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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  The notes were withdrawn in 1964 and modern fiat banknotes can not be redeemed for anything at all.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 The notes were withdrawn in 1964 and modern fiat banknotes can not be redeemed for anything at all.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

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