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:

• Hyper-inflation in Zimbabwe during the past decade.
• Inflation and economic collapse in Argentina in recent decades (this is a very detailed interview that I recommend watching and/or reading in full).
• Hyper-inflation in the Weimar Republic during the 1920's.

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.

Peter