Jul 122012
 

It looks real. But this is Iron Pyrites. However, is true gold really any more valuable?

What is the real difference between ‘real’ gold and ‘fool’s gold’ (Iron Pyrites)?  Sure, real gold is very expensive and iron pyrites is close to worthless, but why is gold so expensive and why are so many preppers so fixated on gold?

We can’t really answer the latter question, but we can provide reasons why you should ignore anything to do with gold as part of your preparations for an adverse future.

In short, real gold is indeed much more expensive than fool’s gold, but – for our purposes – perhaps they are of equal (and minimal) value.

Which Would You Prefer?  Gold or….

Perhaps the best way to discuss the relevance of gold to preppers is to look at three alternatives that we might likely encounter.

One that is a for-real alternative we all have to consider today, and the other two are hypothetical alternatives in a possible adverse future scenario.

1.  A Present Day Choice

So, you’re a diligent prepper, and you’re building up your supplies and establishing your retreat.  Let’s say you’ve just won a lottery prize and suddenly find yourself with an unexpected spare $630,000.  Lucky you!

Which would you rather do with this money?

(a)  Buy a single standard sized 400 troy ounce gold bar (based on today’s gold price of $1575/ounce this would cost $630,000).  Keep it somewhere safe and secure, and worry about it being stolen.

(b)  Complete work on your retreat, expand it a bit, upgrade some of its systems, add extra tanks for fuel storage (and fill them with fuel), buy more supplies, do some landscaping to optimize your future use of your land, and buy extra supplies for future trading or unforeseen emergencies.

Which use of the $630,000 is going to be most beneficial to ensuring your comfortable survival?

The same question applies if you have $63,000 or $6300 or any other sum, large or small as well.  There’s no limit (for most of us who are not on the Forbes 500 list!) to the investment you can make in your retreat and your supplies – and neither is there any limit to the investment you could make in gold either.

But – we suggest – buying gold will never be as useful a strategy as would be investing your cash in additional resources and supplies and materials.

2.  A Future Choice

Let’s say you’re a year or two into a Level 3 situation.  You’ve been surviving, but you’ve pretty much burned up all your stored diesel and propane, a hailstorm smashed some of your solar cells, you had a disease wipe out a lot of your crops last season, and while you’ll survive, you’re hurting a bit.  But on the plus side, you’ve been untroubled by any lawlessness or looting, and you’re starting to wonder if the million rounds of ammunition you stockpiled will all be necessary.  Maybe you might sell some of them.

Word gets around and three people come to see you, each offering to buy some of the ammo you don’t need from you.  Which of the three offers do you accept?

(a)  The first guy offers you payment for the ammo in gold.

(b)  The second guy offers to swap ammo for solar cells and diesel.

(c)  The third guy offers you food.

Now some of you might decide you’ll take option (b) and others might choose option (c), and we’ve deliberately left this hypothetical question open by not specifying actual quantities, because we are trying to point to the underlying principle.  Choosing either option (b) or (c) is each equally valid.

But who would choose option (a)?  You can’t eat gold.  You can’t generate electricity from gold.  You could freeze and starve to death in a house that was full of gold.  Gold has no intrinsic value to people focused on survival.

3.  A Stranger Rides Into Town

Two strangers ride into your prepping community.  They are from two other communities, and each are seeking to trade with your community, wanting to acquire your surplus of crops that you grew during the last season, and which you now have to trade with.

(a)  The first person offers to buy all your spare crops, and will give you gold in exchange.

(b)  The second person offers to buy all your spare crops, and will give you his community’s surplus of bio-fuel and meat in exchange.

Which offer do you accept?  Which offer is best for your community, improving its quality of life and ability to continue surviving into the future?

Hoarding Gold is a Low Priority for Preppers

Note that we deliberately make these three examples into ‘either/or’ choices, and that’s perhaps where so many people might make a mistake.  Sure, in a perfect world, of course we’d love to have lots of gold.  And diamonds.  And silver.   And warehouses full of food.  Our own oil/gas well and a working refinery alongside.  A luxury yacht with nuclear powered engines that will never need refueling.  And so on, and so on, and so on.

But in the real world, we have too little money even to buy all the things that are on our ‘Absolutely Must Have’ list.  We all need to be rifle-focused on checking off the items on our respective ‘Absolutely Must Have’ lists before we then start to add less essential and luxury items to our inventory and preparations.

Shelter.  Water.  Food.  These are the three priorities in our lives.  Gold is neither shelter, water, nor food.  And we have to choose between either gold or some combination of shelter/water/food.  We can’t have it all.

If we can’t have it all, clearly, the gold is the item best left behind.

Gold Will Not Keep Its Value in a Level 2/3 Scenario

Let’s also look at what might happen, if – and that’s a huge if – but let’s just say, if gold does end up having some sort of currency value in a Level 2/3 scenario.

One thing we can be sure of, with no if’s at all, is that an ounce of gold, costing us $1575 today, will buy us a lot less in that future situation than we could have bought with the $1575 today.  For sure, absolutely and of course, everything will shoot up in price, because it will become scarce and either hard to replace or irreplaceable.

Well, yes, everything will shoot up in price, except for gold and other forms of abstract money.

If you have spare money at present, after having bought everything on your ‘Absolutely Must Have’ list, we suggest you use that spare cash to stockpile things of real rather than abstract value – the things that will shoot up in value.  Extra fuel.  Extra solar cells.  Extra food.  Extra fertilizer.  Buy more land.  Plant more trees.  And so on, and so on.  These are all things that will either be valuable to you in the future, and/or will be valuable things you can sell/trade with other people.

But what would you do with gold?  Remember how you answered the second and third question above.  You didn’t choose to exchange your spare ammo with the guy offering you gold, did you.  You didn’t swap your town’s surplus food production for gold either, did you.

What say the situation were reversed – you now have only gold, but nothing else, and you’re having to persuade someone to sell you food or whatever, and the guy with the goods you need is choosing between your gold or another person, offering to swap food for bullets or fuel or something else – anything else – useful.  What do you think he will choose?

The Gold Standard, How Much is Gold Really Worth, and Other Economic Issues

Some people and preppers believe it was a mistake when the US and other countries abandoned the gold standard, and they further suggest that a lot of the problems in the world since that time have been due to leaving the gold standard behind.

Frankly, and although we came top of the Economics classes in our Masters degree, we have no dog in that fight at all, and neither should you.  We have no opinion as to the validity/error of abandoning the gold standard (like much of economic theory, it is a complicated issue which calls for value judgments as much as for dispassionate calculation), and, more to the point, no interest in the topic.  What’s done is done, and nothing we can do will change it, and neither will embracing gold personally make us any richer, or more attractive to the opposite sex, or anything else either!

Gold has only been a good investment if you bought and sold at the right times.

Nothing to do with gold has anything to do with being a better prepper.  Gold is a distraction that takes our focus – and potentially our funds – away from matters of much more essential importance.

As you can see on this chart, and more clearly on its related website, it is true that if you look only at the last six or so years, gold has been a great investment.

But it is also true that it has dropped 15% in the last six months, and 19% from its peak at the beginning of September last year, and it is also true that for twenty or more years prior to about  2004, gold did not go up in price at all.  So, as an investment, gold is far from a guaranteed sure thing.

Let’s circle back to the question we asked at the start of this article, and slightly rephrase it.  Why is regular gold so expensive, compared to other bright shiny metal?  Why has it gone up in price so much over the last few years?

The answer to this surely simple question is awesomely complicated, and probably has to do with complicated international speculation, hoarding, and things close to price fixing.  But the real true answer is that there is no underlying intrinsic reason why gold should be so expensive.  Gold is like the emperor’s new clothes – it is an unreal artificial thing that only has value as long as everyone agrees it has value.  As soon as people start to turn away from gold, its value could plunge again, just like it did in the early 1980s.  After briefly going over $800 an ounce, it crashed down to less than half that price, ruining a lot of people in the process, and did not return to $800 for almost 30 years.

Because of major players with vested interests in sometimes protecting and sometimes manipulating the value of gold (not just individuals, but also banks and entire nations) the value of gold is and will remain an artificial thing, and we ‘ordinary people’ play in those markets at our peril.

Summary

Maybe gold might return to a form of commonly traded currency in a Level 2/3 situation.  But, even if this were to happen, we do not suggest you ‘invest’ in gold at present in anticipation of it becoming a valuable item in the future.

If you have spare cash at present, your highest priority is to enhance the level of your preparations.  When you feel that is fully optimized, if you have remaining cash, we recommend you put that extra money into more supplies to be used as future trading goods.

Future trading goods will massively increase in value in a Level 2/3 situation.  The relative purchasing power of gold will therefore decrease.  Future trading goods are both a better way of carrying forward wealth, and are also something that may directly impact on your own ability to survive comfortably and well.

You can’t shelter in gold.  You can’t drink it.  You can’t eat it.  For us as preppers, it therefore should be of no interest or relevance.

Jul 042012
 

We must plan and prepare for an uncomfortable period of extended lawlessness as part of a Level 2/3 Event.

Conventional wisdom paints an apocalyptic but not very detailed picture of social breakdown in a Level 2 or 3 situation (note – it might be helpful to refresh your understanding of what we define as Level 1, 2 and 3 events).

In the past, we’ve suggested there wouldn’t be an instant collapse of social order and there wouldn’t be an instant mass exodus out of the cities.  That’s not to say the collapse won’t happen (we’re sadly certain that it will), it just is unlikely to happen immediately and instantly.

It is helpful to understand the evolving stages of social order, disorder, and then – hopefully – order once more that will transpire during such situations.  If we understand this process, we can adapt our own responses to the changing world around us – and we can also draw some encouragement from the likely eventual resolution.

Here’s how we see things as unfolding.  We make these predictions based on broad reading of social literature, studies of past social collapses, consensus discussions on the topic, and our own best guesses.  No-one really knows for sure what will happen, but we think this is a reasonably likely overall evolution.  Some parts of the six phases might be more or less prominent, but just as how a wheel has to fully rotate 360 degrees to complete a full circle, each part of it needs to occur as part of the process to the next part and to the final phase six resolution.

The time each part of the process will take is of course conjecture on our part, particularly Phases Three and Four.  So consider this in broad outline and adapt it as you wish to make it part of your own planning.

Phase One – A False Calm

The first part of a Level 2/3 event may last anywhere from a day to two weeks.  This will be the period during which people slowly come to accept and comprehend that life as they formerly knew it has massively changed, and that there won’t be a magical ‘rescue’ by some government service.

During this time, the rule of law will probably continue more or less unchanged.  Indeed, the first steps that the civic leaders will probably undertake in response to the situation will be to declare states of emergency, call out the national guard, set curfews, limit the amount of food one can buy, and so on.

Not only will such steps be taken in an attempt to preserve the status quo, but the people tasked with implementing such orders (police, national guard, etc) will be compliant and act as directed, as will most of the civilian population.

The predominant underlying motivation in phase one will be ‘let’s all keep it together, and we will manage to survive in an orderly and civilized manner’, combined with a paralysis of belief and action in response to a situation beyond most people’s comprehension, and of course, the hope/expectation that someone, somewhere, will come to everyone’s rescue and save the day.  It will take some days before supplies start to run out and the local/regional support structures start to undeniably crumble and fail.

Phase Two – A Growing Panic

Unfortunately, people can only remain so calm for so long when they’re starving.  When people run out of food, and when the local supermarkets and distribution centers also run out of food (actually, this will occur first – panic buying will see the supermarkets empty out in a day or two), and when no more food comes in to replace the consumed food, people find themselves with two stark choices – lie down and passively die, or do whatever it takes to search out and take food for themselves and their families.

Maybe some form of community sharing will be instituted, but some people will refuse to share their own resources, while other people will realize they can get more by taking than they’d get by passively accepting their ‘fair’ share.  The community sharing concept will not prove a success as a result – and even if it were to be a success, how long can it continue?  A week?  Two?  With no new deliveries of food, the available supplies will quickly be exhausted.  You can’t share nothing.

This challenge will apply just as much to the law enforcement personnel as it will to the civilian population, and eventually, law enforcement personnel will abandon their duties and join in the growing free-for-all that is developing.

Isolated outbreaks will grow and multiply, and before too long, the ‘rule of law’ will have vanished and people will be doing whatever they need to do, either to protect the food and shelter they do have, or to seek out and take food and shelter from those who have it.

The cities will become bloodbaths with no remaining organized law enforcement.

The predominant feeling in Phase Two will be a combination of panic and anger.  ‘How could this happen to me?’ and ‘This is not fair!’ will be how much of the population perceives things, and there will come a tipping point where the former Phase One idealistic hope of ‘Everyone else is being calm and peaceful, therefore I should behave that way too’ will transition to ‘Everyone else is looting and pillaging, therefore I need to as well to get my fair share’ – a feeling made all the more essential by the clear evidence that if you don’t fend for yourself, no-one else is going to do it for you.

This phase – the breakdown of law and order, while most people remain focused on their urban/suburban residences and lifestyles – will last a short while, with Phase Three starting almost immediately and then growing more and more dominant until the cities become hollowed out.

Phase Three – Abandoning the Cities

It will quickly become apparent to people that there are no remaining sources of food in the cities, and for most people, both no way to grow their own food and also no safety in their current residences.

Again, people will have two stark choices.  Lie down and die, or roam further afield in search for food and safety.

This will inevitably drive people out of the cities.  Think of all the images you’ve seen of streams of refugees from war-ravaged areas, traveling sometimes many hundreds of miles, leaving their old world behind and heading towards a very uncertain alternate life.  That’s what will happen, except there probably won’t be any UN sponsored refugee camps or friendly countries to host people.

A lot depends on whether the situation is a regional, national, or continent-spanning event, of course.  But even if some countries remain unharmed and unaffected by whatever event it was, the numbers don’t work well in our favor.  Most refugee situations involve no more than a few million refugees, and there are wealthy nations with huge resources available to assist the refugees – most notably, the US itself.  If something occurs to destroy the resources of the US, and if there are suddenly 300 million of us all needing food urgently, how can any other nation adequately respond?

It is one thing for a nation of 300 million to assist 3 million refugees.  But how can a nation of 3 million (or 30 million) now turn around and help the US with its 300 million people, all simultaneously now needy and starving?  The sheer logistics of moving the food and distributing it are impossible to start with, and every other part of a coordinated rescue mission for the entire US also suffers from the sheer enormity of the project.

The refugees may be preyed upon by gangs of opportunists, and may also themselves be roving marauders.  They’ve got to eat, after all, so they’ll have no choice but to find food wherever it is to be found, and to take it whenever they can.

The predominant feeling at this point is ‘Every man for himself’ and ‘I’ve nowhere to go and nothing to do except fight for survival at any and all costs’.

We see this phase as lasting several weeks to several months.

Phase Four – Nowhere is Safe

As people move out of the cities, they’ll variously stop and settle in places or convert to an extended nomadic lifestyle.  What else can they do except just plain die?  An appreciable percentage of the population will indeed die – either from exposure/lack of shelter, from disease, from hunger, or from violent encounters.

It is impossible to see how this can not occur – in the circumstance that a Level 2/3 event occurs on a national basis, it will interfere with the ongoing highly mechanized process of agriculture, and even the labor dependent parts will be disrupted by farm hands joining in the social disorder too.  The country won’t be able to make enough food to feed itself.

Whatever way you run the numbers, anywhere from perhaps a half the population to three-quarters or more of the population won’t survive through the end of the first winter – even if food were plentiful, energy will be scarce, and people will die of exposure as well as of starvation.  And that’s before we start to think about the disease that will ravage through survivor camps, killing off massive numbers of people too.

People who try to establish themselves in some form of sustainable environment for the future will find themselves being challenged by people who don’t want to invest in a future which – to them – is unsure and unlikely; these latter people will be living for the moment and will take what they can, and squander resources recklessly while living ‘high risk’ lifestyles.

A farmer who keeps a herd of dairy cattle will see his cattle taken from him and slaughtered – people would rather have the meat now than a supply of milk for years to come.  A farmer with a supply of seed potatoes for next year’s planting will see them taken by people who want to eat food now and who can’t wait many months for the seed potatoes to be planted and to bring in a full new crop.

A person who has stored sufficient food to feed himself and his family, frugally, for a year, will see a mob take that food from him, eat some of it, waste some of it, and take the rest away with them.

A person who attempts to resist (and fails) may find himself tortured or killed (or first one then the other).  A person who attempts to barricade themselves in their secure retreat may find an attacking mob will simply choose to burn his entire retreat to the ground – with him still in it, of course.

The mob mentality would rather see the person and the mob lose everything rather than the person keep anything for himself.  Win-win will be an abandoned concept.  Win-lose will be the order of the day, and lose-lose will also be an unfortunate approach that is widely adopted too.

Some people might keep a social conscience and attempt to lead a good and lawful life.  Those people will also be known by another name – ‘victims’.  It will be kill or be killed; and those who are not willing to aggressively defend themselves, their loved ones and their possessions will find themselves losing everything.

The predominant feeling at this point will be a ruthless pursuit of the need to survive short-term, never mind the longer term, and never mind the cost or casualties of what one does to survive.  There will be no law and no formal consequences to any actions.

The duration of Phase Four depends a bit on the seasons and the location – a harsh winter will impose calm (and/or an icy death) on people, as well as restricting movement, whereas an extended summer will allow for nomadic roving groups of lawless looters.  We of course can’t guess when during the year a level 2/3 situation may suddenly erupt, but we will say that Phase Four will run through until the winter, at which point – especially in places with harsher winters – it will diminish in scope, and by the next spring, conditions may be ready for Phase Five.

Phase Five – A New Form of Social Order

Out of even the direst chaos, some new structure inevitably evolves.  We see two areas of evolution that will slowly start to coalesce out of the Phase Four anarchy.

On the apparently minus side, the bad guys will start to form into organized groups.  There already are groups of bad guys in place – biker and street gangs – and they will grow enormously in size and power.  Other groups will form on an ad hoc and semi-random basis.

We say this is an apparently minus development.  The good part of this is that any type of organized group starts to get a structure, some controls, some vision, and some concept of a future.  Most of the ‘lawless’ groups on the planet, both now and in the past, have actually been bound by very strict internal codes of conduct and behavior – their lawlessness, as has been perceived by ordinary society, is more a form of culture clash between the culture and values of the group and the society in which they live, and a harsher set of consequences for people who broke their own internal rules of conduct than society imposes on people in general.

This is as true in nature as it is in human society.  The most effective parasites do not kill off their hosts; indeed some parasites create classic win-win systems with their hosts so that both benefit from the association.  We see this with organized crime too, with the classic win-win being the payment of protection money to a local gang.

We won’t debate the interesting point about the differences between paying protection money to a gang or paying taxes to fund the local police department; but if you look at it dispassionately, you’ll see that in both cases, the people making the payments do so in the hope of getting a positive consequence (protection) and in the matching hope of avoiding a negative consequence (a beating or a term of imprisonment).

So we see formal gangs setting up regional territories.  If you pay them protection money, they’ll otherwise leave you alone, and will endeavor to keep other would-be predatory groups away from you.  If you want to travel along ‘their’ road, you’ll have to pay a ‘toll’ to do so.  And so on.

We will also see groups of citizens getting together to re-constitute some sort of citizen based law enforcement, first in some sort of mutual defense agreement, and subsequently by sharing in the costs of full-time law enforcement officers, aided by citizen deputies as needed.

Some areas will be controlled by citizen groups, and others by gangsters.  The citizen groups will have no interest in attacking gangsters out of their area, while the gangsters will occasionally be tempted by the thought of expanding, with ‘border clashes’ occurring from time to time as the two groups test each other’s resolve.  An uneasy truce will lie over much of the country.

Within the alternating framework of either citizen or gangster controlled areas there will still be crime on a more individual rather than organized level.  We predict that penalties for crime will increase – a return to the earlier settler days with summary hanging being the punishment for cattle-rustling, for example.

There may also be marauding gangs who opportunistically tour through areas, whether gang or citizen controlled.  Life will be dangerous, but survivable.

Crime detection/solving will be massively less effective than previously, due to the loss of the high-tech aids the police have come to rely upon.  More crime might be unsolved, but the flipside of that will be that criminals who are caught will be subject to more severe penalties.

Any people incarcerated will have to ‘work their passage’ – society will not have spare resource to feed, shelter, and entertain criminals.  Whether as a punishment or just as a necessity, criminals will find themselves involved in hard labor and harsh conditions during their imprisonment.

The liberal ‘touchy-feely’ crowd who likes to fill prisons with better food and televisions and recreational equipment than many people have outside the prison walls will either have died off (been killed) or will have had their eyes opened and their value systems changed to the point where, like reformed smokers now being aggressively anti-smoking, they may be the first to demand more and more hangings for lesser and lesser offenses.

The key social and support elements will become family based as the smallest support unit, and then faith/congregation (or, in secular areas, block associations) based.  Formal civic government will be bare-bones and will be focused primarily on getting essential life-support services to everyone, rather than funding minority empowerment projects that benefit only narrow groups of special interests.

People will be too busy concentrating on surviving to care about topics such as gay rights (either pro or con) or women’s issues or black history.  Environmental concerns and constraints will vanish – as we see in the world today, only wealthy people enjoying comfortable safe lifestyles can afford such concerns.

The prevailing attitude in this phase will be a grim determination to survive, and a return to a social code of acceptable behavior.

The duration of Phase Five is hard to guess at.  A decade?  A generation?  It really depends on how society as a whole feels it has learned lessons from the circumstances of the Level 2/3 event, and how it might redefine itself for the future, and also on how fast or slow ‘civilization’ in terms of services and products return to something equating to normal.

Phase Five slowly starts to blend into Phase Six, and one of the tools for this will be the growth of trading and contacts between individual settlements.

Phase Six – A Return to Normalcy

As the things that took man from the stone age to the wood age to the iron age to the industrial age to the information age return, so too will society start to adapt and become more refined and nuanced.

As trading starts to spread from one settlement to the next – made possible by the restoration of safety to traveling between settlements – this will help encourage further economies and efficiencies of scale, and economies will start to become less micro-economies and more regional in nature, with improvements in overall living standards for all in the region.

People will start to have the luxury of spare time, and spare money, and will stop living lives constrained by their immediate neighborhood and this year’s crop.  Instead, they’ll again start to think of other things and the longer term.  As Maslow’s Hierarchy of Needs explains, as each level of essential survival is achieved, a new set of objectives and challenges replace them, evolving to higher order issues such as esteem and, at the top, self-actualization.

The prevailing attitude will become one of confidence and assuredness.

What We Need to Do as Preppers

At the very beginning of the six phase cycle, we need to take advantage of the ‘grace period’ that is ours during Phase One. and use this to give us a head start towards getting to our retreats and preparing for the difficulties that will follow.

Ideally, of course, we want to bug out before the civilian authorities start to impose restrictive emergency/martial law controls on people and their movements.

We need to be alert to the onset of a Level 2/3 event, and as soon as we view one as underway, we need to immediately bug out.  During the Phase One ‘False Calm’ we won’t draw so much attention to ourselves driving somewhere in a vehicle, and we’ll encounter fewer threats and problems on the way.

But as soon as the situation clicks over to Phase Two and Three, life becomes much more difficult if we are still in transit on the way to our retreat location.

Hopefully we’ll miss most of Phases Two and Three, because we’ll be well away from the larger cities.  Hopefully, also, we’ll be prepared to confront Phase 4 in a way that will enhance our chances of surviving through it.

More to the point, our understanding of this process is such that – hopefully – we are already laying the seeds of establishing a Phase Five for the region our retreat is located; we want to very quickly make not just our personal retreat but the area it is part of become a haven of citizen-supported mutual cooperation and safety, with sufficient resolve and strength to fight off both uncoordinated attacks and also to stake your claim to your area as being citizen-controlled rather than a gang-controlled area.

Succeeding in creating a positive Phase Five community will help you move forward into Phase Six.

Jun 042012
 

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

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

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

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

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

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

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

Dollar Denominated Prices of Essential Items Will Soar

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

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

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

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

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

Money Will No Longer Have Intrinsic Value

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

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

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

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

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

A Short Term Opportunity for Itinerant Traders

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

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

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

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

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

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

The Implications of a Shortage of Actual Physical Money

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

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

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

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

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

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

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

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

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

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

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

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

Summary

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

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

Jun 042012
 

Gold looks very pretty, and today has a very high value. But will it be of any value at all WTSHTF?

Most preppers already have some sort of acceptance that US currency may become less universally accepted subsequent to a Level 2 or 3 event occurring.  We’ve discussed some aspects of the problems with US currency in a post WTSHTF world before.

Interestingly, one of the reasons that US currency won’t be widely used is simply because most people don’t have much real cash these days.  Sure, we might have large deposits in our banks, we might own stocks, shares, bonds, etc, and we might be able to borrow still more money from our credit cards or home equity, but most financial transactions we do these days are electronic, using debit or credit cards (or sometimes still checks) and we don’t need to actually pass over ‘real’ money for all these transactions.

And, if we did need some real money, we can conveniently get it, 24/7, from an ATM.  So most of us have only a few hundred dollars in actual cash under the bed (or wherever else you keep it).

With electronic banking unavoidably becoming unavailable in a Level 2/3 scenario, we’d all find ourselves limited only to the cash we had with us at the time the event occurred.  Some of us might be fortunate, and find ourselves with lots of cash, but with little in the form of essential supplies to live off.  We’d be cash rich, but asset poor – the cash we own would in no way reflect the new value of the things we owned or could trade.  Others of us might have little or no cash, but several years supply of essential food and other supplies.  Who then is the wealthier person – the person with cash and nothing else, or the person with a basement full of essential supplies and no cash?

So not only is there a lack of cash for commercial dealings, but also the cash that is available in a community doesn’t reflect the true wealth of the community in a Level 2/3 situation, and there would also be no clear conversion between cash and how much essential supplies would cost.

Even if an equivalent set of values was established, what happens if another person joins the community, carrying with him a suitcase full of $100 bills, but without any food or other essential items?  He would have enough money to buy all the food in the community, but who would want to swap their food they need to live on for pieces of paper with green printing on them?

This act would be a bit like, at present, a foreign country printing up counterfeit US currency and spending it.  So communities would necessarily have to in some way distinguish their community’s supply of cash from that of other communities, so that a person from another community couldn’t come in and destroy the financial base of their community.

Gold Also of No Value

Although most preppers agree that US currency will become close to useless, these same people often advocate gold as a way to store value, and as a likely future currency.  We disagree – read on for why we think gold will be of no more use than US cash.

If you want to get a real headache, read (at least) two textbooks on economics – one advocating the benefits of the gold standard and one arguing against it.  Maybe also try to find an open-minded textbook that fairly sets out the pluses and minuses of both perspectives.

If you choose to do this, you’ll hopefully form the opinion that there were and are some good features of the gold standard, but also some major limitations and problems with it.  Did the (do the) good features outweigh the bad, or vice versa?  That’s where the controversy comes in – most economists can agree on the essential mix of good and bad points, they just can’t decide which outweighs the other.

We understand and sympathize with why many people who dislike the government’s growth, largely funded by printing its own money and running deficits, and allowing inflation to eat away – to invisibly tax – the net worth of the citizens, why these people would wish a return to the gold standard, because this would limit the ability of a government to continue this type of financial growth and economic control.

But we don’t believe the underlying ‘magic’ of gold still applies as being the fundamental building block of any economy; indeed, gold has never been universally accepted as the basis on which economies can be created and compared – it has always shared that role with silver.

Much of this is irrelevant theory, however, for a Level 2/3 scenario in the future.  Some preppers say you should keep a supply of gold coins and/or some other form of gold, because it will be universally accepted as a new pseudo-currency after life as we know it (LAWKI) ends.

We disagree, for exactly the same reasons we don’t think current US currency will survive and continue to be universally accepted.  Gold and silver and all other abstract expressions of wealth all suffer from the same problems as paper money – you can’t eat them; you can’t live off them.  At present, it is true that the amount of gold/silver/whatever a person has closely correlates to what they could buy with it, because there are no shortages of anything.  But after LAWKI ends, and there become shortages of everything essential to life, the ability of gold and other precious metals to be converted into things of true value – life’s essentials – completely disappears, because there is no underlying value or use to the gold itself, except as a pretty metal for ornaments and jewelry.

As we’ve asked before, who is the wealthier person after LAWKI ends?  The man with 100 pounds of dried food, or the man with 100 pounds of gold (in today’s terms, the food might be worth $1000, and the gold would be worth almost $2.5 million).

The correct answer has to be that the man with the food is wealthier (assuming food to be in short supply, which is a very safe assumption to make).  If you were starving, and you met both men on the road, and one offered you a pound of food and the other a pound of gold, which would you take?  Which would you agree to work for a day in return for receiving the item?  The food, right?

Also, exactly as the case with money, if civilization ends tomorrow, there won’t be enough gold available to provide an effective means of doing business (unless we were to make each gold coin worth a ridiculously huge amount of money).  And what would happen when a stranger rides in to town with a bag full of gold coins, enough to buy all the spare food in town?

Or what say one of the local residents suddenly strikes it rich, and finds some gold in the stream at the bottom of his property.  Suddenly there is more total gold in the community, but it isn’t represented by a matching growth in items of value to be purchased by the gold.

The only people who would take gold in exchange for items of true value would be people who were taking a gamble and betting that in some point in the foreseeable future, life would return back to close to normal, and gold would become an innately valuable metal again, just as it is now.  They’d be willing to take your gold from you, while giving you very little in return, and would trade off the low value/cost of the gold now with the hope that at some future time, life will return to normal and they can cash in their gold at ‘normal’ rates.

How to Stockpile True Value for a Future Situation

The true currency of value will be an expression of life’s essentials – maybe a ration of food or water or energy, or some sort of composite value expressing elements of all three, and exchangeable for these essentials on a known basis.

So, in preparing for an adverse situation, you’ll find yourself much better off if you invest not in what today’s society accepts as abstract expressions of wealth (whether it be cash, electronic deposits, or precious metals) but rather in items that will have direct tangible value in the future.  The most essential three items for survival will be food, water, and shelter, but with water being a relatively low value item, and with shelter being a very subjective item, we think the key products for measuring and storing value will be food and energy.

In other words, store food and store energy.  You could also store ‘meta-expressions’ of food and energy – in other words, objects that can assist in growing food and creating/capturing/storing energy.  A gallon of gas or a pound of wheat would both be very valuable, but so too would a solar cell array or a wheat mill or some farming implements.

This will become the future replacement of the gold standard – an energy based standard.  This is a much more sustainable monetary base, because unlike gold, energy is a thing of real value.

May 132012
 

This German stamp was worth two marks when first printed, then was over-printed before being released, for an inflated value of ten million marks.

It is very unlikely that in any Level 3 scenario, regular currency such as we currently have in our pockets today, will be honored or accepted by anyone, anywhere.

Even in Level 2 scenarios, while US currency may retain its notional abstract value, and people would be foolish if they burned it as fuel for their fire, it is likely that people may have difficulty using it to buy things with.  It will only be with a restoration of society after a Level 2 event that regular money will resume its normal role.

It is helpful to understand the evolving role of money so as to understand what may happen in a Level 2 or 3 situation in the future.  This article commits several gross sins of over-simplification in an attempt to explain the artificial nature of the money we all rely on today, and to point out why in a Level 2/3 situation, the acceptance of money as an intermediary abstraction of value will massively reduce.  If you’re an economist, by all means roll your eyes in disgust, but hopefully you’ll agree that even though we’ve over-simplified, the key points we make are valid and essential.

Money is Marvelous

One of the most marvelous inventions of the present world is money.  Indeed, it is such an essential element of the world that it is far from new – the oldest known examples of coins date back to the period of about 700 – 550 BC.

It is possible – maybe even probable – that coinage was used prior to that time, but perhaps made of less permanent materials.  Earlier forms of currency may have been fashioned out of wood – wooden nickels – or bone or other materials that probably have not survived down the millennia to the present day, and/or if they have occasionally survived, have not now been recognized as forms of money, being thought of instead as pieces of art and jewelry and tools.

Okay, so we all like money – or, more to the point, we all like the concept of wealth in general.  But why is money, as a means of trading, so good?  There are many reasons for this, some becoming quite technical and less immediately relevant, but let’s look at a few obvious and relevant ones now.

Money Facilitates Trade

In quick summary, money is good because it provides a convenient method of converting or exchanging between different things, and a non-perishable way of storing wealth.

Money makes it easier to trade the items you wish to sell for the items you wish to buy.  You can choose the person to buy your goods based on how much money they will pay you, not based on what products they have to sell in exchange, and you can choose the people you buy things from based on the prices of the products they sell rather than on their willingness to buy the products you have to sell.

If you have spare assets – for example, food items – you can sell them and the money you received will not perish or go stale.  Money also is easier to store – it takes up less space, and doesn’t require any special care.

The size of money also means that if you need to buy something from the market, you don’t need to fill your vehicle with whatever it is you hope to exchange for the products you need – and if your attempts at exchanging the items are unsuccessful, you don’t need to take it all home again.  You simply keep the money in your pocket.

Money also makes pricing more predictable.  As in the earlier example, the value of things now becomes a more universal sort of concept, rather than based on the vagaries of who would wish to buy them at any given time.

Money – An Abstraction or a Tangible Representation of Wealth?

These days, most people conduct most financial transactions without money ever physically passing from them to the person they are buying or selling something with.  Credit cards, internet transactions, electronic banking, even relatively old-fashioned checks – all of these are abstractions of the underlying money, but they work based on the accepted high probability that these abstractions can be readily converted into real money – although depending on a store’s check acceptance policies, these assumptions are not always universally accepted.

It is easy to understand how a credit card transaction or a check embodies a statement along the lines of ‘by this piece of paper (check) I am instructing my bank to transfer some of the money it is holding on my behalf to your bank, from which you can then spend or withdraw it as you wish’.

Now for the really important issue, which most people live their entire lives without ever considering, and – happily – without ever needing to consider.

What is the underlying actual value of the money in your pocket?  How was this value set?  How might it change?

Even the question itself is difficult to phrase and express, because it is such a foreign concept for many people.  What is a dollar worth?  A dollar is worth a dollar, right?  What is the question?

This is actually a very important question after the end of LAWKI.  At present, we all have – to a greater or lesser degree – reasonable confidence in our government and our economy.  We all believe that a dollar is worth a dollar, and don’t need to second guess the issue at all.

Money Originally Had Underlying Value Equal to its Face Value

Indeed, there are historical reasons for this confidence.  It used to be that a dollar was exchangeable for a dollar’s worth of gold bullion.  Our currency was asset backed.  No-one needed to question its value, because we all knew that a dollar was worth a dollar’s worth of some certain asset – typically but not exclusively gold for higher values, and silver for lower values.

This has been the historical underpinning of currency.  While money is also an abstract representation of some sort of underlying tangible object, the fact that it can be exchanged for the underlying object of value has confirmed the abstract value of the money itself.  Money has been, for most of its history, either inherently valuable (ie made out of valuable metal that is worth about the same as the face value of the money) or convertible to an object of known value.

This underlying concept of either inherent value or convertibility to known value also helped trading beyond a small region.  Although these days exchange rates between currencies around the world are based as much on abstractions as on realities, back then, exchange rates were simple – ‘My one ounce gold coin, which I call a dollar, converts to two of your half ounce gold coins, which you call pounds’ (or whatever other currencies were being traded).

A time came when it became more convenient to carry around representations of the underlying gold or silver or whatever, rather than to actually carry the precious metal itself.  Just as gold coins saved us the hassle of carrying our assets with us, paper banknotes saved us having to carry around a stack of gold coins.

Money Becomes More Abstract In Form

Institutions – banks – were created, and they would hold all your money for you (in the form of gold or other precious tangible things) and then issue ‘IOU’ forms indicating that the forms could be taken back to the bank and swapped back to the gold.  These IOU forms became banknotes.

So far, so good.  But then we started to (perhaps) get too clever for our own good.  Banks noticed that people rarely came back to ask for their gold, and so they started to issue more IOUs than they had gold in their vaults.  This worked fine until or if there became a rush on the bank, and all of a sudden, the bank couldn’t redeem all its IOUs and that was considered to be a generally bad thing by the people holding the IOUs, which had now become worthless.

So the government centralized the role of controlling the issuance of IOUs, making it harder for banks to cheat the system for personal gain (but, alas, not making it impossible – not then, and not all the way through to the present day).

It is important to understand that initially the governments took the role of becoming the master issuer of banknotes so as to protect the underlying value of the currency.  But, before too long, they started to succumb to the same temptation that private banks had, too.  Why should they limit themselves to only issuing enough banknotes to represent the gold they had in their vaults?

If a private person or bank does this, they are committing fraud and possibly worse crimes, and risk going bankrupt, and the people holding their now useless IOUs/banknotes lose the value of the paper they have.  But if the government itself does it, well, by definition, it must be legal, right?  And how about the value of the money we have – is it ever at risk?  (Read the section below on hyper-inflation for the answer to that.)

Fortunately, and most of the time, we do not need to question what it is that supports the value of the money we have.  If I say ‘this is worth a dollar’ and you say ‘so too is this worth a dollar’ we are using the dollar as an intermediary way of equating the value of my item and your item, based on our broad knowledge of the values of other items and the value of how we could otherwise spend a dollar’s measure of money.  The key reality is that we have each used a common scale to equate the value of the items we have and might be considering exchanging, and a commonly accepted form of holding on to and passing over the intermediary value of the objects we are trading (ie the coins and banknotes).

We could measure everything we buy and sell in pounds of wheat or gallons of gas or anything else, too; but in the present world, it is easiest to use dollars as a universal measuring tool, and as a universal way of conveying value from one transaction to the next.

An Introduction to Government Intervention and Inflation

But this measuring tool is not a sacrosanct object that stays fixed in form.  The government can change things by putting more money into circulation (or by taking money out of circulation).  This can be a hard concept to understand, and in very simple terms, think about this :  If the total value of things in a town comes to 5000 units of value, and if all the money in the town comes to $10,000, then do you kinda sorta see how you can say the 5000 units of value equate to $10,000?  Each unit is worth $2.

Now if suddenly we get more units of value – say the main value of things in this town is food and there has just been the annual harvest – what happens?  We still have $10,000, but now we have 10,000 units of value.  You know that when something becomes more readily available, the price drops, and this is what happens in our terribly simple economic model.  Each unit is now worth $1.

Of course, if something happens and half the stored food is destroyed, you’ll have 2,500 units, making each value worth $4.

So far, so good.  But what happens now if the town prints off another $10,000 in banknotes.  We now have $20,000 in money, and still the same original 5,000 units of value to spend the money on.

Do you see how adding this extra money, without adding extra value at the same time, means that each unit of value is now worth less.  Instead of a unit costing $2, it now costs $4.

This is an example of inflation.  If the supply of money increases at a greater rate than the underlying wealth of the economy, the value of things gets reduced and their costs increase, because there is a tendency for the total value of all real items of value to equate the total sum of the money in the economy.

Now if you are a federal government and you need to pay for a $1 billion expenditure – maybe a foreign war, or a new capital works program, or whatever, you have an easy way and a hard way to get the money you want.

The hard way is to tax your citizens, or to divert money from other forms of expenditure.  The easy way is to simply print another $1 billion in currency and use that new money to pay for the project, without needing to tax your citizens.  They love it – they have a new freeway or whatever, and haven’t had to pay any taxes.

Except that the value of the currency has been reduced, and the prices of everything goes up.  This would be impossible if each dollar had to be represented by a dollar’s worth of tangible value, but these days, that requirement has long since been abandoned, and so inflation occurs.

We’ve grown tolerant and accepting of a small amount of inflation (and there are other reasons for inflation too, some of them almost ‘good’ reasons).  But what happens if our government breaks its ‘social contract’ with us and irresponsibly prints way more money than it should?

Hyper-Inflation Is What Happens When Money’s Value is Destroyed

Maybe you’ve seen the pictures of inflation-ridden Germany in 1923, and of their banknotes with incredibly high values on them.  Similar things have happened more recently in Zimbabwe, and slightly less spectacularly in Russia.

Remember how we said that if you print more money, the price of things goes up?  Well, in Germany in 1923, the government was printing so much money that it had 300 paper mills and 150 printing companies with, between them, 2000 printing presses, all working around the clock, printing money as fast as they possibly could to fuel the fires of its runaway inflation.  By October 1923, only 1% of the government’s revenue was coming from traditional sources such as taxation.  The other 99% was being artificially created by printing more worthless money.

An item that cost 1 mark in January 1923 was costing 261 million marks by November.  The value of currency was dropping so rapidly that workers were being paid three times a day.

But the ‘real’ cost of things remained the same.  Although the cost of a loaf of bread in Germany rose to 200 billion marks at one point, two things remained more or less constant.  The relative cost of a loaf of bread and a pint of milk and a new pair of shoes remained closely similar – everything was going up in value simultaneously.  And the number of hours of work it took to earn enough money to buy one of these items – that stayed much the same as well.

The other thing that remained much the same was the cost in foreign currency to buy the item.  The cost of bread was skyrocketing in terms of the cost in German marks, but the number of marks you could buy per dollar was also skyrocketing too.

So it has been common in some countries experiencing hyper-inflation for a second stable currency to co-exist alongside the local currency.  Historically that has usually been the US dollar – indeed, during Russia’s early independence after 1991, many items in shops were priced in US dollars rather than in rubles, and the price was converted to rubles only at the time the item was being purchased.

What this shows us is that if people lose confidence in their currency, or if their government plays financial games with it, the currency will fail, but the underlying economy can survive, albeit using a different form of currency.

But because the role of money – marks in the case of 1923 Germany – as an intermediary was totally destroyed, and back then there were not the modern convenient ways to price items in an external currency – so too was the German economy.  Other economies have only managed to survive by basically ignoring their local currency and using some external reference point for trading purposes.

Implications for Level 2/3 Situations

At present, the US has an efficient national economy, with many trillions of dollars of transactions occurring every year.  Goods, people, and money can freely move all around the nation, and while there are some regional variations, in general, a dollar is worth a dollar, wherever you go, and can be freely converted into a dollar’s worth of goods.

After a Level 2/3 event, the country will fracture into tiny regions, each having their own micro-economy.  Maybe your micro-region has a surplus of food and a shortage of energy.  Food will be cheap and energy will be expensive, because the ability (and or costs) of ‘exporting’ food to another micro-region and ‘importing’ energy will be massive.  The opposite might apply just 100 miles away.

That’s okay, and doesn’t destroy the value of money by itself.  But wait – there’s more.

A dollar is only worth a dollar when we know we can for sure use it to buy the things we want and need.  Remembering back to the earlier example, if there is a shortage of goods, they will become more expensive.

In our micro-economies, we will move from an economy where the limitation on transactions is more to do with people’s personal wealth and their ability to afford the items they want to buy – this is the situation at present for most of us; and instead it will become an economy where the limit is not on the money we have, but the shortages/availability of things to buy, no matter what their cost.

Today, imagine two people.  One person has 10,000 gallons of petrol stored in a tank, but no money in his bank account.  The other person has $10 million in his bank, and only half a tank of gas in his car.  Which person would you rather be?  Most of us would prefer to have the $10 million – maybe we’d spend $100,000 of it to buy/build some storage tanks and fill them with 10,000+ gallons of gas, but we’d still be left with $9.9 million to enjoy in other ways, and to buy anything we wanted.

But, after the end of LAWKI, who would you rather be?  The guy with 10,000 gallons of petrol in storage?  Or the person with an entry on his bank statement saying ‘Balance = $10,000,000’?  What would you now be able to buy with your millions?

This example shows two things.  First, clearly 10,000 gallons of gas, formerly worth maybe $40,000, are now worth way more than $10 million!  Secondly, just having money no longer matters.  The former easy convertibility between money and things of real value has been destroyed.

Here’s another example.  Your small community is surviving as best it can, and three strangers turn up at your gate, asking to join your group.  One says ‘I have with me enough food for all of you for six months.’  The second says ‘I hear you have some elderly and unwell people in your group.  I’m a doctor and I have a range of common medicines in my bag.’  The third says ‘I’m a mega-millionaire and I have a suitcase full of $100 bills.’

If you can only accept one of these three people, who would you choose?  We’ll let you argue as between the man with food and the doctor, but chances are, the millionaire will be left outside, unwanted and unwelcome.

Some Conclusions

1.  The completely different economic basis of life after a Level 2 or 3 event will completely change the current relative values of things.  Luxury goods will become worthless.  Common ordinary items will become invaluable.

2.  Because our current US currency has no underlying real value, it will cease to play a role in a Level 3 scenario, and will be put ‘on hold’ during a Level 2 scenario, or perhaps massively devalued.  A pound of meat might cost two pounds of wheat, or $500.

3.  The most important things for a person to have will be skills and tangible items that extend life.  Even gold and silver will be less valuable than a knowledge of farming, animal husbandry, medicine, etc.  A pound of food will buy another day or more of life; you can’t eat gold or silver.

4.  Due to the compelling benefits of currency as an intermediary in all forms of exchange, initial bartering systems will be replaced by new regional currencies, with real asset backing.

5.  The most dangerously useless part of your own preparing is to accumulate abstract intangible wealth – ie, stocks, shares, bonds, CDs, etc.  None of these things won’t be of any value to you WTSHTF.

Accumulate assets that will assist you with food, shelter, comfort and security, not money, because in a Level 2/3 scenario, money won’t buy you any of these life-essentials.  Spend your abstract wealth now and convert it to life enhancing supplies.  Indeed, borrow money to get these things now – if TSHTF, you’ll have the supplies you need, and the debt you incurred will probably become meaningless.