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Robert Kiyosaki Why the Rich Get Richer

Robert Kiyosaki, Why the Rich Get Richer

Booms Were Made to Go Bust

by Robert Kiyosaki

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Posted on Monday, June 25, 2007, 12:00AM

During the height of the real estate bubble, I wrote a column saying that the crash was coming and suggested selling any piece of real estate that was overpriced, questionable, or non-performing. As expected, I received angry replies.

Today, I'm predicting the next crash, what I believe will cause it, and why it'll be a severe blow to the global economy. The signs are already here.

Busts Beat Booms

First of all, it's no big deal to predict booms and busts. All markets boom and bust. It's just easier to predict a bust because the signs are so obvious -- like excess euphoria, easy access to money, huge profits, and scores of happy amateurs entering the market.

Booms are harder to predict. They start silently, like oak acorns buried in the ground -- you don't notice them until they're towering trees. For example, few people recognized Microsoft or Google for the giants they were until after they'd become major players and the big profits had been made.

Paradoxically, that means busts are better because we can see them coming. This gives us time to prepare, and makes it easier to capitalize on them.

The Year the Dollar Died

The coming bust started in 1971. That was the year Richard Nixon took the United States off the gold standard, thus converting the U.S. dollar from money to currency -- that is, from an asset to a liability, and an instrument of debt. That was the year the dollar died.

After Nixon was forced out of office, the U.S. economy went into a slump under presidents Ford and Carter. We had high inflation and low growth, otherwise known as "stagflation," before Ronald Reagan and his dedication to supply-side economics -- Reganonomics -- came along.

Reagan cut taxes and started borrowing money, increasing the national debt. As a nation and as a people, we began borrowing and spending to spur the economy. And the economy boomed until 2000.

A World of Debt

It began to sink after 9/11. We lowered interest rates and began printing more money. In 2003 and 2004, the Bank of Japan created 35 trillion yen to save the dollar and their economy. It was like a loan of $320 billion to the United States, and probably prevented a run on the dollar.

This loan kept interest rates low, which prolonged the boom with easy money from cheap debt. The problem is that interest rates are now beginning to rise, and the mountains of debt will have to be paid back. If interest rates rise and the economy slows, a severe crash could occur -- a crash caused by years of accumulating debt in order to spur the economy.

The world has never been in this position before -- and the whole world is involved. That's because Nixon's actions in 1971 made the United States into a virtual empire. As an empire, we began dictating the terms of world trade: If you wanted to do business with us, you had to accept our new dollar as gold. Unfortunately, the world complied.

The New Money

Today, China ships us products and we ship them dollars. The problem is that the Chinese can't spend those dollars. If they do, the price of their currency, the yuan, would go up. Why? It's simply a matter of supply and demand.

So instead of spending their U.S. dollars in China, the Chinese buy our assets, especially U.S. bonds, with them. Because they buy our bonds, interest rates in the U.S. remain low, and low interest rates encourage Americans to borrow more money. This causes bubbles in real estate and the stock market.

The problem is almost as bad in China. The Chinese are using U.S. debt as collateral in borrowing yuan to finance projects within their country. With the Chinese economy booming and in preparation for the 2008 Olympics, the Chinese have gone shopping -- they want to look good for the world.

Using Chinese debt collateralized by U.S. debt, they've been buying natural resources from all over the world. Consequently, countries that are rich in natural resources -- such as Canada and Australia -- are booming. Real estate and stock markets in those countries are hot.

But the global boom is clearly built on a mountain of debt.

A Familiar Cycle

This type of boom has happened before. In 1971, Japan was finally emerging from the effects of World War II and becoming a world economic power. The Japanese were exporting cars and televisions to the United States, and because we were importing more than we exported, the Japanese took payment in U.S. gold. In fact, one of the reasons President Nixon converted the dollar from money to a currency was to stop this hemorrhage of gold.

In the 1980s, instead of using gold to finance their economy, the Japanese used U.S. debt as collateral for Japanese debt. This caused the Japanese economy to boom just as the Chinese economy is booming today, and it made the Japanese look like geniuses. Business books and magazines trumpeted the magic of Japanese business management.

Then, in the early 1990s, the Japanese boom busted. Their stock market crashed and the most expensive real estate in the world became cheap. Today, the Japanese economy continues to struggle.

China Isn't Japan

China's advantage is that it learned from Japan's mistakes. That's why the Chinese stubbornly refuse to revalue their currency -- they don't want to make it more expensive the way the Japanese did theirs.

Currently, the Chinese yuan is pegged at 7.6 yuan to one U.S. dollar. This makes the United States accuse China of being unfair; we'd like to see the yuan float the way the Japanese let the yen float. This would make it easier for us to reduce our balance of trade, as well as pay back our debt with cheaper dollars.

The problem is that the Chinese know from the Japanese experience that we can talk tough but not act tough -- they simply hold too much of our debt for us to take measures. And if the Chinese started dumping U.S dollars and bonds on the world market, the world economy might well crumble, just as the Japanese economy crashed nearly 20 years ago.

Time for a New Standard

While it's tough to predict the future, one thing is for certain: The U.S. dollar will continue to go down in value, and savers will be losers. With people all over the world piling debt upon debt and spending like fools, it might be best to follow the Chinese.

They've never trusted banks, but have always trusted gold. Maybe it's time we started doing the same.

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578 Comments

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  • Darryl - Saturday, August 25, 2007, 5:42AM ET  Report Abuse

    • Overall: 3/5

    My Dad bought Gold for $800 an ounce in1980-1983 his life savings of about $100k thinking that the world economy waould soon collapse. Well, it hasn't yet although it does look bad. He died in 1998

  • ryano - Sunday, August 12, 2007, 7:45AM ET  Report Abuse

    • Overall: 5/5

    Kiyosaki is the only "expert" talking about trade and the currency, these are markets that require corrections too. It will be interesting to see which prediction is correct Siegal or Kiyosaki. I hope Siegal is right, but I'm afraid he might be missing somthing this time.

  • World Trader - Thursday, August 9, 2007, 12:01AM ET  Report Abuse

    • Overall: 5/5

    Thank you Robert for being honest and insightful. Today's headlines are proving you right. I wish everyone including those in the U.S. government could think outside the box like you. China and the U.S. are strongly tied together in an economic relationship. The website Dollar Collapse will give your readers tons of articles that show that the current U.S. and global economic growth is based on debt financing. It seems that this world of global credit with its buy and pay later philosophy will soon come to an end. It is best for all of us to invest in real assests such as real estate, gold and commodities.

  • chan - Tuesday, July 24, 2007, 9:28PM ET  Report Abuse

    • Overall: 4/5

    This is an amazing story! Thanks for letting us to know more about the cycle of debt. With the booming economy in China, more borrowing and much more spending will be the golden formula for the country to thrill! Jacky Chan from Hong Kong

  • Allen - Tuesday, July 10, 2007, 9:59AM ET  Report Abuse

    • Overall: 4/5

    Money is an imaginary thing invented by man. We can always print more money that is why economies always go up. As long as man lives so will economies.

  • MikeSTL - Monday, July 9, 2007, 8:19PM ET  Report Abuse

    • Overall: 2/5

    Robert advice is generally well taken, but I believe some things are true and others are false. Like a bust is evident and a bull will be next. But for one thing I think Robert has gone to far and is looking for personal gain. I believe I read sometime back that he is in the gold industry. Telling his readers to buy gold to drive up the price for personal gain is morally wrong. Simply said research what you are buying before you buy and buy at the right time.

  • Irishspacemonk - Monday, July 9, 2007, 10:09AM ET  Report Abuse

    • Overall: 1/5

    Nothing to digg about the author, I just think the prediction is too far out. I'm not sure who wants gold, unless they currently own some and want to build up demand for a limited resource. Example, in the early 70s the Japan Market was booming. In the 90s it crashed. 20 years for a prediction in the 70s to play true.

  • James - Sunday, July 8, 2007, 11:26AM ET  Report Abuse

    • Overall: 4/5

    Robert's comments on investing have been generally corrct. Anyone choosing to ignore this advice must have a cystal ball better than Robert's. And, anyone that thinks holding the US dollar has been better than other investments in the last 10 years (or 30 years for that matter) is simply ignorant. Last Friday, the Canadian dollar hit a 30 year high against the US dollar. Tell me, what is going to happen to change this pattern. The US fiscal affairs are in a dismay state. I don't view that as negative, but as a opportunity. If someone wants to prudently invest in the future, some allocation to metals is essential.

  • AbiNija - Saturday, July 7, 2007, 4:34PM ET  Report Abuse

    • Overall: 5/5

    hey rob, well done once again and please keep up the good work. We all love you. Abi from Johannesburg

  • Yahoo! Finance User - Saturday, July 7, 2007, 5:04AM ET  Report Abuse

    • Overall: 1/5

    please read this link... http://www.johntreed.com/Kiyosaki.html Fraud at its finest. All the magic words and rhymes are used to connect with your mind. Soon enough your wallet will disappear. Don't worry, he will replace it with one of his nylon ones and you get to choose the style! The chinese love gold and they love to gamble..do you have your countless books translated to chinese so you got a few billion more people to rip off. ?

  • Robert N - Friday, July 6, 2007, 7:28PM ET  Report Abuse

    • Overall: 4/5

    Prehaps Golds time is coming again.

  • Yahoo! Finance User - Friday, July 6, 2007, 1:46PM ET  Report Abuse

    • Overall: 1/5

    Chinese can't spend money because it will devalue their currency? Yuan doesn't float, they hold the value constant. A so-so history lesson, but what exactly did you predict? After gold has the largest runup in modern times, is he recommending you buy it? That probably would have been good advice a couple of years ago.

  • joem - Friday, July 6, 2007, 1:37PM ET  Report Abuse

    • Overall: 4/5

    Robert, Do you think gold stocks would be better than Office REITs? Do any gold stocks pay dividends? I am retired and seek income with capital appreciation. I do not want to speculate. Your thoughts on this would be appreciated.

  • Jae - Thursday, July 5, 2007, 6:16PM ET  Report Abuse

    • Overall: 1/5

    I do not think the chinese trust gold. They have been trusting the stock market which is why they have pushed it up so high. There will be a crash in the chinese market one of these days.

  • Dwight - Thursday, July 5, 2007, 5:35PM ET  Report Abuse

    • Overall: 1/5

    Someday there is going to be a crash! Oh my! Kiosucki Does it again what a GENIUS! How about some specifics and less general B.S. This clown has been predicting a stock market crash for years. He is the #1 guy telling people to borrow money to buy property and go into debt!

  • Avraham - Thursday, July 5, 2007, 9:26AM ET  Report Abuse

    • Overall: 4/5

    Very Good, as usual. It has a bottom line with good support for it.

  • Yahoo! Finance User - Thursday, July 5, 2007, 9:17AM ET  Report Abuse

    • Overall: 5/5

    Robert is right on trac. I have not seen him miss yet with his thoughts on the economy. Our market was one of the hottest in the Country and has always been. I saw prices jump $200,000 a year for the last four years in the low end of the market. Now in a town of 75000 people we have 50 houses coming on the market every day in the $400-2,000,000 price range. A year ago properties were sold in 30-45 days. Today they sit for months. The people trying to sell are all over levraged and in danger of loosing their homes. All the buyers that were purchasing all the over priced real estate are gone. I have never seen anything like this. I think it is just a matter of time before the whole thing crumbles. Gold and low cost Real Estate may be the only way out. People always need a place to live. My queston to Robert would be which one is better.

  • J - Thursday, July 5, 2007, 12:50AM ET  Report Abuse

    • Overall: 5/5

    Everybody knows Robert K. is an asset to our society. He tells it like it is and doesn't hold back punches; not like other people who say buying a house now will be the best thing to do. Not alot of people have a vision like Robert and I'm glad he can break things down for us. He doesn't need to tell us what to do, because people won't do it anyways. But, if people if a desire and find out why they need to do something, then they will and should. You know what I'm saying?

  • Coach Dave - Wednesday, July 4, 2007, 8:39PM ET  Report Abuse

    • Overall: 1/5

    This guy is a Genius....Tonight it's going to be dark and it will rain tomorrow (someplace)......Can I get a column? duh

  • Henry - Wednesday, July 4, 2007, 5:59PM ET  Report Abuse

    • Overall: 5/5

    Rebel in S.C., This article is right on target. The Federal Reserve has been all about sucking the wealth from the US since it's creation almost a century ago. Roosevelt put the wealth destroying scam into 2nd gear when his infamous gold seizure policy was announced. Then Nixon hit 3rd gear by taking the US off the gold standard in 1971 and demanding that the rest of the world accept US dollars vs. gold. Now, with the Fed-endorsed bubbles having broadsided the US economy, (S&L, Tech Housing), our dollar is becoming worth ... less, worth .. less, worth . less, worthless! The US dollar downfall is in Overdrive now. How easy it was to fool the mostly financially illiterate US public on financial matters for so long. But wait ... the rest of the world is tired of being stiffed by the US Fed. And the ingrates are building strong economies and buying solid assets, (gold, oil, silver, etc.) which is challenging the imperial Federal Reserve! OH, the injustice. After the chaos that the death of the dollar causes, real wealth holders will own the US, (Indian & Chinese gold holders know real wealth).

  • Yahoo! Finance User - Wednesday, July 4, 2007, 4:09PM ET  Report Abuse

    • Overall: 5/5

    Robert in India we have a saying that when Elephant walks the street dogs barks.So I think when people criticize you more for some reason take it as a sign of success.Your feelings and concerns are perceived by the real players in the business.Actually these crictics dont even realise how they are attracting more people to you.Majority of your critics are school smarts but they never understand that business and economies are more about trust relation and common sense and money has a same universal language.As far as gold standards goes you are right and since ages till date its gold alone which determines a country's economy.I would just request you to throw some light on India nad suggestion to Indian entraprenuers on how to have a supportive business with USA in comming years. Kumar

  • Eric V - Wednesday, July 4, 2007, 1:17PM ET  Report Abuse

    • Overall: 4/5

    I didn't read all the comments but I saw a lot of negitive comments with no suggestions on how to make money so what good are the comments??

  • RR-AR - Wednesday, July 4, 2007, 1:17PM ET  Report Abuse

    • Overall: 5/5

    Great points made. The country's debt is like personal debt. More financial stability comes from paying off debt versus increasing it and spending more. If we don't significantly attack this debt, we'll be up a creek paddleless. ... This is the first time in a long I've read someone bring up Nixon's decision to remove the gold-backing from the dollar. We need to undo that. Sooner or later, oil-backed currency will have little worth when the oil runs out. The upcoming election should focus on the country's debt first and foremost, not the war or other issues. Most of that is minutae, because they can be voted away, unlike our debt... The personal attacks on RK are adolescent. Just say you disagree with it. You make yourself look like the retard when you get into name-calling.

  • Yahoo! Finance User - Wednesday, July 4, 2007, 1:32AM ET  Report Abuse

    • Overall: 5/5

    I've been a Real Estate Broker for almost 20 years and have read lots of material pertaining to investing (including all of the Rich Dad books which have been benificial to me personally). I share Mr. Kiyosakis' concerns and outlooks relating to the state of the market today and going forward. In northern Los Angeles county we have 18 months supply of homes on the market. with no relief in sight. I was alarmed at reading some of the negative responses and shocked at some of the personal unwarrented attacks on Mr. Kiyosaki. If you disagree thats fine but don't cast aspersions on anyone for simply stating their honest opinion. Personally I look forward to the bi-monthly articles posted and I would like to thank both Kiyosaki and Yahoo. Keep up the good work.

  • Jerry - Tuesday, July 3, 2007, 4:34PM ET  Report Abuse

    • Overall: 5/5

    another great articled by RK.

  • Yahoo! Finance User - Tuesday, July 3, 2007, 4:15PM ET  Report Abuse

    • Overall: 1/5

    Yahoo finance really inspires me. Where else can a greasy used car salesman with a bad haircut like Kiyosaki get a global platform to expound views on capital markets, utterly uninformed by even a solid B semester of high school econ. Kiyosaki offers insights into monetary policy (gold = shiny, shiny = good, gold = good!?!) as well as capital structure decisions (investors in debt get paid off first in a bankruptcy... so debt is good... so borrow as much as you can! Hooray!). If Kiyosaki can become famous by writing this drivel and (allegedly!) selling cheesy novelty wallets, think what someone who has read a book can do! So everyone should read Kiyosaki's column and go back to work knowing that they there is always a chance for them to achieve greatness in their profession no matter how little they actually know about their profession. Oh, but for god's sake please, please, please, never ever actually take any of the man's 'investment advice' - because that stuff's terrible. I wish his terrible 'advice' wasn't a necessary by product of his quest to become the second Tom Vu. "At first I got lots of discouragement from friends and stranger who are loser! You know what these people kept telling me? They kept saying, 'Well Tom Vu [Robert Kiyosaki], you a crazy nut, here you are, a poor immigrant, poor minority, speak no English, no contact, on and on, and you trying to be rich in America! You crazy, man! Look at people out there! They smarter than you are, they not even rich! Who are you to try?' And you know what? I have to keep telling these people every time, I kept saying, 'You are loser! Get out of my way! I make it somehow!'"

  • Yahoo! Finance User - Tuesday, July 3, 2007, 2:26PM ET  Report Abuse

    • Overall: 5/5

    Thank you RK for opening the eyes of so many americans to the fraud that our Federal Reserve and it's member banks perpetrate on the hard working savers. This constant creation of currency (inflation) steals your earnings right out of your bank account. Savers get wiped out. Since saving is a losing proposition, we are forced to borrow, and the sooner in the boom(currency inflation) cycle you can get your hands on a loan, the more of the wealth of the savers gets transferred to you. Of course, you never know how far the FED will grow the piramid this time around and if you are last, you get wiped out too. In case you wondered why the pundits are trying to decifer every word coming out of the FED. Adding another insult to injury is the income,capital gains and death taxes. Your "income", property, estate doubles in "value" and the IRS is after you, but did it double or are you paying tax upon inflation, no gains at all, and the government just keeps stealing another chunk of your already taxed property. If Congress kept up with inflation, your personal income exemption would be something like $100,000.At the rate inflation is going, those million dollar estate exemptions won't even cover the shack you and your kids live in.

  • Carlos - Tuesday, July 3, 2007, 2:25PM ET  Report Abuse

    • Overall: 3/5

    I wonder how many years it will take Robert to realize that the gold standard no longer applies to our modern world. I can't imagine how could all the countries in the world backup their currencies on the gold metal. There isn't enough gold on this planet. Gold would have an "artificial" and grossly inflated value. But I have to agree, that it is likely that the housing market will not do well in the next few years. The excesses have to be purged, and we might not even be half way there yet. However, I believe the stock market might do reasonably well during a housing slump. Just like housing did fairly well during the tech and stock markets bust. Please read the excellent citations by Idaho. Those deserve 5 stars. :)

  • mykl - Tuesday, July 3, 2007, 12:55PM ET  Report Abuse

    • Overall: 1/5

    Nothing new here.

  • AndrewD - Tuesday, July 3, 2007, 11:00AM ET  Report Abuse

    • Overall: 5/5

    Once again, Robert "says it the way it is". Although, no one can predict, with certainty, exactly what the future will hold, Robert at least uses the correct language and "nails it right on the head" insofar as cause and consequence with reference to the "dollar", "debt", and "booms and busts". His acumen should inspire those who don't quit understand his "language" to do a little study on at least what our fiat dollars are and how the money supply is controlled and manipulated....always at the expense of somebody since there is no such thing as a "free lunch".

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