CPI – as CPI changes represent a symptom of this push (which represents the interplay between the money supply and the activity around that supply). This push is dependent at least in part on the money supply and economic activity (you cannot naturally have one without the other bearing government intrusion). This “push” can be dependent on money supply, if and only if it is very large and there is at least some economic growth. If the rate of economic activity is decreasing, the increase in money supply is not likely to cause an increase in CPI at least until the growth rate becomes sufficiently large. If, however, the CPI is increasing at an alarming rate that is not supported by economic growth, then it is likely due to something unnatural such as a ridiculous increase in money supply (which no rational government or reserve banking system would ever enact). Furthermore, changes in CPI is a relative thing. Having a highly increasing CPI is not by itself a bad thing as long as it is supported by the growth in GDP. A 10% increase in CPI might sound alarming, but it is not if your GDP is also increasing by 15% – in which case you have an incredibly booming economy. The Fed is not likely to cause any of these factors, and its affect on the economy is way over stated. In Fact, the San Francisco Fed performed a study whose conclusion was that the current QE policy in place is having no affect on the economy in 2013, whether positive or negative.

          There is no way America is going to become the next Weimar Republic, whose high increasing CPI was mostly the result of market action against the mark after the installment of war reparations that were required to be repaid in hard currency and not the rapidly depreciating Papiermark. The highly increasing CPI of the 1970s America was caused because dollar-holders abroad became nervous. There was a run on the dollar, which many foreigners and Americans thought was overvalued shortly after Nixon broke the last link to gold. Following this, Poor economic policies then plagued the economy for the next 8 years. Today’s situation does not match either of these, and we are likely to be fighting low inflation or deflation for the foreseeable future, or at least until America’s economic Freedoms are greatly increased.

          • As Milton Friedman qouted:
            “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

            So you are partly right, but do we need infinite increase in money supply? Many says that it is necessary to have a growth. But it is big myth.

            We can have growth even with contstant money supply! It can work like we see in technical part of economy mainly computers. Technical development makes goods cheaper, so you can buy more even without increased money supply.

            And this appoach can be used also in other areas. So with economic growth the prices would slowly decrease.

            Moreover do You still trust official CPI numbers?
            Here are real numbers http://www.shadowstats.com/

            Try to hear this interview with Puru Saxena – in second part
            http://radio.goldseek.com/celente.09.13.13.php
            Nobody in trading den belives in this “bogus numbers” for government. But important is perception of masses…

      • Your comments are all hot air, and a bad attempt at sophistry. The definition of Inflation is a game you play and you know that it has changed along with the dictionary. At least you should Know! Now you mention the Austrian school of Economics as hogwash, yet you also fail to state what school of Economic thought you adhere to and you also fail to admit that in fact, it is the printing of money, be it electronic or cash is irrelevant, as it is the purchase of assets that have no buyers, and are no good, otherwise investors would buy them up and no intervention would be needed. Why did the Banks need them to be taken off their books? The fact that interest accrues, and not to the government as the government has nothing, and produces nothing.. that does steal value from the existing monetary unit and you also do not mention the various mechanism which the taxpayers are being cheated by “hedonic quality adjustments” which understates the inflation used in calculating some components of Industrial Production” and the “false” and misleading way the BLS manipulates the statistics so as to hide the true(REAL) rates they report which is why they use the word “nominal” as opposed to Real. What about the “CORE” CPI? Why do they need to massage the “food and energy” costs, and I do know their explanation, but I dare you to find one average citizen who has not seen food costs rise, and gas yo -yo but overall YOY it is up. What about Unemployment, PPI, CPI,CPI-U, CPI-W C CPI(CHAIN WEIGHTED CPI-U) are “methodological changes designed to move the concept of CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” Now lets address the statement that “You’re not thinking about purchasing power in the right way. The thing you should be thinking about is how much your labor hours can purchase today in dollars.” This is completely false. Wages and savings are not the same thing. Your attempt to address one and not the other says much. What matters is the Purchasing power of your monetary unit, whether it be wages or savings. Prices do not go up in a REAL Economy where their is free competition and to think so is to believe that a centrally panned economy is just and possible over the long run. To not consider the Purchasing power of ones savings and to look only to what your labor hours can purchase in today dollars is a silly statement. Anyone who knows what a good Money is knows it has specific quality’s, and the one that has and will fail is the “store of Value”. It is amusing in a twisted way, to think that you would tell an 80 years old couple that their savings does not matter because what matters is what their labor hours can purchase in today’s dollars. Yet they do NOT have labor hours as they are too old and retired. It gets even more obtuse when you attempt to tell someone who no longer has a job, but has savings that their money does not purchase what it use to which means it does not keep them at a constant standard of living and this also applies to someone who is employed. It now takes two to earn a living wage today precisely because the scheme does not work forever. To be sure this is the first time in History that at least one country was not anchored to a real Money that cannot be counterfeited by a Monopoly such as this third Central Bank in this countries existence. Keynes even said “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”John Maynard Keynes and he also said,”I work for a Government I despise for ends I think criminal” John Maynard Keynes,and to quote J.P. Morgan,

        “Gold and silver are money. Everything else is credit.”
        J. Pierpont Morgan

        Now I did that and did not quote one Austrian Economist. To not know that Gold is the Ultimate store of value because it captures VALUE in the form of the factors of production and cannot be “printed at will”, and has NO counter party Risk. It is also used in many commercial uses and it is being accumulated by Central Bank around the world. Why have the BRICS nations, and even England and Japan began to trade with their own currency’s? That means they are slowly phasing out the use of the USD as the sole Reserve currency. Why has the IMF even called for a new Monetary system? Do you think we have GOLD in our vaults for no reason. Why did India buy 200 tons of GOLD from the IMF?

        Also this statement that follows is false,”There was a run on the dollar, which many foreigners and Americans thought was overvalued shortly after Nixon broke the last link to gold….” Why did he break the link? In fact it was Charles de Gaul of France who called for GOLD to paid because they knew our Gold Reserves at the “official Price” were cheap because of the Vietnam war and Johnson so called Great Society That means the dollar was over valued, and it was in fact a “defacto” default by the USA You can make up anything you wish but common sense and a little real facts will serve people better. WE do not have to be a “Wiemar Republic” to still have Hyperinflation and nobody knows how the End Game will play out exactly, but those that receive the NEW money first do get the greatest benefit and the Velocity of Money at some point will increase, as too many dollars chasing too few goods and services combines with Repudiation of the Dollar by other country’s who have long been unhappy with this situation and the power they wield can be seen in the way Putin backed Syria and stopped the USA from making a move. Their are other stores of Value,such a Precious Gems and company’s with exposure to the South and East, which is where shift is taking place. Surely things are not as they were in the 1900′s as we are the most indebted nation in recorded History.

        • Maybe you should get your own website to write articles. Seriously, do you think anyone is going to read your post if it is twice as long as the original article written by Cullen?

    • Gold traders typically fear QE and hyperinflation, despite the fact that right now Deflation is a much greater threat. Study Japan over the past 25 years – and you’ll see that QE does not necessarily lead to Hyperinflation.

      Gold traders have a misconception for how QE works;

      i. Most Gold traders believe: The Federal Reserve buys government bonds in the open market and thereby swells bank reserves. The banks then put these reserves to work by lending them out which eventually leads to hyper-inflation.

      ii. In reality QE works more like this: Bank reserves, or deposits at the central bank, have a singular role, to facilitate management of the payments system. They are used to settle transactions among banks and never leave the possession of the banking system. Indeed, in most systems, deposits at the central bank can only be held by banks, thus they are never lent “out” of the banking system. Consequently the notion that the quantity of bank reserves somehow constrains or enhances lending in a fiat money world is completely erroneous. Consequently, monetary policy actually has little to do with money. It is more accurately thought of as the control of precisely the interest rate at which the central bank provides the reserves (over which it has a monopoly of creation) that are demanded by banks.

  3. I was surprised Rickards endorsed this video. My suspicion is he was tricked into doing so. He knows better than that.
    Regarding “stealing future wealth”: I think what the video wanted to say is that current deficits (and hence debt) must at some point be paid by future taxes; in my understanding, government debt is a claim on future tax (-payers). No government debt can exist without any taxpayers standing behind it. Cullen might disagree. Maybe elevated government debt was only sustainable since GDP kept rising? Imagine a world in which GDP would have fallen over a longer period. You can’t tax your constituents enough in order to keep debt-to-GDP stable. See Greece. GDP keeps falling, and even if they had managed to reduce debt a bit, debt-to-GDP would still have gone up.
    Inflation: depends on how broad you define “money”. For a pet store owner it doesn’t matter if you pay in cash, debit card or credit card. We live in a debt-based monetary system, so money = debt. I like to use TCMDO (Total Credit Market Debt Outstanding) as a measure of money outstanding. It’s at $56 trillion. It doesn’t matter if the Fed printed $2 trillion – it is dwarfed by the amount of deleveraging by ABS alone (from $4 trillion to zero). Banks are deleveraging. Households are deleveraging. The Fed is simply helping the government to sell big chunks of debt in order to replace those other sectors.
    Inflation usually (not always) needs strong real income growth (which is not the case). The only way I could see inflation is if the Fed / Treasury would trash talk the dollar (imported inflation). However, the US is not very trade-dependent, and it would take a huge drop in the dollar to move the needle. Alternatively, producers of raw materials might begin pricing their stuff in a currency other than the dollar (but that would require the fall of the USD as #1 reserve currency, and that’s a long-term process).

  4. Cullen, I recently read Maloney’s book Guide to Investing in Gold and Silver. He actually details his allocation which I thought you might find interesting.

    He says he always recommends a 50-70% allocation in gold an silver because it’s “an incredibly safe, no brainer investment”.

    He says he’s “heavily biased towards silver”.

    He says the remainder is in mining stocks. In total, he says he has 80% of his assets in precious metals and mining stocks.

    So let’s assume he’s 50% in physical metals, 30% in mining stocks like XME and 20% cash. Let’s also assume he’s true to his word and overweight silver relative to gold by assuming he’s 40% in silver and 10% in gold.

    Since 2006 this portfolio would be up 68%. Since the 2011 high in silver it would be down 40%. Since 2003 when he says he started managing portfolio he’s probably done quite well.

    There’s a little perspective for you.

    • If he is doing this, then he is literally the most retarded investor on planet earth (assuming he continues to hold his positions). Gold and Silver are massive asset bubbles, and have recently popped. Gold will eventually fall back to 2003 levels, and potentially lower. At least half of the gold miner companies out there will either scale way back, or simply go bankrupt as they represent the most leveraged industry on earth. This is an incredibly stupid time to hold precious metal positions – and that is why folks who have a vested interest in the gold industry are resorting to fraud.

      • All I know is that non-income producing assets with a historical standard deviation of 30 are enormously dangerous. Calling them a “no brainer” investment is just reckless. From the perspective of a financial advisor, this sort of advice can be described no other way. It’s just pure reckless and is based on a lack of understanding of basic allocation concepts and very basic micro and macro econ. I sincerely hope people aren’t falling for this idea. It’s one of the more dangerous portfolio recommendations I have ever come across. And trust me, I have seen some incredibly shady stuff in this industry….

  5. There is always a reason to be worried or afraid for the future. Folks in the gold industry are playing on those fears, and gold investors have become doomsday speculators. This is an incredibly illogical way to invest your money. Meanwhile, whilst you wait for that “doomsday scenario”, your gold investment will have lost 70% of its value OR MORE – which means you’ll need another 235% gain to get back to Break Even. And, all the while you’ve been waiting for the “end of the world”, equities will have climbed another 30% OR MORE. This means you just made a 90% swing error on your real potential to earn, and would require you to make an additional 300% to get back to where you would have been if you had instead invested in the broader equities. Your risk for investing in Gold is absolutely enormous – all because you were betting on the coming “apocalypse”.

    • Exactly. Gold is (at best) a hedge against the collapse of debt-backed money and spontaneous, worldwide adoption of gold in its place. Not likely to happen. That’s why they call it the “zero” hedge.

  6. 1 US dollar in 1900 can buy how much?
    1 US dollar in 2013=??

    1 ounce of gold in 1900 can be CONVERTED to US dollars, THEN buy how much???
    1 ounce of gold in 2013=??

    Gold bugs aside. Tell me another form of ‘currency’ (clearly you need walmart to accept your currency to make it viable) that has held up to the same ups and downs long term as gold.

    • What exactly is your point here? You are upset because a dollar in 1900 could purchase more than a dollar in 2013? Are you even sure about that? What could you purchase back in 1900? In 1900 there was a much lower standard of living, and far fewer amenities that Americans could afford & enjoy. Folks back then could not afford a car and no one was flying. Today in America most folks are driving cars, and almost anyone can fly. Oh, and we put a man on the moon in 1969! Today Americans enjoy all kinds of amenities that our ancestors could not. More wealth was produced in America over the last 100 years than the rest of the world combined in its prior history combined – yet you complain because you think the dollar in the year 1900 can not purchase as much as it can today. Commodities and especially gold have experienced incredible wild swings in value over their history – and having a currency backed by them decreases your flexibility tremendous.

      Ironically, Advocates of the gold standards tend to be believers in free markets who don’t like government interfering in the free market. Yet a gold standard means that the government, or some other authority, is interfering with free market forces in a powerful way.

    • You’re not thinking about purchasing power in the right way. The thing you should be thinking about is how much your labor hours can purchase today in dollars. For instance, in 1960 our labor hours purchased about half of what we could buy today because we are that much more productive. Thinking about the purchasing power of the dollar in real terms doesn’t account for wage and salary adjustments over time. Our wages actually purchase substantially more than they did in 1900.

      It’s a little ridiculous how Austrian “economists” misunderstand this and gold bugs perpetuate this myth. It’s just a flat out mistake. I mean, even a little common sense should make you seriously question the idea that our living standards have declined by 95% since 1900. Btw, stocks have crushed gold since 1900. But those are assets denominated in dollars. That’s different than just looking at the currency. It doesn’t mean stocks are great “currency”.

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