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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Rich Today, Poor Tomorrow

by Robert Kiyosaki

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Posted on Monday, March 5, 2007, 12:00AM

As promised in my last article, this week I'll explain why deflation will severely punish the upper middle class. These are the people who think they're rich because their houses and stocks have gone up in value -- that is, because of inflation.

What Goes Up...

People concerned about inflation today tend to buy big houses and nice cars. They believe that the purchasing power of the dollar is going down. But what happens if cash becomes king?

This cash squeeze is already affecting many people who thought they were rich. My wife, Kim, has a friend who's a successful architect. Her husband was a manager of a good sized advertising agency. They have three children, the oldest in high school, and earn about $350,000 a year in combined income.

Because they were flush with cash, this couple purchased two high-end vacation homes, one in the mountains and one at the beach. They live most of the year in a McMansion in Phoenix.

Things were going along fine until the husband lost his biggest client. Then he lost his job, and in less than three months their savings was depleted. They then tried to sell their vacation homes, but the values had dropped below the mortgage amount. Today, they continue to pay the mortgages on their houses and hope the price of real estate will go back up. They sold one of their BMWs at a loss.

In 2005, they were net-worth millionaires. In 2007, they're facing bankruptcy.

Follow the Arrows

People like this couple aren't concerned enough about is the credit bubble bursting, which could lead to deflation. Today, nationwide savings are low and debt per household is up. Most of us know the following equation from Economics 101:

cash + credit = the economy

Ever since 2000, there's been an oversupply of credit. When the Y2K threat loomed, the Federal Reserve flooded the market with credit. After the terrorist attacks of 9/11 and the stock market downturn in 2002, the market was again flooded with easy credit. Excessive credit and lower interest rates kept the economy afloat.

It was a smart move at the time. In the first five years of his presidency, President Bush borrowed nearly a trillion dollars, more money than all of our previous 43 presidents combined, and the resulting credit bubble helped keep the stock market from collapsing entirely and led to a boom in real estate.

The problem is that this debt must be repaid. So the trillion-dollar question is, can the government, businesses, and consumers keep the credit bubble inflated? Here's that equation:

↑
cash +		↑
credit		↑
= the economy (inflationary)

If credit is cut off or the debt can't be repaid, the equation changes to this:

cash +
↓		credit
↓		= the economy (deflationary)
↓

Fresh-Squeezed Stocks

If the credit bubble bursts, it could trigger a short squeeze.

"Short squeeze," a trader term, is when a stock's price is high and many traders short the stock. Shorting a stock means borrowing shares from an investment house, selling them, and hoping the price of the stock drops. When the price drops, a trader buys the stock back and returns it to the investment house he borrowed it from.

For example, say XYZ stock is selling for $100 a share. A trader borrows 10 shares from the investment house and sells them for $1,000. The stock drops to $60. Now the trader buys back 10 shares from the market for $600 and returns the 10 shares to the investment house. He now has a gross profit of $400 before paying interest and fees to the investment house.

A short squeeze occurs when the market goes the other way. In this example, instead of XYZ stock dropping to $60 a share, it rises from $100 to $150. The investment house issues a margin call, which means the trader needs to return the 10 shares he borrowed.

Suddenly, all the other traders who shorted the stock need to buy shares of XYZ in order to return them. As more short traders begin buying XYZ, the price of the stock goes up and up -- from $150 to $160 to $170, for instance. This is a short squeeze in stocks. The traders who thought the price of the stock would go down are squeezed into becoming the ones who drive the price up.

Putting the Squeeze on the Economy

A short squeeze could happen with the U.S. dollar if lenders suddenly forced debtors to pay in cash.

The couple I mentioned above is technically caught in a short squeeze, since they're short of cash and long on debt. They had to sell their luxury car at a huge loss because they were desperate. As time goes on and their savings dwindles, they may become desperate enough to sell their vacation homes at huge losses.

If the credit markets bust, there could be millions of couples just like this who seemed rich but are suddenly poor. This could send the lending rate of the dollar higher, making the value of the dollar higher as well -- essentially causing a deflation.

I don't want the U.S. economy to go into a short squeeze, and I hope the credit bubble doesn't burst. Deflation isn't good, and inflation is easier to cure than deflation.

Invest in Money Smarts

My concern about deflation is best represented by the following equation:

cash +
↓		credit
↓		= the economy (recession)
↓

If the credit bubble bursts, not only will credit disappear, but people will stop spending and start hoarding cash, and savings will increase. Money is fuel for the economy, so when credit is gone and money is in hiding, the economy slows and a recession -- or worse, a depression -- can occur. In this case, prices go down, not up, and cash becomes king.

I certainly don't want this to happen. Nonetheless, given the lack of a clear direction in markets today, a good investment for 2007 may be to pay off some high-interest debt, put a little extra cash aside, and wait for bargains. If there's a short squeeze on cash, I believe it will be short lived. Once the Fed pumps more money into the system, the dollar will continue its fall.

In conclusion, your best investment today may be in time, not money. That is, invest your time in studying, reading books, and going to seminars. I recommend you study the asset class that's high-priced today, and could be low-priced tomorrow. For example, if you want to acquire real estate, study real estate while prices are high.

And if and when the market crashes, be ready to buy.

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  • Brock - Wednesday, April 11, 2007, 2:02PM ET  Report Abuse

    • Overall: 1/5

    To the user that posted at: Yahoo! Finance User - Saturday, March 17, 2007, 2:00PM ET You obviously do not own a BMW. I know, first hand, that they cost alot to maintain. You cant just pull that car up to a Wal-mart to get an oil change for $14.95. You have to take that vehicle to a specific place that speciallizes in Foreign Autos. Guess what? That car doesn't get a $14.95 oil change either... Try $75.00! Thats on a good day. Let them find a problem with their vehicle while your getting serviced and the cost is rediculous. Over a two years span, you can easily run up maintenance costs on a BMW amounting to half the MSRP value of that vehicle. I can say though that I agree with your statement that this article is full of reudimentary verbage. Nothing of value really. If he wants to make statements about current market trends, he should probably reveal to us which "Palm Reader" or "Psyhic" he goes to for his information. It sounds very much like a guessing game that this "Expert" is playing. Either way, I know where I won't be getting my advice from ***Ahem*** ***Yahoo*** ***Ahem*** Sorry, I had to clear my throat.

  • martinb - Monday, April 9, 2007, 10:00AM ET  Report Abuse

    • Overall: 5/5

    He is not trying to give you a life time of education here, he is only writing an article for Christs sake! I find it telling that more people think he is full of it than don't, just as in real life more people just don't' get it than do. (having Bush as pres. is proof). Real Estate is not the investment it used to be, pricing relative to income is way out of whack. The u.s. dollar is in serious trouble. You need to think out side the box if you want to protect yourself and your family. I sell collectibles for a living. One of my biggest movers is foreign currency. There is an unlimited supply of obsolete currencies out there that all represent broken promises. All that remains is the paper that the promise was printed on. Imagine picking up a bundle of currency that in 1985 could buy a house, and now it will buy nothing! How is this possible? Think it can't happen here?

  • Yahoo! Finance User - Saturday, April 7, 2007, 10:13PM ET  Report Abuse

    • Overall: 5/5

    I'm noticing everyone is bashing robert on not giving specific advice or that what he is saying is a load of crap. Robert does not know everything. If you want to know more about economics read the economics column. I also agree with the seminar arguments. Seminars are too big for you to learn much. Thats why you need to find a MENTOR thats doing what your are trying to accomplish. If you really expect to learn everything you need to know to invest in real estate by going to a seminar you have wrong expectations. I feel the best way to invest in real estate is find people in your area that do it now and work with them. The best way I have found those people is the "Rich Dad" clubs so you can't tell me Robert is not useful. I wouldn't look at roberts columns for tax advice either, i would look at the book by his CPA and find another CPA that understands it well and can help you find those same tax advantages for you. If you want to learn about real estate, read a book about it, (Doesn't have to be a kiyosaki book) just so you have a basic understanding. That will help you get started but you still need to find someone that can walk you through it. You can also jump right in but you have to deal with one of robert's favorite lessons, learning from your mistakes. I'm not a fan of seminars as education but you do need to educate yourself. Someone mentioned investing in a savings account or maybe even a money market. I would love to hold your money and pay you 6 to 9% a year and many savings accounts don't even pay that. All banks do for a lot a people is turn right around and lend the money back to you for cars, auto loans, credit cards. They make money on your own cash but so many people are happy with having CD's and money in savings accounts. If anyone doesn't like my comments please send some hate mail to lukesaber2@yahoo.com

  • Yahoo! Finance User - Thursday, April 5, 2007, 7:03PM ET  Report Abuse

    • Overall: 1/5

    This man has no claim to predict monetary or economic trends. He is just using a few well chosen words to sound smart to a novice. He tells you to think rich then tells you to be afraid to invest your money. What a crock!

  • Yahoo! Finance User - Wednesday, April 4, 2007, 1:21PM ET  Report Abuse

    • Overall: 5/5

    All you people with negative comments are 99.99% broke. You pick up such articles to get a get rich quick scheme but then too lazy to implement simple skills given. I wonder why all you people seem to babble about how you should buy stocks and invest here and there, but truth be told.. its not working for you! Its exactly why you stay broke paying 1000 bills. Get a new attitude or let the wealthy keep getting wealthy and you eat of your social security! So please help yourself and get a new attitude.. nothing comes for free!! I mean come on, if you don't want advice from a wealthy person, who will you take advice from? Your financial advisor who takes the metro to work? Or your analyst who drives a Geo?

  • Yahoo! Finance User - Tuesday, April 3, 2007, 4:23PM ET  Report Abuse

    • Overall: 1/5

    whats with Yahoo! finance publishing finance for retards every day? these articles are drivel from a highschool econ book and don't do anything to change peoples situation.

  • Yahoo! Finance User - Monday, April 2, 2007, 5:49PM ET  Report Abuse

    • Overall: 1/5

    I hate to say it, but reading this guy as a form of education is simply not realistic. He may be able to sound convincing to the dumbed down audience by throwing out a lot of economic sounding terms, but his advice is usually not worth the paper (pixels?) it is printed on. I get more enjoyment reading the comments section to see how many people see through the drivel and doublespeak. Except it is also scary how many people think they actually learned something after reading this. What exactly was taught? Deflation may severaly punish those who bought expensive assets using loans whose value has decreased below the value of the loan. Then they will owe more then they could sell the asset for? Wow!! What an insight!! This guy is basically the Wade cook of real estate investing (remember Wade, the so called taxi driver investor. He wrote such gems as: Buy a stock before it splits, because if it splits 2:1, then goes back to the value you bought it for, you doubled your money. Woohoo) His advice is useless, at best, and harmful if people really take it seriously and invest their time and money on his useless books and seminars. Believe me, these articles are entertaining, but have NO value as financial advice.

  • Yahoo! Finance User - Monday, April 2, 2007, 2:05PM ET  Report Abuse

    • Overall: 1/5

    What a Load of CRAP!

  • Yahoo! Finance User - Sunday, April 1, 2007, 4:57PM ET  Report Abuse

    • Overall: 1/5

    I love this clown!! Although he is right. The market could go up... or maybe down. The dollar may increase unless it decreases, but then I buy gold which usually goes up when it's not going down. My friend just bought a building for $8.00, put some paint on the doors and sold it for 3.2 million. Now is the time for real estate, unless of course it goes down. But it may go up after it hits the bottom. And start a couple of companies for a $100 and then just sell them for a million. That's what me and my wife do!! RK - you're the best- keep writing the comedy. I love this guy except when I hate him.

  • kwame - Saturday, March 31, 2007, 3:46AM ET  Report Abuse

    • Overall: 5/5

    Well robert kiyosaki you are a mentor of mine, i am 23 year old foreign student studying in Finland, what i would like to know from all your articles and books i have read is that you recommend real estate is a far better investment than mutual funds . But it's worthy to consider that with real estate it 's capital intensive to start though than mutual funds,which is easier for a student like myself to acquire. But you are indeed an inspiration

  • Hatland/Stanley Avon Group - Friday, March 30, 2007, 10:24AM ET  Report Abuse

    • Overall: 5/5

    Keep teaching Robert. You have the right philosophy. Somehow your works need to be introduced to every school in the nation. Then we may stand a chance of becoming a strong country again. Let me know when you will be in Las Vegas. I would love to meet you. My wife and I are building a large Avon organization here and would like your thoughts on how to build it more successfully.

  • Michael - Tuesday, March 27, 2007, 10:51PM ET  Report Abuse

    • Overall: 1/5

    In this article, Bobby K says: "Most of us know the following equation from Economics 101: cash credit = the economy". Two things popped into my head when I read that. First, thinking back to my own Econ 101 class, I recall NO such equation being taught (it sounds like the kind of gross oversimplification that no real, university-level econ professor would ever teach). Second, I read Kiyosaki's biography, and I'm still trying to figure out when he took Econ 101. The worst part about this article is that it's really a marketing ploy disguised as journalism -- i.e, consider his recommendation at the end to "invest your time ... reading books and going to seminars." Gosh, Bobby... do you mean books like Rich Dad, Poor Dad, and seminars with speakers like YOU??? My advice -- take the money you'd otherwise spend on Kiyosaki's pulp non-fiction and put it in a passbook savings account paying

  • First - Tuesday, March 27, 2007, 6:17PM ET  Report Abuse

    • Overall: 2/5

    Hi Robert, I like your ideas and admire your success. But our expectations are high, we expect more real stuff in your articles than stories. Thanks..... Please continue to give us good advices...

  • Yahoo! Finance User - Monday, March 26, 2007, 10:42PM ET  Report Abuse

    • Overall: 1/5

    This guy doesn't give any real advice. He can explain what people are doing wrong very specifically. But when you want to know specifically what you should do to invest and make money he just says to study and go to seminars and stuff. WHICH MEANS that he wants you to send him more money and get more of his books and cds and videos so that he makes money and you continue to wonder why you aren't rich. I HAVE the secret to making money. If you want to get rich, write a book about how to get rich and watch the green pour in.

  • Bernard - Sunday, March 25, 2007, 11:43PM ET  Report Abuse

    • Overall: 4/5

    Put in 4 stars to correct my rating on previous story. Would have put 2. The short squeeze example is counter- intuitive (ie; comparing when a shorted stock goes up to when a long vacation home goes down: the only link is the "margin" call) & extending the comparison to the US $ seems far-fetched. While I do believe the US $ will go down, I'm not so sure about a deflation scenario.

  • Invest - Wednesday, March 21, 2007, 7:52PM ET  Report Abuse

    • Overall: 1/5

    FAR too simplistic, and parts of if are confusing or flat-out WRONG. RK likes to use anecdotes for hard data. One can keep concepts simple to explain to the "common people", but one should also keep one's facts straight. One of the biggest reasons that the "net savings" figure is negative is that the government bureaucrats primarily compare earnings growth to personal BANK account growth. They totally miss the large-scale "disentermediation" that has occurred in the past couple of decades, with investors going to the stock market (online brokerage accounts, mutual funds and 401-K accounts) and heavily into real estate investing (at the encouragement of people like RK). "Cash credit = the economy" -- with little up or down arrows and economic terms tacked on in parentheses at the end of an identical equation?? Give me a break! Actually, all that "cash credit" equals is available liquidity for an INDIVIDUAL. Unless by "credit" RK means that the credit has already been converted into debt. Loans are USUALLY "paid in cash" -- unless the borrower has to repossess the collateral (if any) -- "short squeezes" have NOTHING to do with repayment terms on MOST loans (except maybe margin accounts). Maybe RK should stick to his area of expertise -- giving advice on managing cash flow and balance sheets for entrepreneurs and real estate investors.

  • Yahoo! Finance User - Wednesday, March 21, 2007, 2:29PM ET  Report Abuse

    • Overall: 1/5

    Boo hoo for stupid people like your friends. Buying two vacation homes? Were they taking your advice Mr. K?

  • SusanS - Tuesday, March 20, 2007, 5:43PM ET  Report Abuse

    • Overall: 5/5

    This guy Kiosaki has the right stuff and correct approach to think critically about the markets, the dollar, etc. thanks.

  • Yahoo! Finance User - Monday, March 19, 2007, 10:00PM ET  Report Abuse

    • Overall: 5/5

    Thank you Robert. I really appreciate the fact that you don't jump on the stupid "buy and hold" band wagon. I hate to think of all the poor saps who are taken in by that mentality. There are times when going long in the stock market is not a good long-term (or short term) investment. It's better to invest intelligently than to trust the pundits. You teach us to think and to lead rather than to accept and follow. I respect that.

  • Asian - Monday, March 19, 2007, 1:14PM ET  Report Abuse

    • Overall: 2/5

    Mr.Kiyosaki..i love your rich dad poor dad book, i also love to read all your yahoo articles,but one thing i have to disagree with you is SEMINARS..my neighbor recently went to one of yours or your partner seminars he spent 500 dollars for that class..i asked him after the seminar class so what have you learn buddy..he said a bunch of bullsh....i just wasted 500 bucks..and they also tell us if we want to advance the class then we have to pay another 1500 dollars...anyway i love your advice on cash flow.. you wrote many books and those books are your cash flow..you dont have to depend on your real estates income from your 1000 apartments that you owned...over all you are very good it's up to the reader to understand your thinking...i will create the same systems that you used and create my own system...thanks robert

  • NormanK - Sunday, March 18, 2007, 6:32AM ET  Report Abuse

    • Overall: 5/5

    Mr Kiyosaki, please write the article about the possibility of gold become US$ 8,000.00 per troy ounce. is it possible? if yes, please explain why and when. i took your advice by investing some of my money (not all) into gold (total 1kg), and read Kitco everyday to enhance my knowledge about gold and day by day i get excited because of it. all gold's articles are very interested to me, and i hope you can write some of gold article too.

  • John A - Saturday, March 17, 2007, 6:56PM ET  Report Abuse

    • Overall: 5/5

    I have read many of Robert Kiyosaki's books. After 60 years of experience in which I have had real estate go down in value and had a business devalue because of major changes in the market, I sincerely wish I had his advice and the wisdom to listen to it forty years ago. This article and its advice is excellent. Thank you, Robert.

  • Yahoo! Finance User - Saturday, March 17, 2007, 2:00PM ET  Report Abuse

    • Overall: 1/5

    Bobby likes to make up stories. How can anyone who only makes $350K a year afford to have a McMansion and two vacation properties? Also how do you take a large loss on a BMW? BMWs don't cost that much that any loss would be small compared to the overall assets held by this make believe couple. Wouldn't you sell at least one of the vacation properties first? Bobby let me know when you predict the bottom of the market since you know so much. Also ask your queer friend "The Donald" to give his input.

  • Ron - Saturday, March 17, 2007, 10:39AM ET  Report Abuse

    • Overall: 5/5

    Most people commenting are not intelligent enough to understand the point of the article. The 90/10 rule applies here too. Thanks for your time and effort Robert

  • Yahoo! Finance User - Friday, March 16, 2007, 10:28PM ET  Report Abuse

    • Overall: 1/5

    "...invest your time in studying, reading books, and going to seminars." Ha! And what seminars would that be, Robert? No, folks, do not attend cheesy "seminars". It's a waste of your time and your money. Should you read books? Yes Should you educate yourself? Yes. But stay far far away from "seminars". If you want to attend classes, contact your local college to see what classes they have for adults in their extended learning department. These classes are usually one time classes taught by knowledge experts who are objective in their field and won't be giving you slanted information.

  • Yahoo! Finance User - Friday, March 16, 2007, 5:06PM ET  Report Abuse

    • Overall: 4/5

    The last sentence is an excellent advice.Kiyosaki is better now than when he wrote his famous books

  • Rodney - Friday, March 16, 2007, 3:45PM ET  Report Abuse

    • Overall: 5/5

    Hey Robert, I bet all those one and two star types have a net worth to match. What happens to the yellow metal in a deflation?

  • Ashish J - Friday, March 16, 2007, 10:58AM ET  Report Abuse

    • Overall: 1/5

    According to RK, sometime "Cash is Trash" and sometime "Cash is King". Which one is it Mr. RK?

  • Yahoo! Finance User - Friday, March 16, 2007, 2:09AM ET  Report Abuse

    • Overall: 5/5

    Good article that explained this one aspect of deflation/inflation nicely. It's a pity that so many other readers choose to use this forum to attack Robert and his other business interests instead of just rating THIS ARTICLE, which is what this facility is for.

  • Ozzy - Friday, March 16, 2007, 1:28AM ET  Report Abuse

    • Overall: 5/5

    Thank you for taking your time to write on this topic Robert, it just seem so funny to me how the guys who speak so badly of you DON'T HAVE THE BANK ACCOUNT TO BACK IT UP LOL. Everyone is real quick to make an opinion based on an opinion, with no facts to back it up. By the way, the guy that said that googled you, THAT IS THE MOST IDIOTIC AND LEAST PROFESSIONAL WAY TO DO RESEARCH ON SOMEONE" But back to the point, I believe that we def. need more people to step up to the plate and do something about the economy, whether is investing, real state, or network marketing (which I do) many people are waiting for a free meal ensted of getting it themselves. So, thanks again for going out of your way to help out the people, because those of us without that level of knowledge appreciate your time and your wise decision. Have a great day.

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