Jun 042012
 

If we encounter a major collapse of society, we can expect the dollar to disappear.

We’ve discussed before the certainty that in Level 3 situations, current forms of money will become irrelevant and close to worthless.

We’ve also indicated that gold will become less valuable in an extended period of massive social and economic disruption – this being quite the opposite of what many preppers anticipate.  Everything we write below applies equally to Level 3 situations, but our comments start from looking at responses, in this article, to a less long-term Level 2 event.

In Level 2 situations, there will be a strange duality surrounding regular money – ie, cold hard cash.  As for any electronic forms of money, you have to assume they will be completely not accepted, due to the electronic banking and credit systems having failed.  That also means ATM machines will not be working, so there’ll be essentially no way to get more cash.

So, no credit cards, no debit cards, and almost certainly, no-one will accept checks, either.  The only negotiable currency will be good old-fashioned greenbacks – which will accelerate the failure of the monetary system, because very few of us have much cash these days.  Indeed, very few banks have much cash either, so even if banks were working, they wouldn’t be able to give cash to more than a few of the people holding deposits with them.

This actually makes for a very interesting economic problem.  Not only will supplies of real goods become very short and in great demand, but supplies of cash money will also be very limited, making money itself also in great demand.  How will that be resolved?

There’s one possible answer, which we’ll come to later in the article.  But let’s first look at things from the perspective of the shortage of goods, ignoring a matching shortage of money.  Then we’ll consider the monetary shortage separately.

Dollar Denominated Prices of Essential Items Will Soar

No matter whether in short supply or available in limitless qualities, money will be of little value during the Level 2 situation (due primarily to the shortage of things to buy with money).  But in the expectation that money will become valuable again when Life As We Know It (LAWKI) returns, people who feel confident about surviving to the return of normalcy, and who have spare things to trade, will most likely trade the things of value they have for money that, although presently valueless, promises to return to some level of value at the end of the situation.

This will probably mean that things become very much more expensive in terms of current currency values, for two reasons.

Firstly, the simple and unavoidable dynamic of supply and demand.  Our economy will massively transition from one in which there are too many things available for people to buy, but with the people having too little money to buy all the things they want, to instead a situation where there are too few items for sale at any price.

Today, you know that you can go to the nearest gas station, and no matter how far you max out your credit cards, there’s no way you can buy every drop of gasoline they have in their underground tanks.  And, even if you did (maybe you have an Amex Black/Centurion card), it wouldn’t really matter, because there might be another gas station on the other side of the road, and the station you just emptied would be resupplied with another 20,000 gallons later in the day.  But in a Level 2 situation, with – at the very least – the oil refineries no longer operating, gasoline suddenly becomes very rare and therefore very valuable.  Instead of all the money you have being insufficient to empty out a gas station’s tanks, now all the money you have might be insufficient to simply fill your car’s gas tank, once.

The second reason why things will become more expensive is due to the uncertainty of the dollar returning to its normal value.  A Level 2 situation has already shattered everyone’s confidence and faith in the certain ongoing constancy of LAWKI, and who’s not to say what might happen to the current currency when life returns to something resembling the former normalcy.  Dollar bills have changed from universally unquestionably accepted guarantees of money, a certain representation of value, to instead, becoming something a bit more uncertain – they are now like betting slips at the race course prior to the race.  Maybe your slip will be valuable, but maybe it will become worthless.

Money Will No Longer Have Intrinsic Value

Today, money has great intrinsic value, because we can readily convert it to whatever we wish.  A dream vacation, a new car or house, anything at all, whether extravagant or essential, can quickly become ours if we have sufficient money.

But, now looking into a Level 2+ scenario, a person for example, selling you the gas at some greatly inflated price – let’s just say, for want of a better number – $250 a gallon – doesn’t really need $250.  What he most needs might be some food, or some more electricity to power his gas station, or something else tangible.  In an economy where there is a shortage of tangible needed items, the items that are available go up in price – as you’ve just observed with the example of buying suddenly extremely expensive gas.  You’d probably find the gas station owner would swap you a gallon of gas for a 5lb bag of rice or beans, and probably he’d prefer to take the rice or beans, because if he ‘only’ gets money, he then has the hassle of trying to find someone who will sell him food, and who knows if/when/where food will be available or what its price will be.

Indeed, if he has 10,000 gallons of gas in an underground tank and no food on the table for dinner, he might swap many gallons of gas for just one pound of rice or beans.  But if he has plenty of food and little remaining gas, then he’ll be asking for many sacks of rice for a single gallon of gas.

Not only will money have no applicability to what he has and what he needs, the ‘exchange rate’ between, in this case, food and gas could vary enormously depending on the circumstances of the two people doing the transaction.

Nonetheless, whether it be a day when food is more valuable than gas, or vice versa, there is almost certainly one thing that will always be of least value.  Abstract money.  Cash.

A Short Term Opportunity for Itinerant Traders

So here’s the interesting thing.  In preparing for this type of situation, if you have a spare $250, you can either keep it in cash, and guess/hope that it will buy you a gallon of gas when you most need it, or you can buy about 50 gallons of gas, containers to store it in, and some PRI-G to extend its storage life today – which for sure is much more gas than the $250 would buy you in a Level 2/3 situation.  Besides which, wouldn’t you prefer to have the certainty of the gas, rather than to drive all around town, burning up 2 gallons of gas (at a replacement cost of $250/gallon) to end up being able to buy only 5 gallons somewhere.

Alternatively, if local fire codes or your lease doesn’t allow you to have 50 gallons of gas in your garage, why not spend the $250 on long life shelf stable food staples.  Our guess is you’ll be able to swap $250 worth of food (that you buy today) for much more gasoline (in a Level 2+ scenario) than you could buy with $250 cash.

Best of all, split your funds and invest in a mix of both gas and rice.  That way, when you find the man with lots of gas and little food, you can do a deal whereby you get a lot of gas for a little food in return, and when you find the man with lots of food but little gas, you can do another deal, again to your benefit.

This means that you are becoming a trader.  If there is an easy way for you to move around an area, balancing out individual surpluses and deficits, you could create an excellent new job for yourself.

That’s not to say that such jobs would be free of competition, or sustainable longer term.  The country general store will probably evolve to become a trading post, much as such stores were 100+ years ago.  And sooner or later, some replacement form of currency will act as a more efficient intermediary than you traveling around with all your trading goods.  But, short-term, you might find it a valuable way to earn a living.

Whether you attempt to do this full-time or not, there is one thing that is clear.  As we concluded in our earlier article about the different role of money in a crisis situation, cash will become of little value, because you can’t eat or drink cash, you can’t use it to keep warm, or in any other way, directly obtain comfort, safety, and sustenance from it.  When prepping for the future, you should convert as much of your cash as you can to things either that you’ll need or which you can use as trade goods to swap with other people who will need what you have, but who might have something else in return that you need.

The Implications of a Shortage of Actual Physical Money

As we mentioned above, there will be a shortage of actual cash in a Level 2/3 scenario.  Few of us have more than a few hundreds dollars in cash lying around our homes.  We don’t need more than that because we do most of our transactions electronically these days, with credit or debit cards, or sometimes still with checks.  And if we do need more cash, we can quickly get some, 24/7, from a nearby ATM.

So even if US currency were to be continued to be accepted, there just wouldn’t be enough of the stuff available to be used.

Rather than this resulting in a revaluation of the dollar and what you can expect to buy for a dollar, we think it will instead result in an accelerated rejection of the dollar and a replacement by local currencies, based on some type of underlying local asset of value.

A Return, Not to a Gold Standard, but to a More Sensible Standard

As we touch on at the end of our article about the irrelevancy of gold as a future monetary instrument, in the past (as in dating back to 1704, and sporadically prior to that time too) there were good reasons for using gold as an international monetary standard on which countries could base their own currency and then trade from their currency to another country’s currency.

But those valid reasons diminished during the 20th century, while at the same time, the weakness and flaw of gold as a monetary base remained as strong as ever.  This is the fact that gold is not an object that inherently has any value, other than the artificial value we give to it.  What is it that makes gold worth about $1500 an ounce, but copper worth only about $1.50?  What is the valuable property that gold has one thousand times more of copper?

There is no underlying logical reason for gold’s high value.  Historically the reason that gold (and, slightly lesserly, silver) was used as a means of storing value was because gold didn’t rust or in any way diminish in quantity. Its long life and chemical inertia made it well suited as a semi-permanent means of representing abstract value.

But in the very difficult times after a major collapse of society, people will not be interested in abstract anything.  They will be necessarily interested only in things of real value – things that can keep them fed, watered, and sheltered.  Gold does none of these things.

We anticipate that any new currency will be based on being redeemable for an equivalent amount of food or of energy, and being as how food is merely a derivative abstracted form of energy, and being as how energy is one of the most basic ‘building blocks’ of everything else in the world, we think the unit of value will be energy based, perhaps with a fixed conversion to food, perhaps not.

The most common measurements of energy are (in alphabetical order)

  • British Thermal Unit
  • Calorie
  • Erg
  • Foot-Pound Force
  • Foot-Poundal
  • Horsepower Hour
  • Joule
  • Kilowatt hour
  • Therm

The internationally preferred unit these days is the Joule, and more likely, the Megajoule.  But all the different units have fixed conversion rates between them (sort of like the fixed conversions between feet, inches, yards, chains, miles, meters, kilometers, etc) and so it doesn’t really matter which unit is the underlying basis which a future currency is measured by (and redeemable for).

Summary

Prepare for a level 2 or 3 situation not by hoarding gold or cash, but by stockpiling food and energy.  If you keep balanced amounts of each, you may be able to profit by trading either to people who need one type of item and who have a surplus of the other.

Anticipate a future currency to evolve (in a Level 3 situation) that will be based on being redeemed for a specified amount of energy.  Energy will become the new defining commodity on which the value of all other things will be measured.  Unlike gold, energy has intrinsic value, making it well suited as a financial base.

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