Monday, September 14, 2009

A question about financial survival

In a comment on my post, a couple of days ago, about financial planning and preparing for economic hard times, reader STxRynn asked:

I guess what I am really interested in is where to put the money.... Stranger is kinda hinting around what I have been considering. An article on Argentina, post 2001 collapse, mentioned having some small gold jewelry as barter items. Sort of along that vein.

I'm working on the six month cushion. And I'm finding myself wondering if cash money is better off in tangibles, gold, silver, tools, "hardware", etc.

. . .

Whats your take on an economic crisis, where our money is devalued/worthless? Like Germany, post WW1... That seems to me, to be where Uncle Sugar is driving us.

Well, I sincerely hope we aren't headed for the hyperinflation experienced in the Weimar Republic! However, I think the greatest danger right now is not inflation, but deflation. We're certainly in a liquidity trap, in the classical sense, which is a classic precursor of deflation: and - as noted before - consumer demand for goods and services has dramatically reduced, as a result of the intolerable burden of credit repayments.

However, I think we may well be headed for a major economic collapse, as a result of our Government's profligate spending, which is completely out of control at the moment. As Karl Denninger pointed out yesterday:

There is not now and never was a "liquidity" problem. The problem is, has been, and continues to be a bankruptcy problem. Individuals, corporations and even governments are in fact insolvent. Most banks are and were insolvent.

Governments around the Western World have refused to do what the law demands, at least in the US: Recognize bankruptcies and resolve them. The law in the United States does not permit such hiding of losses, at least in theory, among the banking sector. "Prompt Corrective Action" demands that delinquencies be recognized and corrective actions mandated prior to insolvency occurring.

This was not done, and now we have a massive cover-up engaged in by The Fed, by Congress and by The Executive, pouring trillions of dollars of "new credit" into a black hole in a desperate attempt to avoid recognition of that which I and a handful of others outlined and proved back in 2007: these institutions are in fact bankrupt, investors were swindled, and tens of thousands of people in the "industry" should be sitting behind bars doing hard time for fraud.

. . .

How long can it continue?

Only until the Asian nations recognize that the consumer can't "come back" to former levels of consumption, as they're tapped out. This in turn means they must develop internal consumptive markets for their products, and that in turn means the end of buying our debt as a means of sterilizing their export flows.

When, not if, that happens then entire exponential fraud game comes apart with extreme violence.

We have been given a gift - a six month (up to now) to couple-of-year (maybe) time frame in which to recognize the truth, break up these behemoth organizations, force the bad debt into the open, default it, make depositors whole and in doing so place our economy on a trajectory where debt-to-gdp will shrink to a sustainable level.

If we fail to do so before the rope runs out - and it will - our economy will collapse. The Federal Government will be forced to contract spending to what it can raise via taxes in the current economic climate - about half of what it spends now. Given our budget and where we spend money, this means a near-complete repudiation of Social Security and Medicare, a 50% or more cut to the military budget, and an elimination of all other federal programs. Unemployment will rocket to north of 25%. Our "just in time" economy will break down and there will be widespread, perhaps even critical, shortages of necessities - food and fuel.

To those who think this can't happen: it can. It has before to other nations, including Argentina.

To those who think that admitting to the losses and taking our medicine can be avoided forever: it can't. Exponential growth cannot be maintained in a finite system indefinitely. That is a mathematical impossibility.

To those who think that "incremental changes" will fix this: they won't. Never mind that all the "incremental changes" we've made thus far are in fact going the wrong way - toward more indebtedness, not less.

There's more at the link. Sobering reading . . . but absolutely factual. (Bold print is Mr. Denninger's emphasis. The paragraph in bold italic red print is my emphasis.)

If this worst-case scenario happens, we'll see massive economic, social and supply-line disruption throughout our nation (and the world, of course). Many products and services we take for granted today will no longer be readily available, or, if they are available, they'll cost a lot more and be in much shorter supply. Those who have what we need may not be willing to accept devalued dollars in exchange for their goods. In Weimar Germany, a 'barter economy' was all that kept many families alive during the worst times. Urban families would exchange treasured possessions, valued at many millions of (worthless paper) Marks, for food from farmers in the countryside. The farmers couldn't eat what they took in trade, but they gambled on the hope that the economy would improve to the point where such items would once again have a negotiable value. That was a better deal for them than to accept the worthless, impossibly-inflated paper currency of the time. Meanwhile, the urban families might have sacrificed items that would have brought them a great deal of money in a more stable economy - but at least they got enough food in return to survive!

I'm not a full-blown 'survivalist', as the term goes. Physical limitations (I'm partly disabled), economic restrictions (I'm on a disability pension) and other factors mean that I simply can't afford to store a year's supplies, and render myself capable of living independently for that long while the rest of the country goes to hell in a handbasket all around me. I have grave doubts about many of those who assert that they can do so, if necessary.

I saw what happened after Hurricane Katrina, and wrote about it at the time. If we experience massive societal breakdown, you can bet that masses of the impoverished will pour out of our larger cities and towns, intent on taking whatever they need from those who have it - and they won't bother to ask nicely before doing so. It's tempting to think of 'holding off the invading hordes' at gunpoint, but it's not really a practical option. Many of them will be armed, too. Besides, what makes you think the authorities won't confiscate 'hoarded' supplies for general distribution? If you believe that local and State governments, faced with massive disruption of this sort, won't commandeer whatever people like you have 'stored up for a rainy day', you're living in cloud cuckoo land. They will come for it - and since they'll be acting under the scope of emergency orders, they'll be (at least nominally) legally entitled to do so: which will make any resistance on your part a criminal act. Helloooo, grey bar hotel . . . or worse.

If you're in a part of the country where such mobs of the hungry and helpless will be comfortingly far away from you, and if you can afford it, I certainly recommend stocking up on essentials to the best of your ability. However, irrespective of where you live, I believe every family should have at least 30 days of essential supplies in reserve as a matter of course. It's not hard or expensive to build up such a reserve, and you can rotate your supplies constantly, using them up and replacing them with newly-bought stocks. If you can afford (and have space to store) up to a three-month reserve, or even more, so much the better. Keep it hidden, so that people don't know you have it - that way, it's less likely to become a target for those who want it.

As for money becoming 'worthless', I suspect that's not likely to happen except in a period of hyper-inflation. However, you may find that certain supplies become more valuable than others. This can be taken to extremes, of course. I recall the so-called 'Year 2000 Problem', when computers were forecast to crash because of a date bug, causing massive disruption to society and the economy. It didn't happen, of course; but some so-called 'authorities' were forecasting that toilet paper would become an item of currency after the 'crash' occurred, because it'd be in such short supply! Other 'valuable' items mentioned included sanitary napkins, toothpaste, soap, and any and every variety of cigarette and alcoholic beverage.

Ignoring the extremes, there's a case to be made for having a decent set of basic tools, for repairs, maintenance and defense of life and property; a reserve supply of fuel for vehicles, heating and cooking; spare storage containers for water and food, more than you need for your own supplies, so that you can store whatever becomes available (or barter the containers for other things to those who need them); and sufficient clothing for your short- to medium-term needs. If you can stock more than you need in each of those categories, that will give you a reserve of items that others are likely to need, and be willing to exchange for them things that you might require. In tough times, such deals might be more 'negotiable' than cash.

There are many survivalist Web sites that can tell you much more about what you can do to prepare for the worst. Many of them are so 'over the top' that I can't take them seriously. Others are fairly rational, reasoned and well-thought-out. Do an Internet search on 'survival', consider the options, make your choices, and see what you can learn.


1 comment:

STxRynn said...

Thank you. I really like your reasoned thinking. I've looked all over for survival information, and most of it is offscour. Some good information is available but it's like panning for gold: back breaking work to find a smattering of dust.

Thanks for all the thought you've put in to answering my questions. I am amazed at the wealth of information you have and your ability to distill it into bite sized portions.

Take care, and come visit sometime...I think we'd get along well. (I'd listen most of the time!!!)