Tuesday, February 11, 2014

Preparing for economic hard times

Following my article yesterday, 'Politicians and central bankers are lying in their teeth', a couple of readers asked in Comments how they could prepare for the predicted downturn.

"Predicting the future is hard, I get it. But my question is, are we expecting a 2008 crash? A 2001 crash? 1929? Something unprecedented? Or completely unknown? Secondly, how would one prepare for such a financial collapse?"

"Yeah, I hear ya about the multinational quagmire that we are in...BUT my economic influence extends to the tips of my fingers! So what do I have to do to "gird my loins" for the crash?"

Others have asked similar questions in e-mails.  I thought I'd try to address some of them tonight.  (And, by the way, the similarity of our present situation to 1929 is scary!  See here for more information.  If you're in any doubt about the seriousness of our current economic crisis, and its implications for the future, see the latest from Karl Denninger.  He speaks the truth.  The danger's real and inescapable.)

It's easiest to explain our current economic predicament by analogy.  Say you're living near the San Andreas Fault in California right now.  You know, beyond any shadow of doubt or misunderstanding, that the so-called 'Big One' - a devastating mega-earthquake along that fault - is only a matter of time.  Sooner or later, it will happen . . . so what do you do to prepare for it?  Some steps seem logical and obvious.

  • Don't live in buildings that are poorly constructed to resist earthquake stresses, and therefore are more likely to collapse.
  • Try not to live in areas where major transport arteries - roads, railways, bridges, etc. - are likely to be cut by an earthquake, thereby preventing you from fleeing and supplies and emergency workers from reaching your area.
  • Store sufficient emergency supplies - food, water, clothing, etc. - to get through a few weeks of deprivation following such a disaster, when supermarkets may be closed or inaccessible.  (Make sure you store them where you'll be able to get to them after a disaster - if they're in a collapsed building, they won't do you much good!)

The most obvious precaution of all is to move away from the entire danger zone, into a safer region.  However, most people don't do that, for reasons that make little sense to me.  If I lived in a flood plain or a storm surge threat area or in Tornado Alley, and I therefore knew beyond any doubt that such a disaster was guaranteed to strike again sometime in the next few years or decades, why would I stay there?  Yet people do stay in such areas.  It seems humans aren't all that logical after all . . .

Let's apply those analogies to economic preparations.  The first point to clarify is that there isn't any 'safe zone' where economic woes won't affect us.  It's not like a physical risk - earthquake, fire, flood, whatever.  When the economy goes down the tubes, everyone's going to suffer.  Those who are well-off will suffer less than those who are destitute, but everyone's going to be affected to some extent, as will every national and regional economy in the world.  We can't run, and we can't hide.

The second important point is to understand and learn from what others experienced in previous economic downturns and disasters.  We're likely to undergo very similar events, so we can learn from their successes - and their mistakes.  The subject is too vast to compress into a single blog article, but I highly recommend that you read as widely as possible about the following economic catastrophes:

Don't just read the links provided above, but do an Internet search on each one and study it more widely.  You'll find a number of common factors.  Here are just a few to be going on with that were common to all of those crises.

  1. Shop-owners were reluctant to put goods on the shelves for sale, because the price they could get for their goods today would be less than what they would have to pay tomorrow to replace them.  They therefore preferred to withhold goods from the market, leading to shortages.
  2. Consumers hurried to buy what they needed at once, while they could still afford it.  Those who hesitated often found that prices would rise overnight, so that what they had budgeted for their purchase was no longer enough.  This 'panic buying' made the shortages of goods (caused by [1] above) even worse.
  3. Wages and salaries could not keep pace with inflation, so many consumers resorted to barter, or worked more than one job.  Payments 'under the table', without taxes or other fees being deducted, became more common, as did payment 'in kind' in goods or services.  A 'barter economy' developed in parallel with the 'cash economy', leading to widespread loss of revenue to the government.
  4. Those who had no reserves of cash or valuables rapidly found themselves in real economic trouble.  If they lived from paycheck to paycheck, the loss of a job (which happened more often during economic turmoil) was a direct and immediate threat to their economic survival, as it was unlikely they'd be able to find another job quickly.  As a result, public reliance on government 'safety nets' grew exponentially - just as government revenues were being slashed through diminished economic (i.e. taxable) activity and loss of revenue in the 'barter economy'.  This made it more difficult for the government to adequately assist those in need.

All these consequences are likely to occur in the USA at some point.  We don't know when they're going to happen - just as no-one knows when the 'Big One' will hit California - but it's as certain as the dawn that both eventualities will come to pass.

Knowing likely risks, we can prepare ourselves for them, if - if! - we have sufficient mental and financial flexibility to do so.  Some won't be able to do so.  They're living from paycheck to paycheck, already stretched to the limit, or they lack an adaptable mindset.  Others will be able to economize to at least some extent, freeing up funds to begin setting up an economic safety net for themselves.  I strongly recommend that everyone try to implement as many of these strategies as possible:

  1. Reduce your debt load.  Every cent you spend on debt each month is a cent you can't devote to more important needs.  Pay off high-interest debts first, then low-interest, but pay them off.  Stop using credit cards as far as possible, and pay off their balances.  Don't incur new debt unless you absolutely have no choice.  Yes, this will mean buying cheaper things.  So what?  If they'll serve your needs, that's fine.
  2. Get rid of what you don't need or use.  This is partly to 'clear the decks' for essentials.  Also, if you have to move, it's easier to do so when you aren't weighted down by lots of junk.  It's also useful to convert your non-essential items to cash - if you can sell them, even for a few dollars, that money can go into your reserves (see next point below).  If you can't sell them, how about swapping them for something you need more urgently?  Craigslist is your friend for that sort of thing, as are yard sales and flea markets.  I've taken excess ammunition and knives into a gun show, swapping some for what I needed and selling the rest.  It's worth doing.  Every little helps.
  3. Build up some emergency cash reserves.  Savings are a lifeline if you need to buy something right away, when credit may be hard to obtain and expensive when it's available.  Even a few hundred dollars may make the difference between eating this month, or going hungry.  Larger cash reserves make life even simpler.  (For example, last year Miss D.'s old car died.  We paid a few thousand in cash from our savings to buy a used car in a private sale, rather than take out an auto loan for a newer, more expensive vehicle from a dealer.  We're still rebuilding our savings to where they were - but having them available when we needed them saved us a lot of hassle, and a lot of money!)  Furthermore, don't keep all your cash reserves in a bank - keep at least some in your home, securely stored.  This can be a life-saver if a power failure disables ATM's or the banks are closed!
  4. Build up a reserve of essential supplies.  I've written about the importance of having basic foodstuffs available - see here.  You can buy a few extra things every time you go to the store.  A few extra packages of rice, beans, dried milk, etc. can go an awful long way if goods are scarce and/or prices are fluctuating.  Even if you're on a tight budget, there are things you can do.  If you find yourself out of work, at least your emergency supplies will help you to survive until the next job comes along.  They can also help you survive temporary fluctuations such as the likely effect of the current drought on food prices this year.
  5. Build up a stock of items that will be useful in a barter economy.  Look for things you can pick up cheaply or free, but which will be of value in times of scarcity.  Take a few extra packets of ketchup or mustard when you order a burger.  Store old nails, screws and bolts, and ask your friends to let you have any that they're going to discard.  If someone near you chops down a tree, ask whether you can have some of it for firewood.  If you work in health care, partly used bottles of common medications (aspirin, paracetamol, etc.) can be very sought-after items in an emergency.  If you're a handyman, you've probably got several sets of screwdrivers, wrenches, etc.  Why not sort them into sets, keep the best for yourself, and store those you don't need?  They make great barter items.  Another example from my own experience:  miniature, airline-size bottles of spirits - available from most liquor stores, or from your friendly airline stewardess - make very acceptable barter fodder.
  6. Pay attention to security and safety.  In a declining economy, those who are at the bottom of the ladder will get desperate.  In particular, if the state is forced to reduce its handouts to those who depend on them, they're going to try to make up for the shortfall by turning to crime.  I don't care whether that statement is politically correct or not - it's true.  It's happened during every such crisis in the past, and it'll happen again in the future.  Be aware of the possible risks, and prepare for them as best you can.  Make yourself a less obvious target by concealing your reserves of provisions, etc., not flashing your cash around, and living inconspicuously.  If you live in a high-risk area for crime, try to move to a safer one.

An economic collapse is a slow-motion thing.  It's not like an earthquake, where everything comes tumbling down at once.  We can expect this to play out over several years, if not a couple of decades.  Plan accordingly.  It's never too late to start.



Anonymous said...

Thanks Peter:
I have asked numerous "the sky will fall" folks how and what to do to prepare and I always get some high minded answers. Your answers are what I was hoping for....simple, straight to the point and ON point!
About 3 years ago my wife lost her job for 6 months...boy did that slap me in the face. I found out I was living pay check to pay check and really didn't know it. How could I not know that? Simple, I let my wife take care of the bills and the check book. Now after almost losing the house, almost going into bankruptcy, and eating beans and rice for a while; I've learned to manage my finances a whole bunch better! And I know how much I have in my accounts and which bill will be due this week.
So after 3 years and doing #1 on your list; paying down debt, all I have left is the mortgage.
It looks like #2 is the thing I'm gonna have to wrestle with this summer...kinda tough considering some of the stuff I've had since I was a kid, but oh well, time to get the last bit of debt off my neck!
Once again thanks for the clear and concise list of attainable goals.

Stu Annonymous said...

As per the 1st comment, very timely advice indeed, all of it quite relevant.
Unfortunately, your last paragraph has no application in the country of my birth, Australia.
Since the Port Arthur massacre by(...), his name NEVER to be uttered, and the Governments knee-jerk reaction of banning, or SEVERELY restricting the ownership of firearms, and yes, that includes B.B. guns, (firearms?), it is virtually impossible in Australia to take firm actions to protect self and family in the family home.
If attacked, in public or at home, the defence actions by the victim are put under the most minute scrutiny by the Judiciary, who decide what is, or isn't appropriate force', taken in self defence.

It is financially crippling for a victim to put up a defence, yet, the attacker invariably gets Legal Aid.

They haven't grasped one singular point, a very important point.
When under threat, and you have nothing but your hands, and whatever is in the house, you will fight to the death, because you have no stand-off deterrent.
As a Police Officer told me three decades ago, when I asked, 'What if I killed an intruder when defending myself or my family'?.
His reply, strictly off the record?.
'Throw the body in the street, then drink as much alcohol as you can hold when you're finished, and go to bed, because as far as I'm concerned, the bastard fell out of the sky, and you were quite drunk before and after'.
I have kept a bottle of rum (poison of choice) in my house ever since.
Of course, I rotate the stock, just in case it goes óff'.

Inconsiderate Bastard said...

A suggestion: perform a SWOT Analysis for your living situation.
S-Strengths W-Weaknesses O-Opportunities T-Threats.

A good SWOT analysis (a poor one is less than useless) will not be done in a few minutes, nor will it be done talking over your shoulder while doing the dishes.

Banish the non-contributing distractions (children and pets), focus on the task and commit to at least an hour a night for a week to 10 days. Be brutally honest about your situation, capabilities and needs - if it's not concrete and verifiable it's fantasy. Fantasy kills.

After building the Preparedness Puzzle with your SWOT Analysis, ruthlessly establish priorities - what gets done first, to what degree, and how many phases are there in that particular component. You can do things in parallel; for example, buying a few extra cans of food each shopping trip does not preclude adding to the woodpile or trading what you don't use for stuff you do use. Example: Are you saving your now-a-teenager's baby clothes? Someone a)can use those baby clothes and; b)will pay something for clean, good condition baby clothes. Maybe not much, but $25 for the lot is $25 of canned food you don't have now.

And be realistic. A spiffy, new AR-10 rifle and 20 magazines for it is great, but two used and reliable lever action rifles in 357 magnum and 500 rounds of ammo is better, and what you don't spend on the AR-10 is more food in the pantry.

Spring is coming, and that means winter clothing sales. We will have another winter in 6-8 months, plan ahead. Thrift stores are good sources - people clean out their closets and donate stuff.

Perform a good SWOT Analysis, then build a priority list from it and stick to the plan.

Erik said...

One thing that a lot of people don't think about, but is kind of understood in this post, is the value of social connections.
You need a network of people you can count on.

Security is much easier if you know your neighbors and you are looking out for each other. Bartering is a lot easier if you know the people you are dealing with, so you know they can be trusted and you know who to ask for the things you need.
If you need your house or car fixed, it pays to know a reliable handyman willing to do the job under the table and not cheat you.
Knowing anyone with medical training is priceless when the healthcare system fail, or simply refuse you access. If you get sick or loose your job, having a household member or good friend that can help you out could actually save your life. And so on.

Peter said...

@Inconsiderate Bastard: It's great to see you mention a SWOT analysis. I've used the technique for decades. In fact, I think I'll put up a lengthy post about it soon, to introduce people to such a useful planning tool. Thanks!

Inconsiderate Bastard said...

You're welcome Peter. I'm a little surprised SWOT hasn't come up more frequently on prepper blogs; it's a pretty useful technique.

BTW, thanks for A and O. Terrific read.

Paul said...

I would agree that we are looking at a probably economic collapse. I would also agree with the thinking about how the entitled class will be pissed when the EBT card no longer works.

It remains to be seen how bad things will be, but I am pretty sure something will come out of the mess as there is just too much information to return to the dark ages.

And here I had been looking forward to the day I could retire. Oh well.

Oleg Volk said...

Wouldn't carrying MORE debt make sense if expecting hyper-inflation? You'd be paying it off with much-depreciated dollars.

Peter said...

@Oleg: Yes, if you can get a fixed-interest-rate line of credit at a low rate. That generally applies only to home loans, and today it's harder to get than it used to be. Furthermore, you can expect legislation to allow lenders to ramp up their interest rates in a high-inflation environment, even if the contracts don't allow for it. That's happened elsewhere, when the lenders have bribed the legislators (ahem - sorry - "contributed to their re-election campaigns").

In general, if you're heavily in debt, the lenders own your ass even more than does the government. Not a happy situation in which to find yourself.

raven said...

I have pondered this question-on the surface, it sounds fine- pay down the debt with devalued dollars-
the huge downside is this- you are making the gamble that your cash flow in troubled times will be enough to cover the expanded debt load- this may be just the time your job goes away and leaves you with a debt you cannot pay.

Knucklehead said...

Personally, I keep my debt low but not zero. Hyperinflation is, to me, the most frightening potential aspect of an economic collapse. Those who lent money will want it back. I carry sufficient reserves to pay off all debt virtually instantly and that would be a relatively good thing if money was rapidly devaluing.

So I'd own all my major assets, in particular my home (shelter) outright. Or would I? Many of us who live in the higher tax areas of the nation, after 15 or so years in our homes, owe as much, or nearly so, to annual property tax payments as we do to the mortgage. And that will not likely go down - taxes never really do.

Economic crisis, loss of job, hyperinflation and I go from quite comfortable to virtually broke in a matter of a few months or so. And then a government entity starved for cash starts raising my taxes until I cannot pay them.

Unless one lives very remotely or in some place I am unaware of, one cannot escape debt. The taxman will impose it on you whether you like it or not.