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

Apr 302013
 
Small country towns have been dying out in recent decades.  A Level 2/3 situation will see their resurgence.

Small country towns have been dying out in recent decades. A Level 2/3 situation will see their resurgence.

One of the key things in developing your retreat is to create or become part of a community.  You can’t viably ‘go it alone’ in a Level 3 situation (although it is possible to do so in a Level 1 or 2 situation).

Depending on the scope of your plans, there are several ways to become part of a community.  Most people immediately assume they will have a multi-acre block of land to themselves, and as for becoming part of a community, they will simply befriend their adjoining land-owners immediately around them, and – hey, presto!  Instant community.

That’s fine, and if it works for you, so much the better.  But a rural community of adjacent farmers/ranchers is not the only type of community that will be created, or which currently exists and may survive, and further more, while working together with your rural neighbors is both essential and positive, the chances are that even when you pool all your various resources and abilities together, there are still large gaps in needed skill sets, abilities, equipment, and so on.

Even in the most extreme of Level 3 situations, there will be a need for small service towns/villages.  These will be (and currently are) places where the nearby farmers can go to buy sell and trade, to get services, to benefit from pooled resources such as education, healthcare, maybe law enforcement that require at least a small amount of ‘economy of scale’ to be feasible, and also as a place to socialize and to meet as a community to discuss/resolve regional issues.

This is very different in concept from most towns and cities these days.  Modern and larger urban creations exist purely for themselves and are sustained internally (or externally via concepts that would not apply after TEOTWAWKI), rather than to service the surrounding country dwellers.

In contrast, a rural town is more outward looking and exists as a service point for its immediately adjacent rural community.  It has an essentially similar economic base today as it has always done ever since the founding of our country, and as it has done for centuries prior to then in the UK and Europe.  It is typically small, with perhaps a one room schoolhouse, a one cell jail, a general store, a doctor, a dentist, a couple of specialty stores and service providers, maybe a lodging house, church, bar and restaurant, and is almost always located strategically on a route to somewhere (and more likely, is not on a spur to a larger town/city, but is on a road that connects larger population concentrations on either side of it).

The Evolution of Rural Towns

These days many rural towns have grown in size to become larger than has historically been the case (or have simply died out entirely).  This is because the ease of modern-day transportation has meant that instead of the local community needing small towns every ten miles, it is now sufficient to have larger towns every twenty or thirty miles.  The traveling time and cost and inconvenience to go 20 – 30 miles today is less than it was to go a mere ten miles in an earlier time.

But please note the distance constraint will become an issue again in a Level 2/3 situation, when road maintenance will be neglected and fuel for vehicles will be either scarce or prohibitively expensive or possibly both.  Instead of thinking ‘I can drive 70 miles on the freeway to a town in an hour, and pay only $6 in gas to do so’ people will think ‘it will take me almost two hours to travel by horse and cart ten miles, and more than a day to travel 70 miles’, and so closer towns will become essential once more.

The key thing about any town is that if it is to survive in Level 2 and 3 situations, it will be because it exists to provide services to the people living rurally in the immediate area.

Many small rural towns these days exist for reasons other than primarily being a service provider to nearby rural residents.  Don’t confuse these types of towns with real locally focused towns, because these other ‘artificial’ towns are less likely to survive.

For example, if a town is currently a tourist retreat, it will not survive (there won’t be many tourists in such a dystopian future).  If it is based around some type of local industry that relies upon the normal social and economic functioning of the normal world, it again will not survive (what happens when the industrial employer can no longer source its raw materials or sell its finished goods, and so can not pay its employees?).  This is as true if it is a traditional industry (perhaps a saw mill) or a ‘new’ industry (maybe a server farm for an internet company).

If it is a retirement town with a large community of senior citizens living off their retirement checks, and augmented healthcare services to meet their needs, it again will not survive (what happens when those retirement checks stop coming in?).

Another factor when considering the viability of a small town is to evaluate its dependence on external sources of water, food and energy.  Clearly, the more it needs to bring these three essential commodities in from ‘somewhere else’, the more its future viability is vulnerable to the disruption of the supplies of these things.

A viable town has its own water supply nearby, and sources its food from nearby farms.  Energy is more of a concern, with it being rare to find a small town that has its own city energy source.  And even if it did, the chances are that the energy generation relies upon bringing in supplies of coal, natural gas, or oil fuel.  Only if the town has a dam and hydro power is it reasonably energy-independent.

Why are we raising these issues?  Four reasons.

Four Reasons Why a Nearby Town is Important to You

First, if it is your plan to create a rural retreat, you still need to have an eye to being within reach of a nearby small township.  You can’t possibly hope to have every skill set, every experience, every knowledge base, every type of equipment, and so on, yourself, on your retreat.  You will need to be able to turn to specialist providers of supplemental skills from time to time.

You’ll also want a place where you can buy things you need and don’t have, sell things you have produced, and/or trade and exchange and barter the one for the other.

Some type of town within a reasonable distance (think non-motorized transport when evaluating distances) is therefore a huge benefit and boost to your own survivability.

Secondly, not all current towns are the same.  Some will fail just as surely and completely as the big cities, while others will survive and may even thrive.  For example, the small town with the struggling hardware store and grocery shop will find that people no longer drive an extra 40 miles to go to Wal-Mart, Costco, or Home Depot, but instead necessarily return to doing business at the closer alternate.

You need to evaluate the towns that are close to potential retreat locations and assess if they are likely to survive and to add value to your retreat lifestyle, or if they are more likely to fail and instead become a source of problems for you at your retreat.

Thirdly, many people make an automatic assumption that a retreat needs to be in a deserted rural area, ‘safely’ far away from other people.  That’s not necessarily the case at all.  If life on a farm isn’t your idea of a good time, maybe you have a set of skills and personal lifestyle preferences that would fit better into a small town environment.  Maybe instead of being a land-owner needing a blacksmith, you can become the blacksmith.  Maybe you can establish the trading mart where the local people (both town-folk and farmers) do their buying, selling and bartering.  Maybe you can become the local saloon owner.  The local schoolmaster or schoolmistress.  And so on.

Fourthly, and this is the big one, maybe there is an opportunity for you to start your own new town.  If there have been towns close down over the last 100 years, but if there is still a reasonable rural population, who now rely on good transportation options to travel further distances, maybe you could consider establishing a new fledgling township and activate it if/when a Level 2/3 event occurs.

This would require some considerable capital investment on a very speculative basis, and so is not suitable for many people to consider.  But creating a substantial rural retreat is not an inexpensive concept either, and so maybe it might be a more appealing concept for you to prepare a skeleton of a new township.  You’d probably still have some ‘town gardens’ in it for immediate food growing, but rather than creating a rural retreat with the purpose of keeping people away for safety, maybe your strategy instead is to create the kernel of a settlement that could grow into a service town, and instead of keeping people away, you’d want to welcome people into it for safety.

Summary

Whatever your relationship will be with a town, being either a part of or close to a ‘good’ town that will survive is a key part of your retreat location evaluation and decision.

Mar 182013
 
The original and 'temporary' FDIC logo' from 1934.

The original and ‘temporary’ FDIC logo’ from 1934.

(Note – there have been lots of developments since we first posted this story, and we’ve been updating it semi-realtime ever since, to keep it current.)

In the US, one of the bedrock values of our society and our commercial system is the safety of our money when we deposit it in a bank.

Every time we walk into a bank, we see the FDIC promise – often on the very doors we walk through – reassuring us that the first $250,000 of our money in each different type of qualifying account at each different participating bank is ‘backed by the full faith and credit of the United States Government’.

Clearly this guarantee counts for something.  Since the start of the FDIC program on 1 Feb 1934, and not withstanding a dismayingly large number of bank failures over the years, no depositor has lost a single penny in an insured account as a result of a bank default.

The government doesn’t just do this out of the kindness of their heart – although, to be accurate, the cost of operating the FDIC program is paid for out of compulsory bank levies rather than by the federal government.  The government enacted the legislation and continues the FDIC program because there are sound public policy reasons for allowing people to feel confident in their bank deposits, and sound economic reasons for encouraging people to save money in a bank rather than under a bed.  Indeed, a cynic would point out that one of those reasons is that money in a bank is public, visible, accountable money which the IRS can focus on.

Maybe you’ve heard about occasional problems in other countries at other times.  But they’ve either been many decades ago, or else countries not like the US – countries with dysfunctional economies and capricious governments that clearly don’t respect private ownership of property and money.

For example, some people may be aware of the several stages of Argentina’s financial crisis, which included a run on the banks in late November 2001, which caused the Argentinian government to freeze all bank accounts for a year in December 2001, allowing only small weekly withdrawals.  Subsequently, the government converted all US dollar denominated bank accounts into Argentinian pesos at an ‘official’ rate which caused the real value of the funds in the accounts to be massively reduced.  (Details of these events can be read here.)

Such situations and actions seem impossibly removed from our stable environment in the US, and few people here see them as posing any meaningful warning lesson.

Indeed, we almost never really stop and think about the underlying reality of how safe our money actually is, because – and happily – it is unthinkable that our money is anything other than 100% safe.  Right?

The Cyprus Situation

Wrong.  As you may have read, on Saturday 16 March the EU forced the Cyprus government to agree to the terms of a €10 billion (US$13 billion) ‘bail out’ of their economy, which would require the Cyprus government to take a slice of every person’s bank account balances as their contribution to the bailout.

Cyprus is both a member of the EU and of the Eurozone (ie it uses the Euro currency) and its financial problems impact on the Eurozone as a whole, with other Eurozone members increasingly asserting what would formerly have been sovereign powers held by the individual member nations.

Although it makes economic sense to have matched monetary policies if you also have a shared common currency, it was not countenanced as part of the EU and Euro agreements, and the citizens of countries such as Cyprus, Greece, and other countries needing economic help are now finding their national governments are being dictated to by other EU powers (most notably Germany, causing some countries to wryly note that Germany’s failed power grab during WW2 is now being replaced by a more successful economic rather than military power grab).

So, anyone with a bank account in Cyprus, whether a Cypriot national or not, is now liable to have 6.75% of their funds under €100,000 taken from them, plus a larger 9.9% slice of all deposited amounts greater than that.

The unfairness of this is breathtaking.  Bank balances are totally unrelated to wealth.  Many super wealthy people have no money in the bank at all – maybe indeed they only have overdrafts (question to the EU – if you take money from people with deposits, will you give money back to people with overdrafts?), but they probably also own much property, stocks and bonds, and other assets galore.  On the other hand, a small businessman’s bank balance might be money that is not his – it is money that he has received from selling goods which he will have to subsequently remit to his suppliers.

But, at the behest of the EU, Cyprus is now poised to take up to 10% of every bank balance in the nation, without any adjustment for what the type of funds may be, and equally from retirees living off their savings as from young mega-millionaires, equally from non-citizens as from citizens.

Of course, as soon as word leaked out about this, there was a run on the banks and ATMS.  So the ATMs were switched off, and the banks, which were closed over the weekend anyway, have also been closed today (Monday) and will remain closed tomorrow (while the government passes the law to enable the compulsory taking) and on Wednesday also.

The even unkinder thing is that the EU has a similar deposit guarantee program to the FDIC program in the US, guaranteeing the safety of a person’s first €100,000 in their account.  That guarantee will be over-ridden and ignored.  Apparently the one thing the EU guarantee won’t guarantee is its own illegal actions.

Implications

Although the EU says they’ll never ever do this again, it being a unique ‘one off’ event, the reality is that they’d have to say that, wouldn’t they.  If people believed they might lose 10% of their bank balances at any time with no warning, who would keep any money in a bank any more?  Especially with banks paying almost no interest, there’d be a resurgence of people hiding cash under the mattress, and a growth of a cash economy which would reduce tax collection rates as well.

So the official word is that for who knows what reason, the EU decided to do this once and once only, in the tiny island nation of Cyprus, but never again, and nowhere else.

And if you believe that, I’ve some ocean-front property in Arizona, and a bridge in Brooklyn that you might like to buy.

Whether the EU might do this again or not is anyone’s guess.  But the key thing is they are doing it now.  They have vividly broadcast to the world as a whole that even a seemingly ‘secure’ and ‘stable’ and totally bound-by-the-rule-of-law federation of nations such as the EU is willing to engage in an unlawful taking of money from its citizens, on the most unfair and inequitable of methods, and with no prior debate or decision-making process.  The sanctity of private ownership has been cast aside.

Such an act would have been unthinkable on Friday.  If you’d told your friends that on Saturday the EU would unilaterally decide to force Cyprus to steal 10% of its citizens’ bank account funds, you’d have been laughed at like you were a crazy fool.

If Cyprus does indeed bow to EU pressure when its government votes on the matter this Tuesday, let’s think about what we’ve seen :

(a)  A disruption in the banking system from Saturday through at least Wednesday – how would that work for you if for five days, maybe longer, all the banks were shut and you couldn’t get a single penny in cash?

(b)  Government guarantees about the safety of your deposits being ripped up and ignored.

(c)  An arbitrary capricious and colossally unfair taking of up to 10% of all the funds in your accounts, whether the money is yours or not, and no matter what your overall financial net worth or wealth may be.  Oh – and this money is taken with no notice or warning.

And now for the really big question.  What happens in Argentina is of admittedly little relevance to what we can expect to happen here in the US.  But if Germany and the other EU giants force Cyprus to do this, they’ve made it into a bona fide government tool for emergency revenue collection.

What would stop our own government from doing the same thing?

Some Wild and Crazy Conspiracy Theories?

Lastly, just to think out loud – bank and economic crises and unpopular government actions such as those in Argentina, those in Greece over the last few years, and now in Cyprus currently, have been greeted by mass civil unrest and rioting.

If the same thing occurred in the US, it is reasonable to assume that a similar violent response would result.  Now I’m not saying that you and I would react violently, and hopefully we wouldn’t.  But there’s an entire ‘underclass’ of people in this society that happily goes violent at any opportunity for any reason, and you just know for sure that they’d gleefully seize on the opportunity, sweeping up naive ignorant other groups of people with them (the ‘Occupy Wall St’ types, the anti-global trade types, and so on).  We’d definitely have our fair share of civil commotion.

Now think for a minute – why exactly is the new Department of Homeland Security – an enormous government department that didn’t even exist until some ten years ago – buying up billions of rounds of ammunition at such a rapid rate that we normal citizens can’t find any ammo on the shelves when we go to buy some for ourselves?

Why is the DHS also buying up more fully auto battle rifles, and why is it buying 2,700 armored vehicles – light tanks?

This isn’t the army, buying up equipment for foreign wars.  This is the Department of Homeland Security, that only operates within our borders.

It isn’t to protect us against a foreign invader – that again would be the army and the national guards.

It shouldn’t even be against normal criminal threats and activities – that’s what we have city, county and state police forces for, plus a bevy of federal agencies too.

The only ‘enemy’ the DHS has is us – the ordinary normal US public.  How are they going to use the 2,700 light tanks against us, and why do they think they will need to?

We don’t have answers to these questions.  But we do think the questions are valid and need to be considered.

Summary

The bond of trust that we have in our banking system has to be seriously questioned based on what is going on in Europe.

By all means keep some money in the bank, but spread your funds around, both in banks and also in smaller credit unions too, and keep a reasonable amount of cash and other ‘liquid assets’ on hand so that if your bank accounts are frozen, or if banks undergo an extended closure, you can still buy the things you need.

Note that we refer to cash and also to other liquid assets.  Something else we’ve seen happen in other countries is a country demonetizing its entire stock of banknotes and replacing them with new banknotes.  Sometimes it is part of a revaluation of the currency (eg in Russia on 1 January 1998 with each new rouble being worth 1,000 old roubles), and other times, it just happens ‘because it can’.

We’re halfway to that point already – with the claims (that may well be without any truth behind them) of our currency being victimized by foreign counterfeiters, and we’re on the way to the other half by claims about the problems with money laundering being used to fund international terrorists and drug dealers.

So it is easy to see how one day the government could surprise us all and say ‘Okay, all old money is no longer valid legal tender, and you have 30 days to convert your old money to this new type of money, and on the 31st day any remaining old banknotes will be valueless’.  You just know that if you then turn up at an official exchange point with an unusually large amount of cash, questions will be asked about where you got all that money from.

We point out in our several articles about the economic system after TEOTWAWKI that we don’t think that either regular US currency or gold and other precious metals will be of any value at all.

But prior to that point, we do agree that gold and other precious metals are a good way to store your cash, safely away from the uncertainties of the banking system.

Update 1, March 19 :  The headline on this article says that New Zealand is also considering a ‘Cyprus Style’ theft of bank depositors’ funds, but if you read the article, you’ll see that actually what the country is planning is a ‘self insurance’ scheme whereby if a bank fails, all depositors of that bank are affected equally, rather than the more common type of bank insurance scheme such as FDIC.  Nonetheless, while not an arbitrary government confiscation, it does show that the concept of the absolute safety and sanctity of bank deposits is being challenged not only in Cyprus, but on the opposite of the world too.

Update 2, March 19 :  It is Tuesday evening in Cyprus and the country’s legislators are still hesitating to vote on the proposed legislation.  It seems the proposal has been varied to now exempt people with balances of under €20,000 from the levy, but exact details are not currently known.

Update 3, March 19 :  Cyprus’ parliament met and astonishingly roundly rejected the EU dictat.  36 members voted against, 19 abstained, and one member was absent.  None of the members supported the bill.

But what will happen next?  The EU support was conditioned on the bank funds seizure.  This ain’t over, but the first battle has at least been won.

Meantime, public confidence in the Cyprus banking system has been done more harm (by the initial acceptance of the proposal by the Cypriot President and his advisers) than good (by the rejection of the measure by parliament).

Update 4, March 20 :  At the end of Wednesday, 24 hours after the Cyprus parliament voted against the levy on bank deposits, no alternate way of raising the €5.8 billion that Cyprus needs to raise in order to qualify for the €10 billion from the EU has been agreed upon.  There is some thought that Russian interests might end up buying Cypriot assets at fire-sale prices, but currently, banks remain closed,  and some politicians are speculating that they might never re-open.  The UK is air-freighting in cash for its citizens, the rest of the country is being forced to make do any way they can.

Update 5, March 21 :  Cypriot ATMs are now disbursing small amounts of cash to bank account holders, but the banks remain closed for normal business, and are not now expected to open until Tuesday next week.  Meantime, there is growing political support for a new attack on the country’s citizens – the government is now considering nationalizing major pension funds.  This would give them access to the cash stored in these funds, meaning that the funds would now have to promise to make future pension payments to their members based not on their liquidity and assets, but rather on government promises.  If that sounds familiar, it should be.  That’s a sad but accurate description of how social security currently works in this country.

Update 6, March 23 :  It is now Saturday again, a week since the first proposal to steal a slice of everyone’s bank accounts in Cyprus.  After being overwhelmingly rejected by their Parliament on Tuesday, guess what?  The proposal is back again, except this time, it might be an even larger 25% levy, but only on deposits over €100,000.  Cyprus has until Monday to meet an EU deadline for somehow devising a plan to raise the €5.8 billion share of its bailout the EU is requiring.

Update 7, March 25 :  A new agreement has now been reached with the EU, barely avoiding the Monday deadline imposed by the EU.  Avoiding a nasty legal fight over the EU’s obligation to guarantee deposits under €100,000, the new agreement only attacks deposits larger than that amount.  According to the linked news item, it seems that in Cyprus’ largest bank (Bank of Cyprus), those depositors may lose up to 40% of their deposits, whereas in Cyprus’ second largest bank (Cyprus Popular Bank), those depositors may lose everything.

It seems this new agreement does not need ratification by the Cypriot parliament, and in any event, it would likely be ratified if it came to a vote.  The reason this is more popular – most of the owners of accounts with large sums in them are not Cyprus voters but rather foreign nationals – typically Russians.  So with brilliant political acumen, Cyprus has fine tuned its approach to inflict least harm on voters and most harm on non-voters.

Nonetheless, the genie is now out of the bottle.  In Europe, at least, politicians have displayed a willingness to countenance seizing bank funds without any type of underlying equity or fairness, and to ignore the bank deposit guarantees when doing so.

Update 8, March 26 :  Banks remain closed and account holders are being limited to €100 ($130) a day in cash withdrawals through ATMs.  Meanwhile the EU, delighted at its ‘success’ in Cyprus, is now threatening similar seizures of bank savings in other countries, too – please see our new article ‘We Got Away With It in Cyprus, So We’ll Do It Again‘.

Update 9, March 28 :  Today – Thursday – the banks in Cyprus hesitantly opened, and we’re guessing they’ll be closed again tomorrow for the Easter weekend.  Citizens can now withdraw up to €300 at a time, although the country’s stock exchange remains closed, and there is a ban on taking money out of the country – a ban that is almost certainly contrary to EU and Eurozone rules.

Meanwhile, Russia has announced plans to force its citizens to put their money into banks – or, at least, much more of it than at present – by introducing a ban on cash payments over $10,000.  This is not as easy as it might seem, because credit cards are rare to non-existent, checks are similarly unknown in Russia, and bank wire transfers cost up to 4% of the amount being transferred.  The Russian government says, unsurprisingly, that it is doing this to crack down on the ‘shadow economy’ – details here.

Note that in our own experience in Russia, both living there and working there, the shadow economy is considerably greater than officially estimated, although when Russia switched from a typical tax system with escalating rates of tax as your earnings increased to a simple flat tax of only 13% in 2001, this caused a surge in taxes paid – an increase of tax collections by 25% in the first year alone.

Unless something substantial occurs, we will end our ongoing updating of this article today. 

Feb 252013
 
A beautiful country scene, for sure.  But is it also a viable source of water for your retreat?

A beautiful country scene, for sure. But is it also a viable source of water for your retreat?

We are writing this on Oscar night 2013, so let’s use an Oscar linked concept for this article.

Did you ever watch the Oscar-winning movie, Chinatown?  It was nominated for 11 Oscar awards in 1975 and won the best screenplay award.  The movie starred Jack Nicholson and Faye Dunaway, and – yes, here now is the segue to this article – featured a plot to do with the struggle for water rights in California.

Access to water is a very contentious thing, both in modern times and historically.  A Google search for ‘water right disputes’ brings up 39 million pages.  Depending on where you are, your ability to use the water on your land – indeed, in states such as Oregon, even your ability to use the rainwater that falls freely from the sky – is almost certainly restricted by a mess of state and federal statutes.

While many of these restrictions may seem overly onerous and interfering, at least they provide some sort of certainty and guarantee as to what we can expect with the water that passes through our properties.

And perhaps because of the comfortable certainties we sometimes take for granted, we’ve often had people proudly tell us about their retreat, and how it has a river or stream or creek running through/alongside their property.  This, we are told, guarantees them all the water they will need, and perhaps also promises them a rich bounty of fish too.

They are more or less correct, but only in terms of today.  But what happens WTSHTF and the rule of law crumbles and disappears?  What happens when people still need water, but their other sources of water (perhaps an electrically pumped well, or city water, or whatever else) are no longer available?  They have no choice but to turn to any nearby river or stream and start taking water from it, surely.

So, depending on where you are along the flow of the river, stream, creek, or whatever you wish to call the body of water moving through your property, its normal flow of water, that is currently protected, with any offtakes and uses controlled, restricted and limited, could change drastically if people simply start taking whatever they believe they need.

That’s a problem, but it is only part of the problem.  What also happens when people lose their sewer service too?  Will they start feeding sewage into their stream?  Will they start washing their clothes in the river?  With the loss of electric pumping, will they take their herd of cattle to the river to drink, rather than having water taken up to cisterns and troughs, with the cattle defecating, urinating, and disturbing the water while there?

Maybe the person upstream from you will even throw dead animals in and generally use ‘your’ stream as ‘nature’s automatic trash removal service’?

All of a sudden, you find yourself either with no water at all, or with polluted water that’s not safe to drink.

Oh – and the fishing?  How well is that going to work when the guy upstream from you, and the guy downstream from you, both throw nets across the entire river, preventing any fish from getting to your stretch of water?

Now – don’t get us wrong.  We like water, and there’s nothing more scenically enhancing than having a ‘safe’ water flow through your property year round.  If there’s a chance to use it for hydro power generation, then so much the better – but note our careful use of the word ‘safe’.  You don’t want a river that has such a volume of water that it is changing its path, eroding its banks, and possibly prone to flooding your fields on occasion.

When evaluating any water that flows through your property as a suitable source of water and possibly fish, you need to very carefully understand what happens to every foot of that water flow from where it first starts, and all the way along its journey to where it enters your property, and some distance beyond as well.  Maybe the guy upstream might build a dam and divert the water’s flow entirely.  And if there’s any danger of someone downstream of you building a dam or in some other way blocking the water flow or causing the river to burst its banks and spill out over your land, that’s something you want to know about too.

It isn’t just your immediate neighbor upstream of you.  Each person from the water source to you can impact on the quality and quantity of water available to you.

And your problems may not only relate to ‘good’ uses of the water.  Maybe the guy upstream from you – or the guy upstream from him – wants to force you (or your neighbor, or both of you) off your land and so they will simply block the river upstream of you and suddenly what was fertile land and easily irrigated becomes neither.

Go watch some more movies.  There’s a dozen or more westerns involving disputes over water rights.  Should we also point out that, at least in the movies, the disputes were seldom peaceably resolved?

There’s another flip-side to this issue too.  If you are planning on being able to help yourself to water from the stream WTSHTF, how do you think the people downstream of you will feel if the water that they too may be relying on diminishes in flow?  Someone, somewhere, is not going to passively accept the change from a healthy flow of water to a muddy polluted trickle of effluent, and is going to start going upstream and ‘persuading’ people to ensure that he can get ‘his’ ‘fair’ ration of water, too.  Note the quotes around those two terms; water rights are truly a contentious subject and people have very different perspectives as to what is right and fair, depending on their situation and needs.

Our point is simply this :  You can’t rely on the current state of water flow on your property, with the underlying assumption being that everyone who potentially could do something to the state of the waterway will continue to abide by every one of the sometimes annoying and restrictive regulations that attach to the rivers and streams that may flow through our land.

If you are in an area which needs supplemental water, and if it is realistic to expect that people will turn to the water source flowing through your property for their water needs (which, after all, is actually exactly what you may be planning to do yourself, too!) then you need to be sure that there’ll be enough water for everyone, including the people downstream of you, because if everyone doesn’t get enough water, disputes will break out, and with people’s survival at stake, the disputes won’t merely involve writing nasty letters and filing law suits to be litigated through the courts over the course of many years and many appeals.  They will get violent.

This also points to another thing.  After TEOTWAWKI, people’s use of the land they are on will surely change.  In some cases, land will be abandoned, but in other cases, land will start to be farmed more extensively and, as best possible, more intensively too.  It is not enough to only understand what might happen to the water flowing through your property today, you also have to guess how this might change in the future.

Some of these future changes could be entirely unexpected.  What happens if someone starts some sort of factory that either consumes a significant amount of ‘your’ water, and/or discharges waste into the stream?

The more you think about that beautiful stream currently flowing through your property, the more you should come to realize that you can’t take it for granted in a Level 3 or even Level 2 situation.  In other words, even if you have what seems to be a perfectly good river/stream providing water to your property today, check out alternate sources of water so that you’re not relying on a single water source in the future.

Feb 182013
 
The time to buy your essentials of all types is before the panic sets in.  Seems obvious, but most people fail to do so.

The time to buy your essentials of all types is before the panic sets in. Seems obvious, but most people fail to do so.

It is now just over two months since the Sandy Hook shooting caused an increase in the rate of buying firearms and ammunition due to people’s concerns about new restrictive legislation, and their hope that the legislation wouldn’t apply retrospectively to existing firearms, magazines, and ammunition.

We’re not primarily a firearms focused website, and our main perspective on this matter is to examine this real life example of our economy’s fragility and inability to quickly respond to changes in the supply/demand equation.  What happens with firearms could just as easily happen to fuel or medical supplies or food items – or anything else at all.

It is true that gun store shelves are no longer totally bare, but if you look at the price tags on the rifles and pistols now available for sale, you’ll notice steep increases in price.  Ammunition is also returning to the shelves, but in limited quantities and again at much higher prices.  Here’s a recent article from, of all places, USA Today that confirms these issues continue to be a problem.

We also can quote an interesting report that was published on a private member only website, explaining some of the constraints that firearms manufacturers are facing.

Smith & Wesson : Is running at full capacity making 300+ guns/day-mainly M&P pistols. They are unable to produce any more guns to help with the shortages.

RUGER :  Plans to increase from 75% to 100% in the next 90 days.

FNH :  Moving from 50% production to 75% by Feb 1st and 100% by March 1.

Remington :  Maxed out.

Armalite :  Maxed out.

DPMS :  Can’t get enough parts to produce any more product.

COLT :  Production runs increasing weekly but restricted by shortages of bolt carriers.

LWRC :  Making only black guns, running at full capacity…can’t get enough gun quality steel to make barrels.

Springfield Armory :  Only company who says it can ‘meet demand’ but meeting this demand sees them running 30-45 days behind.

AMMO :  Every caliber is now allocated! We are looking at a nationwide shortage of all calibers over the next 9 months. All plants are producing as much ammo as possible with 1 BILLION rounds produced weekly. Most is military followed by law enforcement, and civilians are third in line.

MAGPUL is behind 1 MILLION mags, do not expect any large quantities of Magpul anytime soon.

RELOADERS :  ALL Remington, Winchester, CCI & Federal primers are going to ammo FIRST. There are no extras for reloading purposes… it could be 6-9 months before things get caught up.

Distributors have nothing on the shelves.  What comes in daily goes out, nothing in reserve.

Confirming the comments about ammunition above – indeed, revealing the situation to be much worse, this next quote just appeared on the website for Stockpile Defense, a supplier of bulk ammunition to the Front Sight firearms training school in Nevada.  They say their best case scenario is to get only 20% of the ammo they have ordered this year.  One wonders what their worst case scenario might be!

Due to extreme shortages in the ammunition market at this time supplies have run VERY LOW. We continue to get as much ammunition as possible regardless of price. Prices have also increased as much as 50% on some items. At this time we can not guarantee an adequate supply for all students. 9mm and .223 are the hardest to come by.

We are asking students to plan ahead and bring what ammunition you can for the class. We apologize for this inconvenience and please be assured that we are doing EVERYTHING in our power to keep everyone shooting. These are extremely volatile times and conditions are changing on a daily basis. Please check the website often for updates.

Again, we apologize for this inconvenience in these matters and we appreciate your understanding.

Please bring as much ammunition you can with you. We will supplement the rest. We are trying to supply between 500-1000 students per week and at this junction we just are not able to acquire enough ammo to supply all of your needs. We are very sorry for this.

We have 50 million rounds of ammunition on order for the 2013 year. We will not see all of this delivered. If we see 10 million that is my projected best case scenario.

The Growth in Gun/Ammo Demand Isn’t as Huge as You Might Think

It is worth repeating that these extreme shortages of both guns and ammunition are not because of an extreme increase in demand.

There have been only modest increases in firearms sales.  The FBI reports the following number of calls in to their ‘NICS’ service – every time a person buys a firearm from a dealer, the dealer has to call NICS for an instant background check.  Not all calls to NICS are for firearm sales, and some calls represent a sale of multiple firearms, but as a rule of thumb measure, the volume of NICS calls tracks the volume of new gun sales in the country.

The FBI show the following results :

Month Most Recent     Previous Year     Increase in number     Increase in percent
December     2,783,765 1,862,327 921,438 49.5%
January 2,495,440 1,377,301 1,118,139 81.2%

In particular, note that the total number of checks in January decreased compared to December.  Whether this is due to lessening of demand, or just inability to supply, we don’t know.

So these modest increases have totally destroyed the industry’s ability to supply.

Modern Manufacturing is No Longer Flexible

We wrote before on how modern manufacturing is subject to multiple dependencies – for example, a car manufacturer can’t make more cars if he can’t get more of all the sub-assemblies that go into making the car from their suppliers.  For example, the car manufacturer probably buys in its engine management computer systems from other manufacturers.  And these other manufacturers probably buy in the circuit boards, the chips, and so on that go into the units.  And the circuit board manufacturers in turn buy in the components that they then make into the prepared circuit boards, and so on and so on.

The highest profile example of this trend is Boeing.  It used to design and build airplanes from almost the base raw materials.  Originally it would make its own engines, too; but after being broken up due to anti-competitive issues, it split off its engine manufacturing (and its airline operations too) and concentrated on the airplane building.

But now, with its new 787 airplane, it has outsourced not just much of the design, but most of the building too, reducing its role to that of coordinator and final assembler of the airplane from the subassemblies other companies have made.

The good sense of that strategy is very much in question currently.  Not only was the 787 many years late in its development process, but the entire fleet have now been grounded due to safety concerns.  The plane’s electrical system – designed by one company, with batteries from another, integrated by a third company, and with control systems from a fourth company, are showing an alarming tendency to burst into flames, and you don’t need to be a rocket scientist or even an airplane engineer to understand that this is not a good thing.

Somewhere along the way, it seems that Boeing lost control of the overall management and safety architecture of its new plane development, and rather than becoming the ‘Dreamliner’ that it fancifully named its new plane, it is instead more of a nightmare for Boeing, the airlines who have bought them, and the public who may have to anxiously fly in them.

We are seeing the multiple dependencies problem play out with guns and ammo too.  A shortage of bolt carriers is limiting Colt’s production; a shortage of gun quality steel is impacting on LWRC and a shortage of all parts in general is impacting DPMS.  As for ammunition, we know there is now a shortage of primers, and who knows what else as well.

Automation Prevents Flexibility

The other key issue is that all the automation that goes into modern-day manufacturing – while a very good thing from the perspective of low-cost high-efficiency manufacturing – means that increases in production rates may require buying more machinery for the factory.

It was an easy step, decades ago, for a factory to simply hire more workers, particularly for relatively unskilled jobs that didn’t require a huge investment or delay in a training process, and of course, when demand cycles reduced, to let those people go again.  There was little up-front cost, little leadtime/delay, and no ongoing liability.

But a company can’t buy a multi-million dollar machine, and probably also need to build a new bay in their factory to house it, at short notice.  Even if it somehow could, how long would it take to build the new factory extension, and to receive the new equipment it had ordered?  And, after having done this, it would then be saddled with the machinery in the event that there was a future downturn in demand.

It also used to be that manufacturers would have reserve capacity in their factories – the ability to add a second or third shift, for example.  But more and more, manufacturers are preferring to soak up their ‘surge capacity’ rather than buying in more capacity, and so they don’t have as much reserve capacity now.

And, even if they did, remember the issue we opened with.  They might be able to double their output, but what if their sub-assembly supplier can’t also double their output to match?

Manufacturers Deliberately Operate Very Close to Capacity

It makes no financial sense for a company to invest in two very expensive machines that each run one shift a day.  Instead most companies these days would prefer to operate one expensive machine for two shifts a day, and, if demand grows further, to add a third shift too.

This makes financial sense, but what then happens if demand increases but the manufacturers are already running at close to full capacity?

The other part of this picture is what happens when all manufacturers are running at close to maximum capacity and then one of the manufacturers is knocked off-line – unscheduled maintenance, even scheduled maintenance, or whatever.  We see this happen regularly these days in the oil/gas industry, where the closing of two or three refineries simultaneously around the country (for different reasons, but coincidentally at the same time) massively drives up the price of gas at the pump.  Indeed, as we write this, we are staring at huge increases in gas prices at the pump, at the same time that crude oil supplies are abundant.

This points to an interesting related point.  Manufacturers benefit from artificial shortages.  When there is a shortage of product, the manufacturers no longer have to compete with each other, but instead they can all push their prices up and enjoy the bonus windfall profits that come their way.

We see this also in the aviation industry.  As more and more airlines disappear (little more than ten years ago there were more than ten major airlines in the US, with last week’s announcement of the AA/US merger, we are now down to only three) and with the remaining airlines deliberately limiting their flights, we not only get to suffer more flights in the middle seat, but we have to pay more for the tickets, too.

Another example – the recent increases in vegetable prices, with some vegetables increasing in price more than 50% almost overnight, due to weather issues in some areas reducing supplies.  Now you could fairly say that it is very hard to match the supply and demand with a perishable product, but the fact remains that – with the entire world as potential suppliers of foodstuffs, we have seen prices for basic vegetables such as even broccoli shoot up from under $1.50/lb to around $3.00/lb.

Empty Warehouses

Another change is the lack of finished goods inventory.  In the past, it was common for companies at every step of the supply/distribution chain to hold reserves of product, so any sudden surges in demand could be satisfied from the warehouses full of finished products.  And by the time demand had persisted to the point that the manufacturers needed to increase their production rates, their sub-assembly suppliers also had reserve capacity to help them respond to increased production and offtake rates.

As we can vividly see from the above information, such capabilities are no longer commonplace.  So here we are, arguably the world’s most advanced nation and the world’s largest economy, and unable to supply even 20% of the ordinary normal demand for ammunition for the entire year ahead.

Bear in mind also that a lot of the firearms and ammunition sold in the US is imported.  Why can’t factories elsewhere in the world also supply enough for our needs?  Has a slight uptick in demand in the US overloaded the entire world’s manufacturing capacity?  As unthinkable as it may seem, the answer compellingly seems to be ‘yes, it has’.

Summary

The bottom line is obvious.  You need to at all times keep a reasonable inventory of all products you need and consume/purchase on a regular basis.  With a simple stock rotation system, this costs you nothing, and because it enables you to buy when products are at low prices to grow your inventory, and to use from inventory when prices are high at the store, you can actually ‘earn a return’ on your investment in your own supplies of food and other items.

The example of continuing shortages of firearms and ammunition shows that it only takes a small shift in demand to overwhelm the entire supply chain, meaning that most product becomes totally unavailable, and what little still passes through the distribution channels skyrockets up in price.

The time to stock up on essentials is now, when they are plentiful, not in the future after panic buying has already set in.