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Jul 272012
 

In an EOTWAWKI (Level 2/3) situation, money will become of little value or use.

In the economic and real world as a whole, there are many factors that all contribute to the overall rate of inflation or deflation.  Fortunately, most of these different factors act in a manner that is easy to understand, and each factor can be either inflationary or deflationary.

For the purpose of understanding inflation, we can say that the price of things in general go up or down (ie inflate or deflate) based primarily on two simple factors.  The other issues that also influence inflation are not as directly impactful as these two primary factors.

The first factor is the supply of the thing.  The second factor is the amount of money available to buy the thing.

Let’s explain that with two simple examples.

An increase in supply of a product is deflationary (and a reduction is inflationary)

First, to explain the impact of the availability of the thing.  Let’s take a current example.  Cherries.  At the time of writing, we are in the peak of the cherry season – a short-lived season that only spans a few weeks in each region.

If you go to a local market today, you’ll find cherries on sale, perhaps for $2 – $3/pound (as is the case locally in our area).  Last week, they were $4/pound, and the week before, they were $5/pound.

Probably next week, the price will be up to $4/pound again, and the week after, the price will be $5/pound.

Now, those cherries cost exactly the same to the farmer.  If anything, the cherries in the peak of the season are the most expensive to the farmer, because he has to get in extra labor which is less skilled and unproductive, perhaps pay overtime, perhaps hire extra equipment and machinery.

The main reason that the cherries start off high, then drop in price, then increase again is due to the quantity of cherries available.  The more that are available, the lower the price of each one.  Increasing the quantity of a thing is deflationary, decreasing the quantity is inflationary.  This is even more pronounced of course with a perishable product such as fruit, but even things that can be stored for a long time prior to being sold are subject to the same effects.

So of course the same applies to other non-perishable things like motor cars and computers, but in these cases, there are other factors that we’ve chosen to ignore that have also created to the reduction in cost linked with the increasing supply of the products.  These are things like reducing costs to produce the goods due to increased automation and other economies of scale.

So, the more of a thing there is, the less each of them is worth.  The fewer of a thing there is, the more each of them is worth.

An increase in money supply is inflationary (and a reduction is deflationary)

The other factor is sort of hinted at by the first factor, when you think about it.  One way of looking at the situation in the first example is that if a farmer has one pound of cherries to sell, and if you have $10 to spend on cherries, then he can sell his pound to you for $10.  But if he has five pounds of cherries, he might still sell them to you, but at $2/lb rather than at $10/lb.

Now let’s switch our focus from the quantity of cherries to the quantity of money.  What happens if the farmer always has only 10 lbs of cherries to sell.  If you have $20 in your pocket to spend on cherries, you’ll buy his cherries for $20, right?  But if you have $30 in your pocket to spend on cherries, you’ll be willing to give him $30.  And if you only had $10, you’d only be able to give him $10 for his 10 lbs of cherries.

Let’s consider a real world example.  As we explain in this article, after World War 1 Germany found itself crippled with ‘repatriations’ – debts imposed on it by the victorious allies, forcing Germany to reimburse them for their costs of going to war with Germany. So what did Germany do?  It ‘cheated’.  It printed more and more and more money, and paid its debts with this newly printed money.

The effect of printing more and more money, at a time when the German economy stayed the same size (well, actually, it started to shrink) was inflationary.  Prices for everything increased – not due so much to changes in the supply of the goods, but rather due to ‘too much money’ being available.  Consider, for example, postage stamps.  There was no shortage of stamps at the post offices, but the cost to mail a letter went from less than 1 Deutschmark to millions of Deutschmarks.

In other words, the same thing applies to money as to the things it can buy.  The more money in the society/economy, the less each unit of money is worth.  The less money there is, the more each unit of money is worth.

The Relativity Between Money Supply and Items for Sale

Now to consider a derivative issue.  If the supply of a product increases, but at the same time, the amount of money in the economy increases too, then the two effects will more or less balance each other out.  Which brings us to a more complete understanding of how inflation occurs in a society or economy :  Overall inflation goes up or down depending on the relationship between the supply of money and the supply of things to purchase with the money.  Inflation can be increased or decreased by selectively adjusting the supply or either money or things to buy with it, or by adjusting both.

Will a Level 2/3 Situation Create Inflation or Deflation?

Now that you understand the underlying factors that impact on inflation, you can start to work this out for yourself.

The most impactful event in a Level 2/3 situation will be the shortage of things.  The most essential things will be in terribly short supply – things such as food and energy.

There may also be a shortage of ‘money’ – we use quotes in this case, because maybe regular cash – dollar bills and coins as we know them today – will become useless.  People might have great wealth on paper, but in terms of actual negotiable currency, what value is money in a bank if the bank has disappeared?

In this case, the availability or shortage of money is probably of less importance than the shortage of life’s essentials – food and energy.  When you’re faced with starvation, you’ll pay any amount to buy food.  When you’re shivering cold and desperate for some heat, you’ll pay any amount for energy.

The shortage of essential goods will unavoidably create inflation, although this inflation may be due to measure in traditional terms, due to a failure of the traditional money supply.

Implications for Preppers

We’ve said this before, but it is worth repeating.  Having spare money will be close to useless in a EOTWAWKI (Level 2/3) situation.  Having spare food, spare energy, and spare trading good will all be invaluable.

You are best advised to plan and prepare by building up supplies of ‘things’ rather than a supply of money.  The purchasing power of money will collapse in a Level 2/3 situation due to inflation, whereas the trade value of ‘things’ will skyrocket.

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David Spero[suffusion-the-author display='description']

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