May 222013
 
Many major western cities are dangerously unstable and the slightest spark can set off rioting; it is only our present massive police resources that keeps these tendencies in check.

Many major western cities are dangerously unstable and the slightest spark can set off rioting; it is only our present massive police resources that keeps these tendencies in check.

We have written several times about how major population groupings (ie cities) will collapse ‘shortly’ after the essential elements of life cease to smoothly flow in to them as needed.  When there’s no water, no sewage, no food, no gas and no electricity, things will unavoidably get very nasty.

In an earlier post we suggested that cities will decay into violent anarchistic morasses within a week or two.  In that article we were deliberately trying to look at a ‘best case scenario’ (don’t laugh – the collapse of cities taking a week or two is, alas, a best case scenario!).  Our projection was based on the ‘best case’ hope that people would remain passive for a few days and it would only be when people realized no help was coming and they were starting to starve that things would turn truly nasty.

One of our readers, ‘Lt. Dan’, wrote in to share his perspective of what might go down, and alas, it is not nearly as sunny and optimistic as our earlier best case hope.  His point is that violence will break out immediately.  There will not be days of ambiguity before things start to fail.

He says that in known ‘hot spots’ in larger cities, the violence will start at once, and as soon as the violent offenders realize that the police response is inadequate (or totally missing) it will skyrocket in scope and extent.

This is a key issue for us, because it impacts on our decision about when to ‘Get Out Of Dodge’ (GOOD) and hightail it to our remote retreat.  How much time do we have to decide what to do between when a massive problem occurs and when the city becomes lawless?

Lt. Dan writes :

As a retired LEO with over 30 yrs dealing with “society” I have a number of thoughts on this topic. I grew up on a working farm not close to any major metro center but in adulthood joined a sizable metro PD.  So I have perspective from various angles.

The speed and spread of lawlessness with be much faster than most will think.  Even now in “quiet” times LE staffing is usually based on the lowest number of officers to reasonably handle a “normal” day.  Any event(s) beyond “normal” immediately overwhelm on-duty forces.  Planned events like anarchists protesting the latest capitalist conference allow time to plan for enough ON-DUTY personnel (plus resources from other agencies) to be available when violence breaks out.

In most major metro areas there are areas the police routinely avoid because they’re too hazardous.  The violent elements in these areas are constantly looking to explode their violence at a moment’s notice when the opportunity happens.  And when it happens it will spread like a ruptured gasoline storage tank afire.  LE forces will be quickly overwhelmed and retreat to a safe place/bunker for self-preservation.

Most LEO’s have families and a desire for self-preservation.  If the collapse involves monetary problems (like no paychecks) the officers will not be reporting to duty, they’ll be protecting their own.  When this happens the initial violent outbreaks will mushroom like a nuclear reaction.  If the officers are being paid yet, they’ll set up a “containment perimeter” IF they have enough manpower…. which is highly unlikely in a regional or national SHTF scenario.

On other really scary thought I never see mentioned is…. what happens to the tens of thousands of violent criminals in prisons??

In a farming community where religion/moral values are generally much higher than urban dwellers, the problems of violence will be much reduced.  Plus everyone usually knows each other so its harder to want to take advantage of them.  One tip for urbanites…..farmers are not working their butts off to feed the city slickers (who’ve been ridiculing them for years as hicks, etc) and they certainly will not welcome the urbanites showing up during a crisis.

We asked Dan about his comments and background, and he told us a bit more about how he has formed the views he has – and, let’s face it, thirty years in a major metro police department and retiring as a lieutenant gives him a lot of credibility, particularly on police related operational issues and on matters to do with how people will (mis)behave when given half a chance to do so.

Now that he can ‘tell it like it is’ we asked him in particular about something that opinions widely vary on – will the police bravely ‘man the battlements’ and fight to the last man in a failing and doomed effort to save civilization, or will they adopt – as he suggests above – a ‘my family first, everyone else second’ approach when they see the inevitability of a city’s collapse.

Dan replied :

When I first started on the PD in the 70’s I was stuck in the Comm room and on boring nights I’d actually read the Civil Defense binders (HUGE things) full of detail, much theoretical.  For example, upon receiving alert of a nuke attack we were supposed to call a long list of elected officials and city unit directors etc.  We all knew it’d be a total waste of time to call these clueless government people because all they’d do is panic and babble on the phone asking US what to do!

We (cops) talked openly in the Comm Room about what we’d do and we decided we’d immediately leave our posts and spend our remaining time with family.  The point being alerting totally clueless and incompetent “leaders” would do nothing except add to the panic and confusion over which we (cops) would have ZERO control over.

It is important to understand how much we can learn from past ‘lessons’ with breakdowns in cities (in the case of the US, the L.A. riots being a prime example) and how much we have to adjust for a future breakdown of society.

We suggest that the big difference is that in past events, the problem has been successfully contained to a restricted region, and the police have had, in effect, virtually unlimited reinforcements and resupply, and there has never been any question of what the ultimate outcome would be – of course law and order would triumph.

But in a future society-destroying event, none of this applies.  The police will have no resupply or reinforcement, and problems will break out in multiple locations.

We agree with Lt. Dan that very quickly, the police will see the unwinnable nature of the contest and will switch from attempting to defend a disintegrating society from itself, and will focus instead on attempting to ensure the safe survival of themselves and their immediate family and friends.

Summary

Lt. Dan puts it very vividly when he writes

[Violence] will spread like a ruptured gasoline storage tank afire

This means that if you have a GOOD plan and a retreat to go to, you need to be ready to activate this sooner than you might have otherwise hoped for.  As soon as you hear the first word of lawlessness, rioting, looting, and general disorder breaking out, you should accept that this will spread like wildfire across the entire city, and leave as quickly as you can.

Oh – one more unsettling thought.  How will you learn that violence has broken out in another part of the city if the internet is down, and radio and television stations are also down?  Even if some broadcasters remain in service, they’ll probably have limited sources of information and it might take a while for them to become appraised of events and to then broadcast them.

It is also reasonable to guess that broadcasters will be asked ‘not to spread panic’ and so initial reports of violence breaking out might be downplayed or omitted entirely.

Choosing when to bug-out is a difficult but essential issue.  You need to be willing to leave before it becomes too late, and with inertia and resistance to change and desperate hope all encouraging you to delay your decision, you need to fight these tendencies.  Better to leave ‘too soon’ and return back again some time later, safely; than to leave it too late and suffer the consequences.

We talk about the issues to do with making your bug-out decision here.

May 192013
 
The increasing sophistication of electronics obscures their increasing vulnerability to a hacker attack.

The increasing sophistication of electronics obscures their increasing vulnerability to a hacker attack.

Many of the risks and vulnerabilities we have to consider are things that have not yet happened and which we hope might never happen.  Nuclear war, for example.  Or alternatively they are things that happen so rarely as to give us hope they might not recur during our lifetime – a massive asteroid strike, Yellowstone erupting, those sorts of things.

Very few things we consider are things which are actively happening at present, although perhaps that is definitional and a matter of degree.  Maybe it is fairer to acknowledge that some pathways to disaster are already prepared, and we’re potentially heading down them currently.

For example, the risk of economic collapse is never far from the surface (particularly at present), and some type of medical problem – whether a super-flu bug or the consequences of super-antibiotic resistant bacteria – seems to be another type of risk that is of increasingly likelihood.

Furthermore, society’s evolution into an increasingly complex and interlocking structure of chained dependencies makes us ever more vulnerable in the event of any of these events occurring.

But most of these issues are topics for another time.  Today, let’s focus on something that is very much ignored and overlooked by most of the mainstream media – the fact that we, in the west, are already locked in a deadly war that threatens our civilization as gravely as any of these other issues.  We’re not talking about the global struggle against Muslim extremism.  We’re talking about a battle with an enemy we can’t even identify.  We don’t know who they are, and we don’t know where they are.  We don’t even know if they are one (or many) organized groups, or just a random series of unrelated attacks by individuals.

We’re talking about the battle for our ‘cyberspace’.  We don’t just mean what happens if your computer gets infected with a virus, although that’s for sure a bit of collateral damage of sorts.  We mean the major battles that are raging beneath the chaotic surface of the internet, battles which usually go unnoticed and regrettably go unreported.

Here’s a case in point :  This article in, of all unlikely places, a small regional newspaper/website in Montana, talks about a coordinated cyber-attack against the US earlier this month, known as OpUSA.  Apparently it even had some moderate success, including taking down the ISP used by the reporter and more than a million other people (CenturyLink) for a couple of days.

As the reporter concludes,

virtually our entire world economy is now dependent in some way on the Internet, and if it is subverted by malignant forces, then heaven help us.

The only correction we’d suggest is to remove the word ‘if’.

You’d like another example?  This time lets turn to a series of articles in the respected MIT Technology Review.  Their headlines tell the stories, almost without needing to read the full articles.  Protecting Power Grids from Hackers is a Huge Challenge is the headline in one.  An earlier story on that theme is headlined Old-Fashioned Control Systems Make US Power Gris, Water Plants a Hacking Target.

Showing that such activity is not just theoretical is this article :  Honeypots Lure Industrial Hackers Into the Open.  That is an interesting article because it moves beyond the large theoretical element in the first two articles and points instead to a researcher who put up some dummy industrial control systems and found them immediately attacked and successfully penetrated by unknown hackers from no-one knows where.

The war is as much global as it is confined to the US.  Here’s an interesting article about how earlier this year a person, as a hobby, collected data on some 310 million different devices connected to the internet.

His findings?  The article discreetly says that many of the responses he received came from devices revealing vulnerabilities that would allow them to be readily taken over.

We should note that it isn’t just poorly configured computers that are at risk of takeover.  The article mention government level computer takeovers (‘Red October’), as well as government sponsored intrusions (‘FinFisher’).

We ourselves have recent and personal experience with supposedly secure computers being taken over by we don’t know who, but at a level sufficiently severe to cause the FBI to contact us on their own volition and offer their help.  Unfortunately, the bottom line appraisal of the situation by their experts is that nothing is 100% secure and a determined hacker will find a way in to just about anything.

There’s another dimension to this problem as well.  In addition to the hacker attacks from shadowy individuals and organizations, might the key equipment that connects the essential backbone of the internet together contain deliberately engineered vulnerabilities hidden within them by government sponsored organizations?  This worry is at the heart of the reluctance of many western governments, who are resisting the temptation of very low-priced internet routers and switchers offered for sale at low prices by the shadowy Chinese company, Huawei.

This is a vulnerability that is already surrounding us.  Do you have a Lenovo computer, for example (Lenovo is a Chinese company that bought the IBM laptop business a decade or more ago)?  Even if you have an American brand computer such as Dell or HP, where was it made and, more to the point, where were its components made?

Modern integrated circuits have as many as a billion or more transistors plus countless other resistors and capacitors.  Who’s to know what might not be hidden in all of that?

Similar concerns have attached to allowing Huawei to supply equipment for wireless communication services.  Let’s extrapolate a bit :  Here’s an interesting – and totally speculative – thought.  The amazing value new handheld transceiver radios that companies such as Baofeng and TYT are now flooding the US market with – who’s to know if they don’t have some type of remotely activated functions hidden inside them, too?

Some high-end two-way radios have a ‘Stun/Kill’ function which allows the radio to be ‘put to sleep’ via a remote command (ie, to be ‘stunned’) and also to be de-activated totally (ie to be ‘killed’).  This is useful in a law-enforcement/security environment – if a radio is lost or stolen, you can remotely destroy it so as to protect the security of your radio communications.

How do we know there isn’t an undocumented function buried within these radios that could result in them all suddenly being de-activated upon receiving a special command signal?

The same is true of much of the electronics in most other things we surround ourselves with.  Some risks are minimal and benign – it would be unfortunate if our television set destroyed itself after getting a special coded signal in a regular tv transmission.  It would be more inconvenient if the new generation of internet connected refrigerators all failed.  If the engine control computers in our vehicles also failed, then things start to move beyond inconvenient, and once we see the control systems for water, sewage, power, buildings, computerized manufacturing, and all the other things that are now computerized (the elevator in your apartment building or office) stop working, then we’re into the middle of a massive disaster.

Summary

The fact of the growing number of electronic type risks we are surrounding ourselves with is beyond question, and indeed, our governments themselves are sufficiently concerned as to sometimes refuse to buy lower priced equipment that, on the face of it, seems as good as or better than higher priced equipment.

The reality of the risks is underscored by the ongoing active probing attacks on our infrastructure every day.  Some of this may be individuals having fun, some of it is uncoordinated, but some of it for sure seems to be sponsored by state level organizations.

When the time comes for such forces to decide to mount an all-out attack on our computerized infrastructure, it could literally all be over in less than 15 minutes.  Almost before we realized we were under attack, sleeping ‘worm’ infections in control systems could be activated and the systems they control destroyed or disabled.  Power generators and most other machinery could be destroyed due to being deliberately run too hot or too fast, nuclear power stations could be at risk of meltdowns and major radioactive releases, our grid could be in melt-down, and every computer controlled device, from industrial processes to the pumps at gas stations and the cash registers in our stores would all be disabled.

And then, for the coup-de-grace, the internet as a whole would come crashing down, with the backbone routers and switches all failing.  The same would happen to wireless services and even to ham radio type gear too.

Life as we know it would come to an end in less time than it takes to read this summary.

Note, near the end of this article, the observation

It would be possible to adapt to an outage of one or two days with minimal long-term impact on GDP, according to Healy, thanks to backup generators and other measures. “Once you get more than about 10 days, then about 80 percent of economic activity ceases,” he said.

That’s an interesting observation.  We have less than ten days from a major failure before our economy collapses, long-term, down to one fifth its present level.  How would you manage with one fifth the food you currently eat?  One fifth the water?  One fifth the electricity and gas?

Remember that it can take two to three years to get a replacement major power transformer.  Indeed, with a widespread nationwide attack, almost nothing could be repaired and restored to normal operation in ten days.  It is almost a certainty that after a massive electronic attack, our society’s underpinnings would be down for not ten days but more likely ten weeks or ten months, maybe even ten years, and it could take ten decades for a recovery process to be complete.

In an earlier article, we quoted Los Angeles officials as saying people should prepare for a fourteen day period being ‘on their own’.  The only thing wrong with that advice is the assumption that, on day 15, it will all magically be okay again.  With a major national disaster, the only thing that will happen on day 15 is even greater misery than on day 14, and a growing realization that help will not be magically coming.

Which is, of course, why we are actively preparing for our own self-sufficiency.

May 152013
 
You probably didn't think you'd need to study Economics as part of your prepping.  You don't need to, but there are some things you should understand and anticipate.

You probably didn’t think you’d need to study Economics as part of your prepping. You don’t need to, but there are some things you should understand and anticipate.

So there you are, planning how many tins of food you can store and how long it will last you in a Level 3 or Level 2 situation.  You’re counting up the bullets for your guns, and preparing to hunker down for a desperate and challenging time where life will be tough and uncertain, and you’ll be living hand to mouth with few creature comforts and no luxuries.

Your bookshelf is full of items on how to can your own food, how to grow your own vegetables, self-sufficiency, self-defense, and so on.

Probably the last thing on your mind is to now read through some fifteen thousand words of economic theory.  You can’t fight off attackers with economics.  You can’t eat economics.  Who needs economics when you’re in a daily desperate struggle for survival?

We understand your perceptions, and that’s why we’re starting off this long series on apparently abstract economic issues with an introduction, to explain to you why economics is a vitally important subject that you need to consider and factor into your prepping.  A good grasp of economics will truly help you fight off attackers and will truly help put food on your table.  Economics is not abstract, it is immediate and important.

The reason economics is important is because your ability to not just survive, but to thrive, will be directly related to your ability to interact appropriately with other people.  To engage in mutual support activities, to help each other out, and to trade between you, exchanges surpluses of things you have or have grown/created for surpluses of things other people have.

As soon as you start trading with other people, economic factors come into play.

If you factor economic issues into your preparing, and subsequently into your surviving, you’ll find yourself with a better and more valuable store of supplies for if/when TSHTF, giving you a more advantaged starting point to respond to the new crisis situation you find yourself in.

By understanding how representations of value will change and evolve during the crisis and the subsequent slow recovery, you’ll be able to trade better and smarter with your neighbors, helping you all to be more efficient and therefore to live better and more prosperous lives.

As for fighting off attackers, well, you could say that the pen is mightier than the sword, and you could also say that war is merely an alternative form of applied economics.  But it is simpler to say that a prospering society should also be a strong society, and better prepared to protect itself against outward threats, whether they are economic in form, semi-random such as weather, or man-made such as marauders.

A better understanding of the issues in this article series, and of the other articles we occasionally publish about the form of a future economy and how to prepare for it, will truly help you prepare better now, and survive better, subsequently.  That’s why we’ve taken the time to research and write this extensive series of articles.  We urge you to take a lesser amount of time to read through them, and – of course – feel free to comment or question as you wish.

Unfortunately, one of the most distinctive things about the ‘science’ of economics is that it isn’t a science at all.  It is instead a series of theories, biased by personal beliefs and values, and while our commentaries are hopefully sensible and our predictions may possibly be close to correct, no-one truly knows what to expect WTSHTF.  So we are layering imprecise economic ‘theory’ on top of uncertain guesses about the future.

As part of your prepping research, you always need to clearly distinguish opinion from fact.  Even simple seeming things may be as much opinion as fact – for example, the storage life of any given product.  Do you really think that the companies selling extended shelf life food that they say is good for 25 years have really conducted 25 year tests on their products?

Another example – the frequency tuning range of a radio might be a fact (but we’ve seen people even get something as simple as this wrong).  On the other hand, its ability to work well for your communication needs is an opinion.

You are always best advised to consider all information from all sources with an open but skeptical mind and to weigh up differing opinions (and conflicting ‘facts’) before settling on your own personal plan.

We have six articles in the series.  Ideally, you should read them in sequence, but of course, browse through them any way you wish.  We hope they are of value to you.

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy

May 152013
 
Our imbalance of trade and our economy's reliance on foreign nations makes us increasingly vulnerable to economic problems imposed on us by other countries.

Our imbalance of trade and our economy’s reliance on foreign nations makes us increasingly vulnerable to economic problems imposed on us by other countries.

Many preppers perceive that after TEOTWAWKI (ie a Level 2 or 3 situation) the present US currency will become of little value.  Their view of the future possibly revolves around using precious metals for currency and/or a currency-less situation that involves bartering.

This six part series moves sequentially through the reasons why our current US dollar will cease to be of value if society should collapse, and then looks at the value and effectiveness of bartering as a replacement, the role of precious metals in the creation of a new currency, and finally comes up with some predictions for a future currency and how you can best prepare for this.

We suggest you read these articles in sequence, starting of course with this article first.  But they are each independent of the other, so help yourself in whatever form you like.  Please also see other articles in our general series on Economic Issues After TEOTWAWKI.

The Current International Vulnerability Of Our Fiat Currency

We agree it is likely our present ‘fiat’ currency will cease to be of value after a collapse in our society.  But there’s another factor to consider as well – a collapse in our society might be precipitated by a collapse in our currency, rather than happening the other way around.  And a currency collapse could occur either as a result of internal problems within our society and its economy, or as a result of outside forces from other nations and our external creditors.

Our fiat currency’s only value at present is the US government saying ‘This dollar bill is worth a dollar because we say it is’ – a statement that survives due to it being supported by a near unanimity of opinion among US citizens domestically, and by those other people/organizations/governments around the world that accept US currency, and who agree the value is indeed as it is claimed to be.

If the credibility of the US government guarantee/edict weakens, so too does the strength of our currency.  At present the government does as much as it can to gently encourage us – some might say to brutally force us – to conduct our financial transactions in dollars.  Of course, the more we do that, the more visible our trading becomes, and the easier it is for the government to effectively assess our economic activity and tax us, so the government benefits both by keeping the dollar as the prime basis of our economy, thereby implying its reliable value, and also by keeping our trading easily measured and therefore easily regulated and taxed.

There’s nothing new about fiat currencies.  Most countries have a fiat based currency, because it gives the government issuing the currency a huge amount of economic flexibility – quite literally, the ability to print money.

The value of any country’s fiat currency therefore goes up and down as a result of many things, every day, including how people perceive the strength and prudence of the country’s government and its economy.  The country’s balance of payments is another factor, as is the interest rates payable on investments in that country, and the relationship between the country’s economic activity and the amount of fiat currency in circulation.

These various factors point to the problems with the unified Euro currency – different governments, different economies, different strengths, different interest rates, but one shared currency.  These forces, all pulling in different uncoordinated directions for each of the different countries in the Eurozone, threaten to tear the Euro apart.

A common currency must be supported by a common set of economic conditions and policies.  That is why the Eurozone is seeking ever greater power over its member nations, so as to buttress the varying strengths and weaknesses of individual national governments with an overarching claim/promise of Euro value made by a central government, and with a consistent economic underpinning of the currency.

So, the first point is simply this.  If there is a collapse in our government, our economy, and our society in general, then it is very likely that there’ll be a collapse in the dollar, too, because it is a fiat currency with no real underlying value.  We are probably all agreed on this.

But this collapse in value will be in two different parts – internationally and domestically.  We’ll consider the domestic issues in the next part of this series, and now concentrate on the international issues.

International Impacts of Dollar Problems and Devaluation

Domestically it is probable that our currency will retain its integrity unless some society-destroying crisis comes along or the government acts extraordinarily foolishly.  Mild inflation or deflation may impact on its value, but other than that, the currency should remain reasonably linked to economic activity and real values.

But internationally, our currency’s integrity relies not just on us, but also on the actions of other nations which we have little control over.  As other countries become increasingly larger and more economically powerful, and as international groupings of countries have more control over the global economy, our ability to dictate (and, more recently, to even influence) the world’s economy is weakening.  Rather than setting the economic ‘rules’ for the world, increasingly we are having to follow those created by others.

For example, if ‘investor nations’ such as China stop buying our debt on the basis of, as at present ‘We’ll excuse you 6.15 yuan of debt that you owe us for every dollar you give us’ and instead say ‘We don’t think your currency is worth as much, so we now want two dollars from you for every 6.15 yuan you owe us’, that would see our currency’s value halved – it would be devalued.

Similarly, if other countries said to each other ‘We’re not so comfortable doing our trade between ourselves in dollars any more.  Let’s instead start trading in a different currency’ then all the stockpiles of US currency being used by other countries and individuals for trading would be released and returned back to us to be changed into whatever other currencies they preferred.  Any time there’s a flood of any product into any market, its value drops, and the same is as true of currency as it is of food and other goods/services.  This is not just a hypothetical speculation – read this article about the sleeping giant that is starting to wake – the Chinese Yuan/RMB and its potential to become a major global currency.

It is believed that there is a great deal more US cash used in the rest of the world by other countries as part of their economies than there is actually in the US itself (perhaps 70% – 80% of all currency is held in other countries – here’s a somewhat dated but interesting article).  If all those other countries started returning their dollars back to us and said ‘Here’s your money back, we don’t want it any more, please give us euros instead’ our currency would again rapidly and massively devalue.

People often assume that a government can control the value of its currency compared to other currencies in the world, but that is not entirely true.

A currency’s exchange rate is something that can be determined to a greater or lesser extent by how other countries act and respond.  A simple analogy – say you are selling apples.  You can set the price at 10c each or $10 each, but the only thing that really matters is not the price you put on the apples, but how many you actually sell.  It is the same with currencies – a government can say its currency is worth whatever they wish to say, but if the government’s valuation is out of line with the real value of the currency, you’ll get a ‘black market’ with unofficial currency trading at the real rate and little or no activity at the official rate.

Is Devaluation Good or Bad?

What happens to us if our currency is devalued?  The most immediately obvious would be imported goods going up in price – there’d be no more cheap Chinese imports.  But is that a bad thing or a good thing?

It would be a shame to go to Wal-Mart and see the price of everything had doubled, for sure.  But if the price of imported goods skyrockets, maybe that helps us to then start to rebuild some local manufacturing.  In addition, our own exports become more competitive on world markets, because with the dollar now worth less, our goods, still bringing the same dollar price to the US sellers, cost other people in other countries less in their own currencies.

Think of the US automobile industry.  If our currency was devalued, that would mean that foreign cars become more expensive in the US, and more people would start buying American cars again.  Meantime, in other countries, foreign cars would remain the same price, but US cars would drop in price.  People in other countries would start buying US cars, too.  (To the pedants out there, yes, we know this is and much else in this series a simplification – ‘foreign’ cars often have significant US content, and ‘domestic’ cars have huge amounts of foreign content, but we’re talking concepts here rather than exact specifics, and the essential concepts remain accurate.)

Not only would this put more people back into work in Detroit, but it would mean that our balance of trade would improve – our imports would drop and our exports would grow.  We would have more money coming in to the country and less going out.  Money would become more plentiful, interest rates would drop, and so on.  One source of pressure on our currency would be reduced.

So from that perspective, devaluation would be good.  But remember – at the same time, everything we import would go up in price, and so we’d spend more of our weekly wages buying essential (imported) things – which these days is just about everything, including even basic food and produce.  That’s a bad thing.

This duality of costs and benefits is why the Chinese government in particular is happy to maintain an artificially high value of the US dollar.  The artificially weak Chinese yuan boosts their manufacturing economy.  They don’t care that their weak yuan makes imported goods more expensive, because their economy is primarily a domestic driven economy.  They don’t import much, so who cares if imported goods go up.  It is more beneficial to be selling their exports for more money, because they have a positive balance of trade.

Devaluation is one of those things that has good and bad features associated with it.  In a room full of economists, you’ll find some who strongly recommend it, and others who strongly hate it.  Economics is far from an exact science!

Devaluation might be bad, and might be good, but is unlikely to precipitate a sudden collapse in our economy and our society.  Yes, depending on the speed and extent of a devaluation, it certainly would impact on our economy, but it is unlikely to cause it to colossally collapse.

Other External Risks and Factors

There are other potential pressures on our currency too.  If foreign nations become reluctant to lend us money (which we need to finance the government’s ever-increasing annual deficits) we’d have to increase the interest rates we offered them to entice them to give us money, and that would increase business costs across the board, reducing domestic expenditures, shifting more of our GDP into interest payments to foreign countries, and hurting the economy.

It is entirely possible that foreign investors could get ‘spooked’ – investors are crowd loving and crowd following animals who like to do what everyone else is doing.  That’s why we see things like the dot-com boom, when everyone wanted to invest in internet businesses, and then the dot-com bomb when everyone realized that most of such investments were nonsensical.  The same surprisingly irrational and emotional factors can apply to the perception of entire nations, too.

It is also entirely possible that a large enough grouping of countries who hate us could group together to bring economic pressures to bear on us.  After all, that’s what we do as a matter of course against nations we don’t like – we impose ‘economic sanctions’ on them.

It was easy for us to impose economic sanctions when between us and a few of our strongly supportive allies, we controlled the largest part of the global economy.  But our share of the world economy is now very much smaller than it was, and we have fewer allies, who are in turn also getting smaller.

The demographics point to the new economic super-powers being, in the short-term, countries such as China, India, and lesserly Brazil and maybe Russia.  Those countries range from ambiguously neutral to actively hostile to our interests.

Add to that the growing Muslim activist movement in the Middle East, Asia and Africa, and the continued huge money flows going to OPEC nations (who are seldom friends of ours) and we are becoming increasingly vulnerable to orchestrated pressures by hostile nations to weaken our currency and therefore our economy.

This is not just idle speculation.  The Euro has already displaced the dollar in many countries as being the preferred international currency to trade in, and there are regular moves by OPEC to move oil costs away from being dollar denominated and to instead to use some other non-US currency measure.

Implications for Preppers

An economic collapse could occur for reasons outside our country’s control.  Other nations could act to diminish the value of our currency and to harm our ability to trade internationally.

What does that mean for us?  You should store your assets not in dollar denominated funds, but in the form of real assets.  Property and long-lived prepping supplies are two obvious choices.  Firearms and ammunition are another – both seem to be going steadily up in price, even before the current panic buying and leap in prices (but don’t buy at the top of the market pricing).

Gold and silver might also be a consideration.  If you invest in companies, try to choose companies who will have a viable business plan even if our currency shifts massively in value.

Article Series Continues….

This was the first part of our six part series on prepper economics.  Please do read on through the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy

May 152013
 
As part of the world's worst ever hyper-inflation, banknotes were thrown away in the streets as being worthless - Hungary, 1946.

As part of the world’s worst ever hyper-inflation, banknotes were thrown away in the streets as being worthless – Hungary, 1946.

This is the second of our six part series about prepping economics.  An index listing the other sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the first article and then reading your way through the articles in sequence.

Domestic Impacts of Dollar Problems

We considered some international vulnerabilities that could impact on our domestic economy in the first part of this series, and explained how much of this vulnerability is due to our currency being a fiat currency with no underlying real value to support it.

The second thing to consider is domestic risk.  What happens if people within the US stop accepting the dollar as a meaningful marker of value?  What happens if businesses start saying ‘We no longer accept dollars – we only accept Bitcoins or precious metals’?

We know some businesses that already deal exclusively in Bitcoins or precious metals.  Sure, they’re not mainstream businesses, and sure, there’s no immediate reason to think they are starting a trend that will explode to envelop the entire US economy.  And, most of all, these are actions that are being taken at present, while society remains functional and in place.

As for Bitcoins, we are concerned about the stability and legality of this ersatz currency, and just today (May 15, 2013) there is a news item indicating that the US Department of Homeland Security is taking action to prevent people transferring funds to one of the Bitcoin currency exchanges.  We don’t know nearly enough to have a comment about the underlying legality of the Bitcoin currency, but we are unsurprised to see the US government attempting to make it difficult for its citizens to use an alternative form of currency to store wealth and trade with.

Bitcoins are of course a very abstract form of money.  You don’t even get any certificates to show your entitlement – everything is computer based.  If the US Government shut down access to Bitcoin servers from the US, it is possible that you might have difficulty extracting your cash equivalent, and it is also possible that a concerned effort by eg the US and EU to constrain and control Bitcoin trading might see their value collapse, leaving you with little or no cash equivalent.

The bigger question is what happens to the dollar if we encounter a WTSHTF type event and have to live through a Level 2 or 3 scenario?

As we’ve discussed in other articles in our series on the economy after TEOTWAWKI, one of the almost immediate impacts of any WTSHTF event will be a massive change in the current balance between goods available for sale and money available to pay for them.

At present, we have a more or less balanced situation where there are sufficient products for people to buy when they need them, so the buyers of goods are happy; and there is sufficient money available for people to pay for the goods they buy, so the suppliers of goods are happy, too.  Any change in this balance will be very disruptive, causing prices to either skyrocket or plunge.

This is not just abstract theory.  We see it regularly every year with seasonal items like fruit and vegetables – prices go up and down with availability.  We’re also seeing it at present (and now for five months solidly) with the run on firearms and ammunition, the massively increased prices, and the disappearance of available items to buy.

Problem 1 – Shortage of Goods and Inflation

Very quickly after TSHTF, the supply of goods will dry up and disappear, meaning that whatever inventory of products remain will skyrocket in price/cost/value.

We will suffer a period of hyper-inflation, in other words.  One of the typical adjuncts to hyper-inflation is that the citizenry seek other forms of storing value, rather than in unreliable currency which buys less and less product every week, every day, and sometimes, in extreme cases, every hour.

Imagine a situation where you phone your local store and are told that potatoes cost $10,000 a pound, but when you get there half an hour later, you find the price has increased to $12,000 a pound, and while you are arguing about the price rise with the store manager, the produce department manager comes out and replaces the $12,000 a pound sign with a new sign showing $13,000 a pound.

Imagine a situation where hundred-dollar bills have so little value that you use them for toilet paper, because real toilet paper costs more than $100 per piece.

Imagine a situation where you literally need a wheelbarrow to take your money to the store to buy food.

These situations are, however, not imaginary.  They have happened in past hyper-inflation periods, particularly in Germany after World War 1 and Hungary after World War 2, but also in many other countries.

The best known example was in post WW1 Germany.  This was not the most extreme case of hyper-inflation, but is probably the best known.

In Germany, the price of gold increased by one trillion times in six years.  That’s a concept that is impossible to fully comprehend.  Imagine, six years ago, that you put a penny in a bank.  In our current situation, today that penny would still be worth right around a penny.  Try to comprehend if that penny was now worth $10 billion dollars.

Or, to look at it from another perspective, say that six years ago you had a total net worth of $500,000.  That’s nice to have – you’re not a gazillionaire, but you’re not poor either.  After inflation like in Germany, today your $500,000 would be worth literally nothing.  Less than one ten thousandth of a cent.

Heck, imagine you were Bill Gates, with a net worth of perhaps $25 billion six years ago.  Your fortune today would be reduced to 2.5 cents.

The worst month during Germany’s hyper-inflation was October 1923, when prices were doubling (and money was halving in value) every 3.7 days.  But don’t think hyper-inflation was only something that happened a long time ago, and could not happen in today’s world.  In addition to less extreme inflation, which remains commonplace, hyper-inflation has occurred in many other countries, subsequent to the German experience.  Strangely, nations and their economists and politicians seem unable to learn from the lessons of Germany.

In Greece, in October 1944, prices were doubling every 4.3 days.

Now move closer to the present day.  In July 1946, prices were doubling every 15 hours in Hungary.  In January 1994, prices were doubling every 1.4 days in Yugoslavia.  And in November 2008, prices in Zimbabwe were doubling every 24.7 hours.

Here’s a fascinating table of notable periods of hyper-inflation.

On last thing about hyper-inflation.  We said above ‘Strangely, nations and their economists and politicians seem unable to learn from the lessons of Germany’.  There’s actually a more sinister point here.  Countries do understand how to prevent hyper-inflation, and they also understand how to create it, and sometimes hyper-inflation is a cynical and deliberate act on the part of a government, to variously redistribute and destroy wealth, and to nullify all debt.

Problem 2 – Shortage of Cash (and Deflation?)

There’s a second – and opposite – part to the economic impacts from a WTSHTF event.  But we don’t think the two opposite effects will balance out, rather they’ll contribute to a total breakdown of our current economic system.

The chances are that most of the money you have is not in the form of cash and coins.  It is stored in a bank account, or maybe represented by a balance in a 401(k) or other retirement account, or in the form of bonds and shares.

Normally you could cash in or get a loan against your 401(k) account, you could sell shares and bonds, and you can withdraw cash from your bank – things you can conveniently do, whenever you like.  Most of all, just about anything you buy and pay for could be done with a debit or credit card, or – worst case scenario – with a check.  Many of us live in an almost cashless society these days – we don’t get paid in cash by our employers, and we don’t in turn pay cash for most things we buy.

How will this work after TEOTWAWKI?  All electronic and abstract forms of money will fail, because there will no longer be the functional computer networks to support them.  If a tree falls in a forest, does it make a noise?  More importantly, if the computer data recording the balance in your bank account disappears, do you still have any money!

Maybe you’ve seen what happens if a store loses power at present.  Typically they’ll stop selling goods, because their cash registers stop working and they can’t ring up the sales.  Smaller stores with simpler cash registers and without an integrated online inventory management/re-ordering system might still agree to sell you something, but only if you can pay cash, and only if it doesn’t have to be weighed, because neither their scales nor their debit/credit card terminals will work without power.

Now multiply that by the entire country, and you’ve a huge problem.  The bulk of everyone’s wealth is locked up in inaccessible abstract forms, or has been destroyed.

How long could you survive if you had to pay cash for everything, and if you only had the cash that you have with you right now – you could not get more cash from any sources?

This is a mutual shared problem.  You want – you need to keep buying food and other essentials.  At the same time, the people with things to sell still want to sell them, but if no-one has cash to pay for them, what do they do?

This is the point where future-tellers predict we’ll see two different solutions.  The growth in bartering, and the use of precious metals (or something else) as a replacement currency.

These Problems Aren’t Solely Due to Our Currency Being Fiat Based

In fairness, not all these problems would be avoided if our currency were representational rather than fiat based.  Sure, the value of the currency compared to other world currencies might be more fairly based, and definitely inflation would not be nearly such a problem, but these are only small parts of the disruptions and problems that will occur if society fails.

We’ll still have the biggest two problems – a collapse of manufacturing and distribution meaning that goods we need are no longer being made in sufficient quantities and can’t be shipped to us, and a loss of functionality for all electronic forms of cash.

So, whether our dollar continues to be fiat based (as it surely will be) or even if the government were to make it representational again, the biggest economic problems WTSHTF are unavoidable (for the country as a whole – you can individually act to minimize their impact on you), no matter what.

Implications for Preppers

Hyper-inflation is possible when you have a fiat currency, but not so possible when your currency is representational (see part 4 of the series for definitions).

Although inflation adds zeroes to the currencies every month or so when countries were struggling with hyper-inflation, the underlying relative values of ‘real’ things remained much the same.  A loaf of bread was always worth about the same as a dozen eggs.  An ounce of gold would consistently buy so many chickens, and so on.

People who store their wealth in fiat money lose every time the fiat money is devalued by inflation.  With even modest amounts of hyper-inflation, billionaires become paupers.

You can protect yourself against the ravages of inflation by storing your wealth not in fiat currency, but in things of real value – either goods and supplies and stores, or possibly precious metals.

Keep as little fiat money ‘cash’ as possible.  Store everything else in things of value – things that will either help you to survive, or things which can be used in trade.

One last interesting thought about hyper-inflation.  People who own money – whether in cash or in bank accounts – typically lose due to the money declining in value.  People who owe money typically profit greatly because the value of the sum they owe declines down to nothing.

For example, if you have a mortgage on a house, the value of the house will stay constant, but the value of the mortgage will drop and drop down to almost literally nothing.  Maybe it is a good idea to be ‘cash poor and asset rich’.

Article Series Continues….

This was the second part of our six part series on prepper economics.  Please do read on through the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy

May 152013
 
After a societal collapse, trade will be conducted in more primitive conditions, and will likely involve bartering (at least initially).

After a societal collapse, trade will be conducted in more primitive conditions, and will likely involve bartering (at least initially).

This is the third of our six part series about prepping economics.  An index listing the other sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the beginning and then working your way through the articles in sequence.

Most preppers will agree with the first two parts in this series, where we look at how present forms of money (ie US currency in both physical and electronic form) will cease to be useful after TEOTWAWKI.

Now for the big question.  What will replace it?  This is where people’s views diverge.  What will replace the current dollar currency, and how/when will that transition occur?  Two common answers are either ‘barter’ and/or ‘gold, silver, and other precious metals’.  So let’s now consider the benefits and challenges associated with bartering as a means of trading.

An important issue, which we’ve not looked at sufficiently in past articles on the general topic of economic issues after TEOTWAWKI, has been to appreciate that a post-WTSHTF economy will have two distinct parts to it.  The first is what we term a transitional period, the second is a more stable scenario moving forward from that.  We’ve considered the more stable future in earlier articles, but the period of transition is of great importance to us all, because that is where the greatest difficulties lie.

At the end of the previous article, we reached a point where a person has no money to buy the things which other people have to sell.  You’ve got a keen buyer and a willing seller, but no money to allow the transaction to occur and for value to be exchanged – for the buyer to give an appropriate thing of matching value to the seller.

How Bartering Should Work in Theory

This is where the concept of bartering arises.  ‘I’ll exchange my pound of meat for two pounds of your vegetables’.  Or ‘I’ll paint your house if you’ll repair my car’.  Or whatever else.

Examples such as the two above, showing how bartering works, makes it seem like a positive and very clearly understood proposition.  It is a direct exchange of goods and/or services between two willing participants, and there’s no dependence on any external factors such as money or anything else.

As such, bartering seems ideally suited for a ‘post-disaster’ type economy, because it is independent and does not require any external forces or factors.  So yes, in some situations, bartering can be an excellent way to conduct business.  But only in some situations, and as we’ll now see, these situations are probably very rare.

The Five Problems of Bartering in Reality

Unfortunately, bartering theory doesn’t translate well to the real world, and quickly you’ll discover there are limitations and problems with bartering.

Problems start when what you want to trade isn’t what the guy you want to trade with wants.  If you have eggs to trade and he has milk, that’s fine if he wants eggs.  But if he wants meat, and you don’t have meat, you’ll not be able to trade, even though he wants to sell milk, and you want to sell eggs.

There are five major categories of problems when it comes to real-world bartering.

1.  The (Double) Coincidence of Wants

This is the term economists use to describe the situation we just described.  You and the other person need to, by happy coincidence, each want the thing the other person wishes to trade.  If you don’t, then you can’t barter directly.  You need to invite a third person into the transaction, and hope that the three of you can now create a circular barter.  Maybe you need to add a fourth person, too.

Needless to say, the more people in the transaction, the massively more complicated it becomes.  And these more complex transactions lead to many of the subsequent problems becoming apparent, too.  Let’s next consider :

2.  Lack of a Common Measure of Value

Maybe, most of the time, you with your eggs and your neighbor with his milk can swap one product for the other, and you’ve worked out an agreed value that each quart of milk is worth a dozen eggs.  Each time you meet, you hand over your dozen eggs, and he hands over his quart of milk, and there’s no need for any extended or additional bargaining.  You both also have some predictability – you know how much milk your eggs can be traded for.

But what happens if your neighbor says ‘Hey, Bill, I’ve still got your eggs from last week, but if you get me a pound of meat, I’ll swap that for the quart of milk you want’?

Your first problem is to decide if a quart of milk fairly equates to a pound of meat.  Your second problem is now finding a person with meat to sell, and having him agree that a pound of meat equates to a dozen eggs.  Maybe the meat guy doesn’t much like eggs, and says ‘I’ll only give you half a pound of meat for a dozen eggs’.  You go back to your neighbor and say ‘Hey, the meat guy would only give me half a pound of meat for my eggs, so here’s the half pound, can I have my quart of milk’.  But your neighbor says ‘No way – when I trade directly with the meat guy, I always get a full pound of meat for my quart of milk.

This problem is expressed as a lack of a common measure of value.  You’ll end up having to keep a huge table in a spreadsheet program (assuming you have a computer that still works!) which lists all the different trade items in your community and their respective value in terms of all the other trade items.

If you do that, you’ll find many anomalies such as the example we just walked through.  In the modern world, such anomalies are often described as ‘arbitrage’ – the ability to buy something cheaply somewhere and then sell it for more money somewhere else without having added any value in the middle.  In an ‘efficient’ market where all buyers and sellers understand the respective value of all things, such anomalies are unlikely to occur, but bartering is not an efficient market and you’ll end up with crazy seeming situations such as the eggs/milk/meat example.

The unpredictability of costs and values makes it very hard to make appropriate buying and selling decisions and harms everyone involved.

3.  Trades of Unequal Value

Maybe you keep pigs and your neighbor keeps cows, and you decide to swap some pigs for some cows.  You want a cow to get some milk, and your neighbor wants to start raising pigs.

In the past, it seems that generally two cows are being traded for five pigs.  But you only want one cow.  How do you give your neighbor two and a half pigs?  You can’t – you either have to give him two or three.  You can’t swap five pigs for two cows, because you only have four pigs in total (and don’t want/need two cows either).

This is because the pigs and cows are indivisible (assuming they are alive), and that is the third of the problems with bartering.  If you’re trading grain for milk, it is easy, because both milk and grain are easily divisible into small quantities, but if the things being exchanged can not be split into small amounts, how do you handle that?

4.  Problems Storing Wealth

Let’s go back to the example of you trading eggs for other things.  Maybe you want to save up for a new tire for your tractor, and maybe that will cost you 2,000 eggs.  Okay, you can do that, but perhaps it will take you 25 weeks to accumulate that many eggs to then trade for a tire.  No problem – you have to patiently wait half a year to have the eggs sufficient to pay for the tire, right?

Wrong.  Because after only a couple of weeks, the eggs start spoiling.  You can’t accumulate and store wealth using a perishable product.

Another example of the difficulty of accumulating wealth would be if the product you are selling is your personal skill, expertise, and labor.  If you haven’t sold each day of potential work, there’s no way you can save it up and sell it the next day.

Even if you do have a problem that has some longevity associated with it, perhaps it is bulky or requires special (expensive) storage.

The difficulty of storing wealth is the fourth of the big five problems with bartering.

5.  Problems Transporting Wealth

Today, we all have credit and debit cards in our wallet that probably at any time can support purchases of some thousands of dollars.  Maybe we also carry a checkbook with us, and maybe our wallet is bulging with $100 bills, too.

Transporting wealth is easy in the present world.

How will this work in a future barter driven economy?  If you are a farmer selling cows, you have to take your cows to the market, and any you don’t sell, you have to take home again.  Clearly you can only go to local markets.

At least the cows can walk.  What say you are selling eggs or milk – how will you take this to trade with (remembering the milk needs to be kept cool, and the eggs treated gently)?

For a more extreme example, maybe you are going to sell the manure from your farm animals.  How do you transport that?

Of course, you always have to transport the goods you are selling, but it is one thing to take whatever it is you are selling on a one way journey to the person who has purchased the goods (and/or maybe he even collects them from you), but what say you are just going to the local store to buy some miscellaneous items.  Today, you’d have cash and plastic.  But in the future, do you always have to have half a dozen animals traveling with you, just in case you decide to buy something unexpected?

Addressing the Limitations of a Bartering System

Don’t get us wrong.  When you and your neighbor can conveniently swap eggs for milk across your shared fenceline, bartering is great.  We’ve all swapped things in the past, and it sometimes works well.

But these are infrequent exceptions.  Most of the time, for most transactions and requirements to buy and sell, bartering is nothing less than a full-out disaster that interferes with every aspect of what should be a smooth and productive, predictable transaction.

Inevitably, sooner or later, your community will start to address some of the limitations of a bartering system, and equally inevitably, out of this process, little by little, will evolve a common and convenient ‘medium of exchange’ – what we know of as money.

Implications for Preppers

We don’t know how long an interim period of bartering may last in a Level 2 or Level 3 situation.

Because all transactions necessarily involve a willing buyer, a willing seller, and a mutual agreement, you can’t unilaterally insist that instead of a barter transaction, the other person accept your valuation of what his goods equate to in bullion or any other abstract thing, and it will probably take time for a consensus about the appropriate values of precious metals to settle.

If you have any flexibility in considering both the types of things you will stockpile to use as trading goods in the future and also the type of ongoing ‘value creation’ you will conduct (ie what you’ll grow or raise, the types of services you’ll offer) we suggest you consider the implications of how readily such things can be bartered.

You should choose items that are not only desirable to buyers, but also ones which can be divided into small amounts and which can be readily transported (ie high value per pound/cubic foot) and which can be stored for a long time.  These will be better barter goods than items with opposite characteristics.

A definite opportunity will exist in your community to provide what would first be little more than a market – a meeting place for people to barter and exchange things, and which could then evolve to offer additional added value.  You could perhaps create the first form of local currency – market credits that could be used by buyers and sellers to transport value from one transaction to the next.  These would start off as little more than IOUs which you could consolidate, so that if a person wanted something, they could see what IOUs were already out there.

You could also either provide a published set of ‘cross-trade’ rates to help buyers and sellers minimize some of the contradictions that would appear (see our example of this in problem 2 above), and/or you could profit by exploiting such discrepancies yourself.

Becoming the community’s new banker – if done fairly – would win you the appreciation of everyone involved, because you’d be helping everyone to trade more efficiently and effectively.

Article Series Continues….

This was the third part of our six part series on prepper economics.  Please do read on through the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy

May 152013
 
Even the simplest societies quickly migrate to the use of money to represent wealth.  It is certain this will happen after TEOTWAWKI, too.

Even the simplest societies quickly migrate to the use of money to represent wealth. It is certain this will happen after TEOTWAWKI, too.

This is the fourth of our six part series about prepping economics.  An index listing the other sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the beginning and then working your way through the articles in sequence.

So far in this series, we have discussed how US currency is unlikely to be accepted in commerce during a Level 2 or 3 situation.  We then moved forward to consider the suitability of barter an alternate way to support the necessary buying, selling, and trading of goods and services in whatever communities of surviving people you can interact with.

Bartering has some benefits, but is replete with many challenges and limitations.  Because of this, it seems inevitable that any community will evolve past simple bartering to more sophisticated bartering where not only goods and services are exchanged, but abstracted forms of these start to be accepted as well – IOU notes, if you will.

Soon the IOU notes will start to be traded without actually being cashed in.  Perhaps you first wrote an IOU for ten dozen eggs to Mr A.  Mr A is then buying some meat from Mr B, and says ‘I’ll give you this IOU for ten dozen eggs’ in payment for your meat.

Mr B does not come and ask for his eggs.  Instead, he passes the IOU on to Mr C when he buys butter from Mr C, and of course you hope that eventually the IOU will end up lost or so damaged as to be destroyed, so that you never need to make good on your original promise!

These IOUs are not without problems.  For example, if you write out an IOU for ten dozen eggs, how can the holder of that note then split it, giving an entitlement to six dozen eggs to one person and four dozen eggs to another, and so on.

Furthermore, while it is good, from your perspective, that you avoided having to pay the ten dozen eggs on the spot, you now have the obligation to deliver ten dozen eggs to someone hanging over your head.  Sooner or later, someone is going to appear and ask for the eggs.  Does that mean you now have to keep ten dozen eggs set aside at all times just in case someone arrives, asking for them?

Eventually these IOUs for all sorts of different things will be superseded by a different form of IOU – what we would consider to be money.

Please now read on for how we see this evolution of money as continuing.

The Simplest Form of Money

If we track the evolution of currency in earlier civilizations, we can see a common process that seems to consistently occur.  It seems very likely to expect a similar evolution as we attempt to rebuild from some sort of disaster and the social collapse that occurred.

Money started off as being some thing of value which was then used as a ‘medium of exchange’ as well as for its primary purpose.  This is termed ‘commodity money’.

This thing of value is something which is clearly understood and accepted in the community as being valuable, and it presents as a reasonable solution to most of the limitations of barter.  It is something that can be stored for an extended time, it is something that is sub-dividable, it is something that is easy to transport, and it has a clear value that people can agree on, and is readily bought and sold.

Maybe it might be decided that your community’s currency will be in the form of sacks of grain.  This would not score high marks for transportability, but it does reasonably well on most other headings, and as for the transportability, before too long, some clever person will say ‘Hey, Joe, you don’t need to come clear in to town to buy grain, then take it all the way home to store, then bring it all the way back in to town to buy things at the market.  I’ll store it for you, and you can just give people notes authorizing me to hand over shares of your grain to them.

All of a sudden, you’ve got the community’s first new style bank, and you’ve got the bank also allowing you to ‘write checks’ on your account.  And when the banker realizes that people never need all their grain at one time, and that he can therefore issues IOUs to people for grain that he doesn’t actually have, your bank will have started creating/lending money, too.

Gold has historically been an excellent form of commodity money because it addresses all the problems with barter.  It is easily transported, stored, and sub-divided, and has an underlying value in and of itself (at least in normal and historic times).

An Evolutionary Step

The next step beyond commodity money is representational money – the IOUs and checks that we have been talking about, and then becoming more sophisticated into a more generic form of underlying value.

This is where a banknote (for example) is issued that can be exchanged for the underlying commodity.  The banknote might say ‘this is worth an ounce of gold’ or it might say ‘this is worth a dollar’ and the value of gold in dollars would be fixed, making it the same as the note simply saying what weight of gold it was the same as.

Representational money can be even more convenient to store and transport and subdivide than commodity money.  It can be used alongside commodity money – ideally there’d be no major difference between getting an ounce of gold and a note that was worth an ounce of gold, and indeed, this is what happened in historic times, when there might be simultaneously coins that were commodity money (ie the value of the coin was reflected in the value of the metal that was used to make the coin) and representational money in the form of banknotes.

A problem with representational money is that it is susceptible to being counterfeited.  Commodity money can not be readily counterfeited, because the value of the money is the same as the value of the thing which is being used as money.  Commodity money can be slightly cheated on by reducing the weight or measure or quality of the commodity, and these types of considerations impact on what types of products are suitable to be used as commodity money.  However, other than small fractions shaved off, or quality issues, commodity money is self-referential and establishes its own validity and value.

But representational money usually has little or no underlying value in and of itself – its value is its promise that it can be converted to the thing it represents.  This means that if it can be duplicated – ie, forged, there is a potential problem that needs to be countered by making the representational form as difficult to copy as possible.

The key thing about commodity money and representational money is that it is difficult for a person to spend money they don’t have.  In theory, a bank or government should not issue bank notes worth a greater amount of gold than the gold they had in their vault.

In practice, of course the banks and/or governments would typically issue more, gambling that it would never happen that everyone would want to convert their banknotes into actual gold at the same time.  But, even after allowing for that, there are practical constraints on how much representational money could be fairly and responsibly introduced into circulation.

Hyper-inflation would never be possible with representational currency.  On the other hand, some economists argue that deficit spending (ie spending money you don’t have and which doesn’t otherwise exist) is the best way to stimulate an economy, even though this will probably involve the creation of inflation as a result.  Which brings us to the next step :

The Ultimate Form of Currency?

It has been common for governments, for either good or bad reasons, to seek to free themselves of the limits on how much money they can create that are imposed on them by representational money’s need to be linked to an appropriate supply of the thing the money represents and can be converted into.

So governments switch to issuing fiat money, where money is worth whatever the government says it is, but the government doesn’t undertake to convert the notes into a specific thing of value on any basis at all.

Fiat currencies are only as stable as the governments that support them, and as part of the government’s attempts to strengthen the essentially weak currency, they will commonly attempt to limit or restrict the ability of their citizens to use alternative forms of representational currency; indeed, the US itself has an ongoing history of cities and private individuals attempting to create alternative forms of currency, and of the federal government attempting to prevent such measures.

At this point, if you’ve not yet read the first two articles in this series, it might make sense to do so.

Implications for Preppers

It seems economically inevitable that social groupings will agree upon – either formally or informally – some type of commodity currency as they evolve to address the limitations of simple bartering.  It is possible that different communities will adopt different commodities as their monetary unit.

A community with most of its economic activity being in the form of potato growing might choose pounds of potatoes as a measure (not a good measure, by the way, because how do you adjust for the quality of the potatoes).  Another community might be wheat based, and so on.

There’s no easy way to prepare for this step in your community’s economic evolution, other than to be a positive agent of change to encourage the adoption of commodity currencies and to help the commodity evolve from being actual goods and services to things of more abstract value such as gold and silver, which you may already have a supply of.

There is clearly an opportunity for some people in the community to start providing banking services, and if you are a respected member of the community, maybe that could be you.

Article Series Continues….

This was the fourth part of our six part series on prepper economics.  Please do read on through the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy

May 152013
 
This silver dollar banknote was redeemable for a 'real' silver dollar.  The notes were withdrawn in 1964 and modern fiat banknotes can not be redeemed for anything at all.

This silver dollar banknote was redeemable for a ‘real’ silver dollar. The notes were withdrawn in 1964 and modern fiat banknotes can not be redeemed for anything at all.

This is the fifth of our six part series about prepping economics.  An index listing the other sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the beginning and then working your way through the articles in sequence.

In the response to a Level 2 or 3 situation, we agree that we will first see simple bartering and many different products being used as mediums of exchange, even within the same community.

Mediums of exchange will evolve to commodity currencies, and then the next big step will be from commodity currencies to representational currencies.  We do not see the ultimate step – to a fiat currency – as likely to occur until such time as there may be a solid national government back in place again.

We guess that regular (ie post-collapse) US currency will be rejected, not only because it is a fiat rather than representational currency, but also because the societal collapse will have people feeling betrayed and let down by the government and unwilling to honor the government by trusting in the value of its money.  It only takes a few people saying ‘I don’t want those banknotes, because I can’t eat them or spend them’ for the confidence in the US currency to implode.

Precious metals, on the other hand, have always had a slight ‘anti-establishment’ feel to them, and also, whether deserved or not, have been widely perceived as being of lasting and real value.

The Role of Gold, Silver, and Other Precious Metals

Just like how the value of fiat money is based solely on people’s willingness to accept its value, if enough people say ‘gold is a reliable and trustworthy form of commodity or representational money’, then it will become exactly that, in a form of self-fulfilling prophecy.

Gold is something that has long been recognized as valuable and suitable as both a commodity and representational currency, for thousands of years into the past.  So in selecting gold (and other precious metals) as a currency WTSHTF there is the expectation in people’s minds that ‘when things get back to normal’ the gold will continue to be of value in the future, too.  The value of other things may change enormously, but people would reasonably assume that even in worst case scenarios, gold will always have some substantial residual value.

Countries and banks may fail, currencies may boom and bust, but gold has always held substantial value.  Sure, the price of gold has gone up and down over the years too, but it has never collapsed down to near zero, and even when going up or down at its fastest rates, it has still been comparatively stable.

However, using gold as a currency in a small community has two problems associated with it.

First, to start with, the community might not have much gold.  How much physical gold does a normal (!) person have in their home?  Maybe a ring or two, some gold chain, and perhaps other jewelry, but in total, probably no more than an ounce.

In a post-WTSHTF society, some people will find themselves asset rich (the farmer with some livestock, for example) and other people might own sizeable gold holdings, whereas other people might have neither.  So there’s a total disconnect between the tangible assets and wealth of a community and its gold holdings.

This would mean that in one community, gold has a much greater (or much lower) purchasing power than in the next community.  If one community has, for example, ten tons of food and ten ounces of gold, and another community has one ton of food and one hundred ounces of gold, it should be obvious that an ounce of gold will buy a great deal more food in the first community than the second.

This leads to the second part of the problem.  There’s your first community with its ten tons of food and ten ounces of gold, and it has ended up with an equation that an ounce of gold equates to a ton of food.  But there’s your second community, which has balanced out that an ounce of gold equates to 20 lbs of food.

So what happens when the two communities come in contact with each other?  A person in the second community will travel to the first community, and will say ‘Hey, I’ve got ten ounces of gold, I’ll buy all your food’.

Even if the new equation is that 20 ounces of gold equate to ten tons of food, all of a sudden the people with gold in the first community have seen its purchasing power halve, purely because a person from the second community came along with some of his ‘cheap’ gold and upset their local market.

And the people with food in the second community, who have been able to get an ounce of gold in return for just 20 lbs of food, now find they have to give away a great deal more food to get another ounce of gold.

This is the real problem of using a currency form that is unrelated to the wealth and economic base of the community which uses it.

Longer term, of course, as small communities link up economically, there will be a smoothing and averaging out of the purchasing power of gold.  Gold has worked fine for large communities (ie countries) that have slowly evolved their economies and only slowly adjusted their gold inventories, but in a fragmented and suddenly formed new social situation after a major collapse in our present society and its economy, there is no obvious ‘proper’ value point for gold to start at.

There’s another issue as well.  In the early days of recovery after some sort of collapse, with people desperate for life’s essentials, which community has the greater true wealth?  The one with ten tons of food and ten ounces or gold, or the one with one ton of food and one hundred ounces of gold?  This moves us back to the fact that – in simple terms – you can’t eat gold.  Its value is an abstract value rather than an ‘essential to basic survival’ value.

This doesn’t invalidate gold as a currency, it merely means that its purchasing power may shift substantially depending on a community’s needs.  You should not expect gold’s purchasing power to be the same after a collapse as it is now.

Does that make gold (and other precious metals, too) a good or bad form of investment?

Some people might argue that whether good or bad, it might be necessary to have some precious metal stored so you have some ‘universally exchangeable currency’, no matter what its value might be.  That’s certainly true, but whether you should prioritize building up your bullion stocks before you build up your food stocks – that’s a point we’re not so sure about!

The Ultimate Evolution of Currency?

Our prediction is that while gold might continue as a representative form of currency, the thing of value which it represents will change and will become a true value constant that accurately reflects the ‘wealth’ and economic situation in societies.

Some people have predicted that a future currency will be based on units of labor – hours of work.  This is possible, but how do you equate an hour’s work on the part of a heart surgeon compared to an hour’s work on the part of a trainee street sweeper?  Some idealists would say that an hour of time has the same personal cost to the person spending that time, no matter what they are doing, and that is of course true.

But from a value-to-society and an overall economic contribution point of view, it is clear that some hours from some people have greater overall value than other hours from other people.  Can you imagine the complexities of trying to set relativities between different types of work?  They would be reminiscent of the challenges in the bartering field, trying to equate the values of every product in terms of quantities of every other product.

Food is another possible semi-universal measure – maybe the currency could be based on caloric content of food.  But this too is more complicated than it might first appear to be.  For example, how to adjust for the fact that some food is much ‘nicer’ than other food, even though the calorie content might be the same?  Indeed, think of some of the most valuable food items – spices – they provide almost zero calories, but are sold sometimes for hundreds of dollars a pound.

Consider also that the underlying cost of providing 1000 calories of beef is much greater than the underlying cost of 1000 calories of pork or chicken, and the underlying cost of providing 1000 calories of vegetables is lowest of all.

Clearly, food is a difficult thing to base a universal currency on as well.

A Universal Underlying Currency Base

There is one thing that is relatively easily measured, and which has similar value to everyone.  Energy.

We take energy for granted in most of our lives at present.  Sure, we grimace when gas goes up in price, and our electricity bills always seem to be more than we’d think.  But in both cases (and in most other cases too) we are typically paying maybe only one tenth the true cost of the energy we consume (that is why new sustainable energy sources are so expensive, because in such cases, we have to pay all the costs).

In a difficult future, energy costs will skyrocket.  In part, this will be because there will no longer be conveniently subsidized energy sources.  All petro-chemicals are ‘subsidized’ by our not having to pay the ‘cost’ of growing the trees, thousands/millions of years ago, nor do we pay the ‘cost’ of allowing them to slowly transform to hydrocarbons.  In addition, most renewable/sustainable energy sources have major government subsidies.

In the future, energy costs will increase in part because all energy will be in short supply, and the law of supply and demand will push up the cost of what energy is available.  In additional part, energy costs will increase because future energy will be produced in less efficient and less automated forms, with higher costs of production.

Energy has been one of the key limiting factors of any civilization, and the growth of civilizations can be tracked in part by their growing energy use.

Energy is also a key cost of anything and everything we need to live.  You might think ‘there’s no energy being used when I grow potatoes in the garden’ but you’d be wrong.  True, there’s not a lot of energy being used (which is part of the reason why potatoes sell at retail for as little as 10c a pound!) but there has been some energy used, even if it is just your personal energy (and the more you work, the more you eat), to plant the potatoes, to water them (where does the water come from – does it need a pump, for example?), to fertilize them (where does the fertilizer come from?), to take them out of the ground again, to store them, and to transport them to market.

A currency based on energy is one which truly is the great leveler.  There can be no arguments about ‘my energy is more valuable than yours’ because one of the great things about energy is that it is all the same.

Sure, there are lots of different units which are variously used to measure energy – ergs, horsepower-hours, BTUs, therms, calories, joules and foot-pound force, to name just a few.  But they can all be converted from any measurement system to any other measurement system using simple arithmetic.

Energy is also infinitely subdividable.  It is possible to trade energy in small or large quantities.

The other good thing about energy is that if energy becomes more abundant and less expensive, then so too does everything else.  Maybe the relationship isn’t a direct one to one, but the two are linked.  With gold, a change in the quantity of gold in an economy may change values, but only artificially, not as a direct consequence of the increased amount of gold present.

About the only weakness of energy is that it is hard to store.  How do you store electricity?  How do you store sunlight?  Or wind?  For all intents and purposes, you can’t, which is part of the complexity inherent in matching a country’s electricity supply capabilities with its demands.

But because energy is being consumed all the time, generally there’s an ongoing flow of energy into an economy and an ongoing demand and consumption of the energy going into the economy, and particularly in the first phases of a recovery from a disaster, there will always be greater demand than supply.  In other words, although it is difficult to store energy, there is unlikely to be any need to do so for a long time after any economic recovery starts to proceed.

So, circling back to our example of the distorting effect when more gold is brought in to an economy, upsetting the value of things but not actually growing the economy, this problem is also reduced if the currency unit is energy based.  No-one can object to having more energy brought into an economy and society, because everyone benefits.

So, our prediction is that if logic is to prevail (and that’s a huge big proviso, of course!) we foresee a future society where the representational unit of currency is based on an underlying quantity of energy.  Maybe the currency is in the form of gold, in which case the value of gold would be expressed not as an abstraction (ie a certain amount of fiat currency), and not as a supply/demand variable amount of any particular item, but rather as a quantity of energy.

Implications for Preppers

On the face of it, energy is an excellent thing to stockpile for the future.

Unfortunately, it is not easily stored – liquid fuels need annual stabilizing treatments and even then only have a life of perhaps ten years or so.  However, there’s an ‘upstream’ consideration – a much easier thing to stockpile might be the means to generate usable energy in the future – solar cells and solar heaters, wood fired boilers, gas making equipment, wind turbines, and so on.

Photo-voltaic cells in particular have extremely long lives, particularly when kept in storage.  With pricing currently at amazingly low levels (it seems the Chinese government is enabling Chinese companies to sell them into the US at prices well below cost) it might be a good time to stock up on some of these, and the associated controllers.

Article Series Continues….

This was the fifth part of our six part series on prepper economics.  Please do read on through the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy

May 152013
 
Gold coins like this 1/10th ounce coin (currently worth about $150) make convenient ways of exchanging widely accepted value as part of buying and selling items.

Gold coins like this 1/10th ounce coin (currently worth about $150) make convenient ways of exchanging widely accepted value as part of buying and selling items.

This is the sixth and final part of our series about prepping economics.  An index listing the previous sections is at the bottom of this article, and if you’ve arrived here directly by following a link, you might want to consider starting at the beginning and then working your way through the articles in sequence.

We’ve written before to recommend you should stock up on long-lived supplies that are easy to store and have a high value per cubic foot of storage space – both for your own needs and then, beyond that, as trading goods.  In the previous part of this series, we recommended having a stock of energy generating equipment as a trading good, too.

Essential supplies will skyrocket in value in a Level 2 or 3 situation.  Never mind what you might barter or trade/exchange them for, the key thing is that if you have valuable things, you’ll be ‘wealthy’ in such situations.

But there will be times when you need to buy things and you can’t trade things you already have for what you want to get (because they guy selling what you need has no interest in the things you have for sale).  In such cases, a supply of gold would probably be our first choice as an alternate form of wealth/value to use for trading.  Frankly, we’d prefer silver, but gold is more likely to be universally accepted.

Gold and Silver – Which is Best?

The problem, such as it is, with gold is that at current prices, even a small piece of gold is worth a lot of money.  A single ounce is about $1500 at present, and even a tenth of an ounce is therefore $150.  Although there are some ridiculously small gold ‘bars’ all the way down to 0.1 gram pieces (about 1/300th of an ounce, with about $5 of gold in it) the problem with these small-sized pieces is that the cost of production adds greatly to the cost.

For example, on the same day that we could buy a kilogram of gold for $46,583.08, a single gram was selling for $58.83.  So $46.58 of the $58.83 relates to the value of the gold, but the other $12.25 relates to the cost of processing the gold to the smaller value piece.  That’s a large surcharge – more than 25%.

On the other hand, a 100 ounce silver bar is selling for about $2520, and a one ounce round is selling for $25.74.  The value of the silver in the one ounce round is therefore about $25.20, so you’re paying a much smaller premium for the convenience of a low denomination piece of money (about 2% instead of 25%).

Furthermore, the $25 silver round is a sensible sized coin, weighing an ounce.  The 1/30th ounce (ie 1 gram) $50 piece of gold needs to be protectively housed inside a plastic case and is tiny and fragile (and easily lost).  And a tiny 1/15th gram piece (about $10 in value) measures a mere 0.1″ x 0.2″ – little bigger than a fleck of dust.  For low to moderate sums of money, silver coins just make better sense than gold coins.

Our guess is that people will fix on the desirability of gold and have a better understanding of gold prices.  They may not have as clear a perception as to what silver is worth, and so silver values might vary more unpredictably than gold values.

On the other hand, maybe most communities will have an exchange where a dealer will buy and sell gold and silver and convert it consistently based on that local community’s economic balance.  So perhaps you should have some one ounce silver rounds for lower value trading (currently about the same as $25), and some 1/10th ounce (or 2.5 gram) gold bars for higher value trading (currently about $150).

In What Form Should You Buy Your Precious Metals

Generally you can choose various different forms of silver and gold bullion, and different issuers.  Some forms are official coins, others are just plain bars and ’rounds’ ( a term used to describe things that look like coins, but which have no official monetary value in any country).

There are slight differences in the different types of bullion and where they are made, but sometimes big differences between bullion and officially issued coins (the official coins being more expensive).

Some coins are also valued much higher due to having collector/rarity value.

Rarity value and collector appeal may be a factor in today’s current valuations, but in a post-collapse economy, gold and silver will be simply worth what it is worth, based on the weight of the metal alone.  Any rarity or collector value will be erased.

That’s not to say that there might not be small differences in values.  If something looks more impressively official and credible, it might be slightly preferred and have a slightly higher value.  If you think that sounds far-fetched, we’ve traveled in countries that will pay more if you are exchanging crisp new unmarked unfolded US $100 bills than if you are exchanging older worn marked ones.  Sure, in the US, all $100 bills are worth the same, but in some other countries, the more worn it becomes, the less valuable it is.

So our guess is the best types of bullion are ones with lots of official stamps and seals and assay marks on them, making the items appear more official and more reputable.

Other Precious Metals and Diamonds

What about diamonds and other precious metals?  Should you invest in those, too?

We don’t think diamonds are a good investment, because it requires specialty knowledge to assess the value of a diamond.

This makes it is much harder to predictably trade in diamonds than in gold.  Within reason, if you have an officially marked piece of gold bullion, then its value and quality is self-evident for all to agree upon.  But with a diamond, who is to say how it scores on the four or five ‘C’ scale (cut, color, clarity, carat and quality), and even if you can agree on its rating, there is no common value ascribed to each aspect of the rating.  Furthermore, the scales aren’t linear.  A two carat diamond is worth more than a one carat diamond (assuming the other factors are the same), for example.

Diamonds are also not a ‘liquid’ form of investment – in other words, it is hard to find someone to buy your diamonds when you want to sell them.  With gold, the transactional cost of buying and selling it is reasonably low, but the cost of buying or selling a diamond can be very high – you might be lucky to get half its notional value when you sell it.

There are lots of other precious metals, but some of these are more properly described as ‘expensive’ rather than precious, and their value relates to their scarcity compared to society’s consumption of them in (typically high-tech) manufacturing processes.  Such value premiums would disappear when the manufacturing stopped (ie in a Level 2/3 crisis).

The only other moderately common metal for investing is platinum.  We occasionally see palladium investing too, but ask yourself the question – if someone approached you with a palladium bar, would you know what it was or what it was worth?  Probably not!

The same is also substantially true of platinum.  Platinum is currently trading at prices very similar to gold, which begs the question – why trade in platinum when you can as readily trade in gold?

In terms of popularity, everyone understands and likes gold, many people understand and like silver, but almost no-one understands or likes palladium (do you even know what color it is?), and somewhere between silver and palladium you’ll find platinum.

Keep it simple.  Get gold as your first choice, and silver as your second. The only other things you should be investing in are ‘real’ things – stores of goods, rather than abstract representations of money/value such as precious metals.

Measuring Precious Metals

Note that gold is weighed in either grams or troy ounces.  A troy ounce is not the same as a ‘regular’ ounce.  There are 16 regular ounces in a regular pound (also termed avoirdupois), with a pound weighing 453.6 grams and a regular ounce weighing 28.35 grams.

There are 12 troy ounces in a troy pound.  A troy pound weighs 373.2 grams, and a troy ounce weighs 31.10 grams.  Make sure you understand what type of ounces you are dealing with, and don’t be tricked to weigh gold with a regular set of scales, because a regular ounce is about 10% lighter than a troy ounce.

Yes, all a bit confusing, and for that reason, maybe it is easiest to use metric measures.  Unlike liquid ounces, troy ounces and avoirdupois ounces, a gram is a gram is a gram.  Always.  🙂

Note also that gold bullion is 99.99% pure gold, also termed 24 carat.  Most jeweler’s gold is mixed with other metals to make it stronger, and perhaps also to make it cheaper.  It is common to see gold jewelry with purity levels from 22 carats down to 10 carats, so if you are dealing in gold jewelry, you need to understand not the weight of the item, but how much of the item’s weight is actually valuable gold, compared to comparatively worthless ‘base’ metals.

Note that jewelry is commonly sold for a great deal more than the underlying value of the gold in it.  This represents its value as a crafted item of beauty.  But its underlying value, for gold bullion trading purposes, is only that represented by the raw gold in the piece, with no allowance given for beauty or anything else.

On the other hand, gold coins usually have a very low value stamped on them.  A US Double Eagle coin, for example, shows a face value of $20.  But it has 0.9675 ounces of gold in it, so its value as bullion is much greater – about $1450 today.  The more modern Gold Eagle coin shows a value of $50 on it, but it contains 1.0909 troy ounces of gold, which is valued at about $1640.

Where and How to Buy Bullion

You can buy gold and silver on eBay, on specialty websites, and direct from retail stores, pawn shops, and a miscellany of other places too.  You can even attempt buying metal directly from people (ie old jewelry in particular) by placing ads on Craigslist and other similar places.

The first thing to be sure of is that you want to have the actual physical ownership of the metal you are buying.  Some investment oriented companies are designed so that you never need to go to the expensive bother of having the metal shipped to you, of having to then safely store it, and the subsequent expensive bother of having to ship the metal on to whoever you sell it to in the future.  Some of these companies at least designate specific pieces of real gold as being yours, others give you notional ‘paper gold’ rights, exposing you to great liability if the company does not or can not honor your gold rights in the future.

If you are a gold trader, these arrangements are excellent.  But, you’re probably not a gold trader.  You’re a gold investor and hopefully a gold owner. WTSHTF, how likely do you think it is that you’ll be able to call your investment broker and ask them to ship you the gold you own but which is stored on the other coast (or even in a foreign country)?  That’s truly not going to happen, for lots of different reasons, all of them bad!

Now, about the other places where you can buy gold and silver.  You need to be sure that your funds are not at risk – in other words, the ideal situation is you handing your cash to the person you’re buying the metal from at the same instant they hand the metal to you.  That way, there’s no risk to you.

If you are dealing with a company in another state, they will of course want to get your money before they send the metal to you, and if you are paying by personal check, they’d be very prudent to wait until your check had cleared.  But think about that – they don’t even start to activate their ‘we’ll send you your gold real soon now’ promise until after you’ve lost any chance of stopping the payment you sent them.  You then have to anxiously wait until the product not only ships but eventually arrives safely.

Lots of people do this every day, of course, we’re simply saying be careful to choose a reputable dealer when you’re buying metal on this basis.

Every day, the spot price for gold and silver is posted, and that is used as a base for most bullion sales.  However, you’ll quickly notice that you can almost never buy gold and silver at this price – you usually pay a little more, and you can also almost never sell gold and silver at this price – you usually get a little less.  That’s much the same as buying foreign currency – there’s a buying and selling rate, and sometimes other fees as well.

This stands to reason when you think about it.  How would the gold dealer you bought your bars from make money if he didn’t add some sort of extra sum to the underlying cost price of his gold?  Plus someone has to pay for the gold to be insured and shipped to you, too.

It isn’t just that.  Those spot prices assume you are buying in bulk – with the standard size large bar weighing 400 troy ounces, about the same as  27.5 lbs.  At $1500/ounce, that is a $600,000 item.  (Just for the record, standard sized 400 ounce bars can actually vary in weight by as much as 10% above or below its standard weight, but the exact true weight is stamped on each one.)

If you are buying smaller pieces – for example, one tenth of an ounce bars – the manufacturing costs to make those bars are much more appreciable than then are for a 400 ounce bar.  Of course it takes much more cost to make 4,000 small things than it does to make one large thing.

There is definitely an economy of scale concept that applies to gold.  Bigger bars have an underlying cost per ounce that is closer to the notional posted price per ounce.

The economy of scale concept also applies to buying in bulk.  If you buy ten or one hundred bars or rounds, you’ll probably get a better price than if you just buy one.  The dealer probably takes no more time to process an order for one hundred bars as he does for one, and the shipping isn’t one hundred times more expensive, and so on.

Our point is that you shouldn’t feel that you’re being taken advantage of when you pay over the posted price per ounce for your gold.  Yes, you want to pay as little over the posted price as possible, but you need to realize that you will pay some amount more.

Generally the best thing to do is to buy large quantities on fewer occasions, but an exception to that might be if gold is doing one of its crazy climbs in value – in that case you might want to buy more regularly – indeed, you might agree with your dealer that you’ll buy small amounts of gold regularly, but at a higher volume price to reflect your ongoing purchases, and only shipped to you on occasion rather than every time, so as to save on shipping too.  Remember, everything is always negotiable, even the price of gold from your favorite dealer.

Now, although we’ve said you should expect to pay a little more than the underlying gold cost, you don’t want to go crazy and happily pay a lot more than the underlying gold cost.  We’ve seen eBay auctions that are selling gold at ridiculous surcharges – they hide the true cost of the gold by quoting in grams rather than in ounces, and they talk about lots of pieces of gold and many grams, all for ‘only’ whatever the total price is.  For example, currently there is one auction listing selling ten miniature bars, each weighing 1/15th of a gram.  The total value of these ten pieces is $31.30, and the asking price is $200.

Do your sums.  Work out what the true cost of the gold is in dollars per ounce.  You might be astonished (remember there are 31.10 grams of gold in a troy ounce when converting from grams).

We don’t know if this ever happens, but if you see gold being sold by the ounce, make sure it is by the troy ounce, not the avoirdupois (or ‘normal’) ounce.  An avoirdupois ounce is lighter than a troy ounce (there are 28.35 grams in an avoirdupois ounce).

All gold bullion is marked with its weight, and its weight is expressed in grams or troy ounces,  But if you have a dealer telling you ‘I have some 1.1 ounces bars of gold’ probably he has converted the troy ounces into avoirdupois ounces, so as to make it seem like you’re getting more gold, and he is hoping you won’t know the difference.  Or he might say ‘I have some 25 gram bars, which work out to be 0.88 ounces’ and he has converted to avoirdupois ounces, again to inflate the apparent value of the gold (the weight of the 25 gram bar in troy ounces is 0.80 ounces).

One last thing.  Most of your purchases should be of fairly low value individual pieces of metal, so as to make it easier to trade with them.  Don’t be like the guy who goes into a 7-11, or tries to pay for a short cab ride, with a $100 bill.

Try not to pay too much of a premium for smaller sized pieces, and certainly, minimum values of $25 – $50 are probably fine, but the flip side of paying a little more for lower value pieces now is that they will probably be worth more in the future, for the same reason they are worth more to you now – they are more convenient to trade with.

We generally advise against buying jewelry and other gold scrap (for example, computer circuit boards and connectors).  The first problem you would face is being able to assess the value of such pieces – unless the gold is stamped to show its purity, how can you be sure what the gold content is?  Then there are the costs and hassles in taking such things and turning them into exchangeable gold bullion.  Even if you can melt down and refine the gold to 99.9% or better purity, you still need to get an official assayer’s stamp on it to prove its purity and weight.

Implications for Preppers

We like gold and silver, and wish we had more of it ourselves.  But we also like food, water, shelter and energy, and so our first priority has been to build up our supplies of the things we’ll directly immediately need ourselves in a Level 2/3 situation.

Only as we grow more comfortable about the adequacies of our immediate needs do we then start adding some gold and silver to our supplies.  We know that no matter how thoroughly we prepare, there will inevitably be other things we need, or repairs we need having done, and/or other services we will also need to buy and pay for, so some gold and silver is definitely a good thing to have on hand.

We don’t know for sure, but our guess is that food and other vital supplies will go up in value much more than gold will WTSHTF.  So while we agree that holding supplies of gold is a better way to protect your wealth than is holding supplies of cash or intangible wealth such as stocks and bonds, we feel the best form of investment is to have an abundance of essential supplies, to simultaneously improve your own chance of surviving and living comfortable, and to give you trading materials that will be future-inflation-proof.

When you do buy bullion, there are risks you need to prudently minimize, and there are huge variations in cost depending on the size and amount of product you are buying.

Read the Entire Article Series….

This was the final part of our six part series on prepper economics.  Please do read the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy