Apr 252014
 
The development of hyper-efficient mechanized agricultural production revolutionized our country, but simultaneously increased our dependence and vulnerability on increasingly complex infrastructure.

The development of hyper-efficient mechanized agricultural production revolutionized our country, but simultaneously increased our dependence and vulnerability on increasingly complex infrastructure.

Almost exactly two years ago we wrote an article ‘Urban Drift : A Worrying Trend‘.  The commentary and conclusions in that article remain as valid today as then, only more so.

The last two years have shown a continued move away from rural and non-metropolitan counties and to the cities.  When we wrote our article in May 2012, we said that about 80% of the country lived in urban areas and only 20% in rural areas.

USDA data shows that now only 15% of Americans live in rural and non-urban areas.  That shift from 80/20 to 85/15 is more significant than you might think – it is the difference between a 4:1 ratio and an almost 6:1 ratio.

Of particular significance is that this population shift isn’t just being caused by the cities growing faster – it is caused by people leaving the rural areas and moving to the cities.  There are now fewer people living in 1200 counties than there were in 2010 (in total, a reduction of 400,000 people), and while this has been partially offset by growth in 700 other counties, a net imbalance remains, with the cities an even more unbalanced part of our country (the USDA has an interesting chart showing which counties had growth and which lost people on the page linked above).

The period 2010 through 2013 marks the first ever extended period of rural depopulation.  Sure, often in the past, rural population growth has lagged behind metro growth, both in percent terms and also in absolute numbers, but now we are seeing four years of actual decreases.

Furthermore, many of the remaining rural residents are not productive – they are either retirees, or ‘lifestyle’ dwellers who might actually have non-agricultural type jobs that they telecommute to.  Many more are service/support workers – the people who work in the schools, the stores, and the local governments.  The actual number of people who are self-supporting is remarkably few.

Our cities increasingly rely upon food that has been grown using intensive/mechanized forms of production, and which are located increasing distances from the cities themselves.  If our modern energy-intensive world changes, then the food can no longer be grown so efficiently, and it won’t be able to be transported as far, making for crippling food shortages in our cities and all that implies.

In other words, in the last two years, the situation has got worse, not better.  Cities have become even more dependent on even fewer people supplying them with the food they need.

As preppers, we need to be sure we can supply our own food WTSHTF.

Jul 302013
 
Follow these six strategies to get more of this stuff in your pocket.

Follow these six strategies to get more of this stuff in your pocket.

Many of us feel a sense of anxious urgency about our prepping.  We know that if we suddenly find ourselves trapped in a Level 2 or 3 situation, we are not yet ready to be able to survive such a challenge; but what we don’t know is if/when a Level 2/3 situation might suddenly appear.

To put it as bluntly as possible, the biggest constraint we have is the lack of cash to invest in our preparing.

Well, we can’t give each and every one of you many thousands of dollars of cash, but we can equip you with the tools to cut down on your own monthly outgoings.  In this, the second part of our new series about prepping on a low budget (please also see part one), we look at how you can get out of debt more quickly, freeing up the money you currently spend on paying off what you owe, and enabling you to use it on more productive things instead.

Strategy 1 – Prioritize Paying Off Your Debts

So what is the first thing you should pay off?  Generally it will be the balance with the highest interest rate.  Look at all the debts you have, and understand what the APR is on each of them.  You might be amazed to see the difference in APRs.  For example, maybe you have a discounted car loan at 1.9%, a student loan at 5%, a revolving line of credit at 7%, and two credit card debts, one at 15% and one at 24%.

In such a case, you should make nothing more than the minimum payments due on everything except the 24% credit card debt, and you should do all you can to get that 24% balance reduced down.  At 24%, you are paying $20 a month on every $1000 you owe; if you can reduce the total owed by an extra $100 in payment this month, then next month that will give you a $2 reduction in interest you pay on the now lower total amount outstanding.  $2 might not sound like much after having paid off $100 extra the previous month, but if you are making payments over, maybe, two years, then in approximate terms, that $2 is a recurring benefit over the 24 months of the loan and will (sort of) save you $48 over the remaining period of the loan.  That’s a much more significant saving, isn’t it.

That is one of the key things about reducing your interest payments.  A trivial seeming $1 a month reduction in interest payments might seem of no value at all, but it is saving you $1 a month for every subsequent month, as long as the loan remains open, and over many years, that really adds up.

The other key thing is that if your interest bill is now lowered by $1, next month your payment is going more to paying off the balance and less to paying interest, so you are paying off more principal, which means that the following month, there will be even less interest to pay and even more principle paid off, and so on.

You might already know that if you start missing payments, your debts start to spiral out of control.  The flipside of that is that if you start paying more than your minimums each month, you quickly start to reduce your balances much more positively than you’d have thought possible.

After you’ve paid off the worst loan (in terms of interest rates) you’ll then successively move through everything else you owe money on.

Generally, the last thing to pay off would be your house mortgage, because that probably has the lowest interest rate associated with it.  Plus, for most of us, the interest is tax-deductible, reducing the real interest cost by as much as 30% or more (depending on whatever your top marginal tax rate is).

There’s no better way to control your outgoings without making any impacts on your lifestyle at all than by simply prioritizing how you pay off your debt, starting with the highest interest bearing debts first, and then working successively down to lower and lower interest bearing debts.

Exception – Prepayment Penalties

Some types of loan might have prepayment penalties associated with them.

Make sure that the loans you are focused on paying off as quickly as possible have no prepayment penalties associated with them.  If there are penalties, you are probably advised to concentrate on paying off other debts first.

Strategy 2 – Keep a Credit Card with No Carried Over Balance

Many credit cards have a deal whereby if you pay off your balance completely when it is due, then each month’s charges don’t incur any interest if you keep paying them off when the balance comes due.  Okay, we probably understand that already.

But did you know that if you don’t pay off your card entirely, then all charges immediately start accruing interest without the grace period you’d otherwise get if you were clearing the balance each month?

In other words, if you have to keep some balance on a credit card, have two credit cards.  One which you are paying off, but on which you add no new charges, and a second one which you keep current, so when you add new charges to it, you can pay them off when they come due, next month, without incurring any fees on those.

Strategy 3 – Consolidate Costly Credit

If you can, it is very helpful to consolidate your debts and to move them to the lowest cost source of money.

For some of us, this can best be done by getting a Home Equity Line of Credit (HELOC).  You’ll probably get an interest rate around 4% – 5%, and possibly might even be able to claim the interest as a mortgage/tax deduction on your 1040, depending on your circumstances and the nature of the amounts owed.

Let’s say you owe $5,000 at 12% and $5,000 at 18%, and you manage to get this transferred to a HELOC at 6%.  That means your monthly interest payment will instantly reduce by $75 every month – more if you can make your new interest payments tax-deductible.  That’s another $75 a month that you’ve suddenly created – and it is money you should then use to keep paying down your debt, at a new faster rate.

If you can’t get a HELOC, maybe you can still get some smaller loan from your bank or credit union, and if not at 6%, definitely still at much less than what you’re paying to the worst of the credit card and other lending sources.

Move the money you owe to the lowest cost lender.

Strategy 4 – Refinance Your House

We just spoke about rolling credit card balances to a HELOC.  But what if you have a home mortgage with a high interest rate on it?  Why not ‘kill two birds with one stone’ – refinance your home to a lower rate and also increase the amount you’ve borrowed to pay off other debt.

At the time of writing, there’s even a federal scheme that allows some home borrowers to get a federally subsidized new home loan with no origination fees and no qualification requirements.  Ask if you qualify for one of those.

Strategy 5 – Roll Balances to a New Card

Maybe you sometimes get offers in the mail giving you ‘pre-approved’ credit cards and allowing you to roll over a balance from another credit card, with an initial grace period of no interest charge applying.

Make sure there truly are no charges – no ‘cash advance’ type charges or anything else at all, and if it truly is a way of getting some months of free interest, then if the interest rate that commences at the end of the free period isn’t worse than what you’re paying now, why not cut up one credit card and start using the ‘free money’ offer on the new credit card?

We know some people who have done this repeatedly, each time getting a new grace period of some months before any interest starts being charged.

Needless to say, don’t go into debt initially with the plan to do this into the future, but if you are already in debt, this might help reduce the cost of paying off the money you owe.

Strategy 6 – Renegotiate Your Interest Rate

You mightn’t realize this, but many times you’ll find you are able to negotiate the interest rate you are charged on your credit card balances.  The credit card company doesn’t just have one interest rate that everyone, everywhere in the US, uniformly pays.  It sets interest rates more or less individually, based on your credit score, your history with the card issuer, your address, and many other factors.

If you have been making your payments regularly – or sometimes even if you haven’t – you might be able to negotiate a lower interest rate.  Even if you only get a 1% reduction in your interest rate, this could save you thousands of dollars.  Look at our table of interest costs in the middle of the previous article in this series, Seven Thoughts About Borrowing Money.  Say you had a $10,000 loan at 18% and were making payments over a 10 year period.  If you can reduce that to 17%, and if you keep your monthly payment much the same as it was before, that means you now pay your loan off over nine years instead of ten, and your total interest paid drops from $11,922 to $9,587.

You pay your debt off a year sooner, and you save yourself $2335 in interest, all as a result of getting ‘only’ a ‘small’ one percent reduction in interest charged.

That’s sure worth making a phone call and asking for, isn’t it!

Why would a credit card company/bank drop your interest rate?  Because it costs them a lot of money to get a new customer; and it costs them much less to keep you as a good customer than it does to lose you and buy in another customer – the marketing cost of getting each customer, and the promotional cost of a ‘no fee for the first year’ and/or a ‘100,000 mile frequent flier bonus if your sign up for our card’ and/or a ‘no interest on balances rolled over for six months’ or whatever other offer they are giving to new customers is massive.

Summary

There are sometimes good reasons and sometimes unavoidable reasons to go into debt (we discuss them here).  But there are almost never valid reasons to delay paying off the debt you’ve incurred.  The most compelling reason of all is that getting out of debt is just plain smart – your disposable income will skyrocket when you no longer have so much of your paycheck already committed to debt repayments.

The six steps above will help speed you towards a debt free future.  It will help, but you’ve still got to do some heavy lifting too – make paying off your debt a priority, and accept some lifestyle sacrifices while doing so.  In return, you’ll have a much healthier financial future.

Jul 292013
 
Borrowing money is nothing new, but the many ways of getting into debt these days make it easier to find yourself in financial trouble.

Borrowing money is nothing new, but the many ways of getting into debt these days make it easier to find yourself in financial trouble.

None of us have as much money to spend on prepping as we wish.  So we’re starting a new article series to help you become more financially free, and better able to invest in more complete prepping.

Our financial lives revolve around two main factors.  The income we generate each month, and the money we spend each month.  Hopefully we spend less than we earn, of course.

The issue isn’t so much the actual numbers as it is ensuring there’s a positive gap such that you are earning more than you are spending.  If you want to widen that gap, you can do either or both of two things, and only two things.  You either increase your income and/or reduce your expenses.

An exception to that rule seems to be if you’re managing a city, county, state or the entire federal budget.  Deficit spending seems to be something that these public bodies can do with impunity, but don’t you be tricked into believing that either you can safely spend money you don’t have, or that the public bodies can, either.  Detroit declared bankruptcy last week, other cities have already done so with less publicity, and some other cities similar in size to Detroit also have massive unfunded liabilities.

The only difference between us and a public body is that the speed of our crash would be quicker and harder, and that it is our own personal money and future at risk – the administrators of public bodies are seldom personally at risk when they spend their way into deficit oblivion.

So, how to reconcile the need to not spend more than you earn with the easy availability of money to borrow?  And how to borrow money as inexpensively as possible?

1.  Should You Ever Borrow Money?

Chances are you currently owe money, like most of us.  Maybe you have a house mortgage, a car payment, a balance on a credit card, a store card, a student loan, maybe payments on some furniture or something else you financed, and so on.

Some people say you should never borrow money.  We’re not saying that, and as we said, most of us do owe money.  But we will agree that many of us should probably borrow/owe less than we do.  There are times when it makes sense to borrow money – buying a house being the classic example of that.

Sometimes you might have no choice but to borrow money, it might be literally life or death.  Medical and dental bills would be an example of that.

A third category when it can make sense to borrow money up front is when the thing you are paying for is something that will provide an ongoing financial benefit to you – an educational qualification to advance your career, or a new tool that you can use to work more productively and more profitably (sometimes a new(er) car can be justified under this heading too).

A related category would be when you must spend money up front to save needing to spend more money later on.  For example, if your house needs repainting or your roof needs replacing, you are better advised to get that done in a timely manner, for fear of having much greater costs subsequently if you delay.

There is a final, fifth category where it makes sense to borrow money.  If you are in an unusual situation where an item is going up in price at a greater rate than the cost of borrowing money, maybe it is better to borrow so you can buy the item now, rather than save and buy the item later when you have saved enough money.  This has often been true of real estate, and can sometimes be true of other things too, although be very cautious when it seems you are being presented with any sort of ‘amazing short-term opportunity to save money’.  More often than not, the deal isn’t as amazing as it seems, and the short-term opportunity might be longer term than it seems to be.

It never makes any sense for any seller to sell anything for less than its fair normal market value; if someone is trying to tell you they are selling you something for less than it is worth, you have to wonder what sort of fool they are to do that.  If something is truly worth, say, $50,000, then why wouldn’t the seller ask $50,000 for the thing?  Why would he only ask $25,000?  Yes, there sometimes are valid reasons why real true bargains come along, but be very wary of deals that seem ‘too good to be true’.

So, there are five situations when it may make sense to borrow money.  On the other hand, there are also many times when it makes no sense to borrow money at all, because the ability to easily borrow money merely tempts us into buying something we didn’t and don’t need.  A bigger screen television, for example; a newer car, a hot tub, an extravagant vacation, or whatever else it is that is currently tempting you.

Manufacturers and retailers spend billions of dollars every year tempting us to buy as much as we can – and then to borrow more money to buy more things that we shouldn’t be buying – because if we all reduced our levels of spending and consumption, our economy, which has become ever more dependent on people spending more than they should, would implode.

But don’t worry about the national economy.  You should be ‘selfish’.  Never mind about the national or international economy, and don’t think about what the other 330 million people in the US are doing.  Think only of yourself, and what is best for you – our economy can probably withstand the effects of you reducing your own level of consumption slightly.  🙂

For the future, if an item doesn’t clearly fall within the five appropriate-to-borrow-money categories above, you should discipline yourself to not buy it until you have spare available cash in your bank account to pay for it.

This will save you much more money than you think, because not only are you saving on the interest costs of borrowing money, but you’ll find you end up buying fewer things, and those you do buy will be more sensible appropriate things.  You’ll have a better life style, you’ll own better things, and you’ll have more money in the bank and fewer monthly outgoings.

You’ll also discover the joys of being able to negotiate cash discounts, of being able to buy things when they are at the lowest price, and so on.  So let’s hurry your forward on your path to a much stronger financial situation.

2.  The Subtle But Massive Costs of Interest

Some of us go to ridiculous lengths to ‘save money’ – we know a person who proudly drives ten miles to fill their car up with gas at a cheaper gas station, but (by our calculations) the cost of driving there and back exceeds the money they save each time.  There are lots of examples of people who are ‘penny wise and pound foolish’, and hopefully you’re not guilty of any of these failings, yourself.

But there is one failing that many of us have.  We are sometimes so appreciative of any source of credit that we seldom stop to look at the cost of the credit, and to comparison shop when borrowing money.  The cost of credit – the interest rate we are charged – should be as important to us as the price of gasoline or the cost per pound of potatoes in the store.

Because interest ‘compounds’, there is a huge difference in total cost to you between a higher and lower interest rate, and between paying a loan off quickly or slowly.  The best thing to do is to get your interest rate down as low as you can, and to pay the loan off as quickly as you can.

Let’s look at several different scenarios to see how this works out, using a $10,000 loan amount every time.  If your loan is more, just multiply the amounts by how many times more it is to see the impact.

Interest % Years = Monthly Payment = Total Interest Paid
21% 10 $199.93 $13,992
21% 5 $270.53 $6,232
18% 10 $180.19 $11,622
18% 5 $253.93 $5,236
17% 10 $173.80 $10,856
17% 9 $181.36 $9,587
15% 10 $161.33 $9,360
15% 9 $169.24 $8,278
15% 8 $179.45 $7,228
15% 5 $237.90 $4,274
15% 4.5 $255.78 $3,812
10.5% 10 $134.93 $6,192
0% 10 $83.33 $0

 

You’ll notice several things here.  If you halve the time it takes you to pay off your loan, your monthly payments don’t double.  The increase by more like 50%.  As for the other 50% that doesn’t increase, most of that saving is due to you paying much less interest – half as much interest, sometimes even less.

The longer your loan, the massively greater your total payments will be.  Keep your loan periods as short as you can, and any time you have spare money, use it to pay the loan down still faster and further.  Remember that each extra dollar you pay, over and above your monthly minimum, is going entirely to paying off the principal amount owing, and that once you’ve reduced the principal, you no longer pay any more interest on it in any of the remaining months of the loan.

You can also see the huge difference in total interest payments at different interest rates.  Reducing your interest rate by only a few percentage points can save you thousands of dollars over the period of your loan.

Most of all though, hopefully you’ll vividly see the massive costs associated with borrowing money.  Say you’re thinking of going on a vacation – $5000 for the two of you.  Does it really make sense to borrow that money on your credit card, and to pay it off over 5 years at 21%, making the total cost of the $5000 vacation into $8100, and to be making payments for long years after you’re returned home and already forgotten about the great time you hopefully enjoyed?

Remember the five (and only five) scenarios for borrowing money, above.  If something isn’t clearly within one of those five scenarios, don’t be tricked into borrowing money to pay for it.

Now, talking about tricking, let’s look some more at issues to do with borrowing money.

3.  Avoid Unnecessary Fees

Lenders love late fees.  They massively increase the amount of profit they make from the money they’ve lent you.  So don’t be tricked into incurring them.  Plus every late payment – even by only a day – becomes a downcheck on your credit report.

Know when payments are due, and make sure your payments are always safely and surely received a couple of days before they are due.

Banks also love the fees they charge when you go into an unapproved overdraft, and/or the fees they charge if they bounce your checks.  Many times the bounce fee can be more than the check amount itself!  There’s no excuse for writing checks when you don’t have money in your account; make sure you never end up incurring these fees.

We know one person who regularly writes checks he doesn’t have money in his account to cover, and boasts that the bank always honors his checks.  That’s very kind of the bank, but he also confirmed the bank charges $30 every time.  A $30 fee for what is in effect a one or two day loan of $100 or $200?  Say it was a $200 check for two days.  That $30 fee is the same as a 2760% interest rate, and if I ever found myself paying that interest rate, I’d sure not boast about it.

We know another person who is often late paying his water bill.  He says he only really feels the pressure to pay it when he gets a notice of pending cut-off hung on his door handle at home, and then he pays it immediately.  He says it doesn’t matter, because it is not reported on his credit report.  But what he doesn’t say is that he is assessed a $20 late fee each time that happens.

A $20 late fee might not seem like a huge amount, but what a total waste of $20 for no benefit in return.  He still had to take the time to pay the bill, but by being slack, he wastes $20.  And one time, he was out-of-town, and returned home to no water, a late fee, a reconnection fee, and an emergency call-out fee.  Almost $100 in fees.

So pay your bills on time, even the ‘nasty’ ones you don’t like (like parking tickets, before they double) and the ‘unimportant’ ones like water bills.

In general, you should have a look and see how much each of your credit cards is costing you in annual membership fees, and how much your bank account is costing you too.

Do you really need three different Visa cards – especially if they each charge you $50/year?  Almost certainly not!  We generally have one Amex card, one Visa card, and one Mastercard in our wallet.  That way, if we have a problem with our Visa or Mastercard for whatever reason, we have an alternate to use, and we also have an Amex which we mainly use only at Costco (Costco has a deal on a combined Amex/Costco card membership).

Trim down the credit cards you possess.  And choose credit cards with no annual fee, or a low annual fee.  Some credit cards charge $100 or more a year, some are free.  Unless there’s some way you’re clearly getting the value from the annual fee (maybe it gives you a free companion airline ticket or something), don’t use that type of card.  If you do need that particular card, see if you can negotiate a lower annual fee with them – you’d be surprised how much you can negotiate with the credit card companies when they think you’ll otherwise leave them and go elsewhere.

You should also look at your monthly bank fees.  Banks change their fee structures all the time, and while they send out notices of changes to their terms and conditions, who has time to read through them all and try to work out what has actually changed?  Although you might have got the best deal at the time you opened your account, almost surely, over the years, it has changed and other deals have come along so you no longer have the most appropriate account type and fee structure.

Many banks have some type of ‘free checking’ account, or if not, they very probably have a lower cost account than the one you currently have.  If you’re paying more than $10/month, go ask for a better deal.

Many people report better experiences with smaller banks and local credit unions rather than with larger banks.  If you’re looking at changing banks, be sure to speak to a small bank or credit union as part of your shopping around.

If you sometimes need emergency loans, in small amounts and for short periods, make that part of your bank shopping too – find out what their policies are and what the fees will be.

4.  Negotiate Down the Fees You Pay

If you are borrowing money through an independent mortgage broker, ask them to split their fee with you.  The chances are they are getting 1%, 2%, or maybe even more of the money you are borrowing as their fee/commission, and just like realtors will generally give back some of their commission, so too will mortgage brokers give some of their fee back to you, too.

But be careful how you approach this matter.  If you ask the mortgage broker about the fee up front, he might say ‘sure, of course’ and then present you with loan rates that he has inflated the fee, so that he can then ‘reduce’ the fee and ‘give you back’ some money but still end up with as much money as he would have got anyway!

When borrowing money, it pays to shop around and compare, and when you’ve found the best two or three, then negotiate between them to see who will trim their own margin the most.

Even if you’re not negotiating by asking for a fee giveback, you can simply instead ask for a fee reduction.  We’d not recommend you ask a full-time bank employee to share their fee with you, but you can ask the bank employee for a reduction in the loan fee.  Remember these loan officers are in the business of making loans, not refusing loans, and they have some discretionary ability to vary the rates they first offer you.

If you make a mistake and the bank charges you a bunch of fees for bouncing a series of checks, and if this is not something you make a habit of doing, go into the bank, meet a banker in person, and ask for them to reverse out the fees.  If you discover that your ‘free checking’ account requires a minimum $5000 balance, and you dropped below that, ask for that fee to be waived too – but you can only do this once or twice.  However, if you’ve been with the bank for a while, you can simply say ‘I forgot’ or ‘I didn’t realize’ and they’ll probably cooperate with you.

You might be surprised to see how quickly many institutions will take their fees off again, but you have to ask them (politely!) first.

5.  How to Borrow Money Cheaply

Just as important as paying off your debt is avoiding incurring new debt as much as possible.  But sometimes there is no alternative to needing to borrow some money.  When you absolutely must borrow money, try to do so on the most favorable terms possible.

If you have a credit card, try to never take a cash advance from your available credit limit.  This is a very costly thing to do.  You will be charged an immediate cash advance fee (usually 2% – 3% of the amount withdrawn) and then the amount instantly starts accruing interest.  Worse still, many credit cards then make all the other current charges on your card start accruing interest, too.

One way around this, if you’re short of cash, is to simply pay for more things by credit card, and pay for fewer things with cash.  You’ll probably get a month or two of time, interest free, to pay for the new charges on your card if you’re keeping it current each month.  That’s a lot better than paying all the fees for a cash withdrawal.  You’d be amazed at how much you can buy with a credit card these days.

Payday loans and pawn shops are even more expensive than credit card loans.  As nasty as they are, it is probably better to make a cash withdrawal off a credit card than to enter into one of these transactions.

6.  Take Advantage of Special Deals

Maybe you have a chance to buy something on a ’90 days same as cash’ basis.  If you see such a deal, you should consider several things.  First, ask the store if they also have a cash discount offer at the same time – maybe you can get a 5% or greater discount for paying cash (because it probably costs them at least 5% to give a ’90 days same as cash’ deal).

If they don’t, then if you can afford to pay cash for the deal anyway, you could buy it on the ’90 days same as cash’ basis, and make sure you make the payments as is needed to avoid having interest kick in, including paying everything off the day before the 90 day point.

If you need something that is offering the 90 day deal, you should take it, and understand what happens on the 91st day.  Does that mean that suddenly all the past interest over the previous 90 days will then be billed to you?  Or do the 90 interest free days remain, no matter what?

Then at the end of the 90 days, you then use a credit union loan or something like that with a lower interest rate to then pay the balance, and make your payments on the credit union loan.

Maybe you are offered a deal on a new car with 1.9% financing.  You have already saved up the money for the car, so you don’t need it.  But here’s an idea – why not borrow the money for the car, and then with the money you’ve saved up, use it to pay down any other monies you owe – even your house mortgage.  If you have a house mortgage at (say) 6%, you’ve managed to suddenly replace perhaps $30,000 or more of it with money you borrowed at 1.9% as part of your car purchase.  That’s a good deal, even after allowing for the tax benefits on the house interest.

Be careful if you use the money to pay down your house mortgage though, because your monthly house mortgage payment will stay the same, and you’ll also then have to find more money to pay for the car payment.

7.  What to Do With the Money You Save

Each time you save yourself some money, don’t spend the money you’ve just freed up, and don’t let it just disappear into all the rest of your money.

Instead, take the money you’ve just now saved and either use it to pay down the money you owe on something, or use it to build up your preps.  Either which way, you end up with a lasting benefit, and at no extra cost to you.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Current International Vulnerability Of Our Fiat Currency

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

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

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

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

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

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

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

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

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

International Impacts of Dollar Problems and Devaluation

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

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

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

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

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

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

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

Is Devaluation Good or Bad?

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

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

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

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

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

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

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

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

Other External Risks and Factors

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

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

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

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

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

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

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

Implications for Preppers

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

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

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

Article Series Continues….

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

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

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

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

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

Domestic Impacts of Dollar Problems

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

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

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

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

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

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

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

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

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

Problem 1 – Shortage of Goods and Inflation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Problem 2 – Shortage of Cash (and Deflation?)

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

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

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

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

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

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

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

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

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

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

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

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

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

Implications for Preppers

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

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

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

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

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

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

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

Article Series Continues….

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

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

Mar 262013
 
Cypriot citizens protesting the EU imposed raid on their bank savings.

Cypriot citizens protesting the EU imposed raid on their bank savings.

As we described in detail in our eight times updated article about the Cyprus banking crisis (which you really should read if you haven’t already), the EU forced the Cypriot government to seize funds from private bank accounts in that country to partially fund the EU’s ‘bailout’ of the Cyprus economy.

Although private individuals, the world over, have reacted with astonished horror at seeing a government suddenly abrogate every notion of the sanctity of private property and swoop in and take money from people on an arbitrary and colossally unfair basis with no prior public debate or discussion, the financial markets reacted calmly – this would be expected, because the money being taken out of ordinary regular bank savings accounts was seldom money held on behalf of major financial institutions, and the bailing out that it was funding would generally benefit those same institutions.

So, after noting the totally self-serving lack of disapproval by financial institutions, the Chairman of the Eurozone (the grouping of EU nations that use the Euro), Dutchman Jeroen Dijsselbloem, has claimed that this gives him the authority to insist on similar actions in other countries in the future.

This marks a huge reversal of public policy.  Previously, while smaller EU bank depositors were given a €100,000 guarantee by a process similar to our FDIC guarantee (which goes up to $250,000 here), larger depositors were also protected by an ‘unwritten’ understanding  Quite sensibly, the EU and its Eurozone subgroup wanted to instill confidence in bank depositors.  A 100% safe banking system is one of the essential building blocks of any economy and currency; without a reliable banking system, the entire economy becomes dysfunctional.

But the Eurozone has now decided that it will risk the integrity of its banking system, and has gone on record as saying that if a participating nation and its banks get into trouble, it will consider funding at least some of the bailout by seizing funds from bank depositors.  The next two countries likely to feel the impact of this new approach will be Spain and Italy.

Details here.

Implications for Preppers

So why are we writing about matters in the Eurozone?  Aren’t we supposed to be focusing on things to do with prepping in the US?

This is an important issue that you need to understand, because it is an early signal of what could happen here.  Goodness only knows that our economy is in as bad a shape as any European economy, and there is no sign that our deficits will convincingly shrink at any point in the future.  Government spending as a percentage of total GDP seems predestined to only grow and grow and sooner or later must reach a tipping point where everything collapses.  This is not a matter of ‘if’.  It is a matter of ‘when’.

The US economy is like ‘the emperor’s new clothes’ – it only continues to work as long as no-one questions its validity.  It is perhaps also an example of the saying ‘If you owe a bank $100,000, then the bank owns you; but if you owe a bank $100,000,000, then you own the bank’ – in this case all our creditor nations consider that it is in their best interests to continue to support the US dollar and US economy, but if (when?) they no longer feel this to be in their best interests, our economy could collapse as quickly and as spectacularly as any third world nation.  Currently we as a country are ‘too big to fail’, but as our economy continues to become a smaller and smaller share of the total world economy, our status as ‘too big to fail’ becomes more and more questionable.

What would happen if we lost the support of our creditor nations?  What would happen if we could no longer fund our deficit spending, and if our creditors would start to call back the money we owe them rather than rolling it over again and again?

Which brings us to the implications about developments in the Eurozone for us here in the US.  What we are seeing in the Eurozone is a callous calculated decision that if governments and their largest banks get into financial trouble, it is now becoming acceptable to turn to private citizens to bail them out, and to arbitrarily just take money from people on any basis that is quickest and easiest for the government.  In the case of Cyprus, and as is now being threatened for other European nations too, this is in the form of simply taking a flat percentage of the money you have in your bank accounts.

Europe is a stable grouping of nations in which the rule of law and concepts of due process, democracy, and protecting the private ownership of assets are all well established universal principles.  But when they are faced with financial expediency, we have seen how quickly these bedrock principles have been abrogated and abandoned.

Could it happen here, too?  You bet!

What would happen – to you, and to our society – if it did happen?

For yourself, personally, you need to realize that this would be a sudden event with little or no warning.  One day our President and his advisors might wake up and say ‘Heck, it’s time to put a stop to this ever larger burden of debt around our neck’ and before the day is out, have enacted regulations to free all bank accounts and passed any necessary legislation to authorize the taking of bank funds.  To succeed, it would have to be done with no prior warning; otherwise people would urgently withdraw money from their banks.

The worst part of this scenario?  The government would probably have the enthusiastic support of much of the country behind them.  The 50% of the population who pay no tax and may instead be net beneficiaries, receiving government support, have become so immersed in the selfish concept of personal entitlement that they’d be delighted to see the ‘rich people’ being forced to ‘contribute their fair share’ some more.

Bottom line?  You can no longer rely on the safety of your money in any bank.  And that FDIC guarantee?  Just like the government could increase it from $100,000 to $250,000 back in 2008, there’s no reason why it couldn’t decide to reduce it down to $25,000, or to withdraw it entirely.  The FDIC guarantee is, as it proudly says, ‘backed by the full faith and credit of the US government’ – but what happens when the government acts in bad faith, or when the government runs out of credit?  We’ve seen both those eventualities occur in Cyprus, and now being threatened elsewhere in Europe.

For society as a whole, there is one significant difference between the US and European countries.  We have an armed citizenry.  Would the riots, stone throwing, arson and such like that have been a constant backdrop in troubled countries such as Greece whenever their government announces proposed austerity measures become something more violent in the US if the government announced a taking of a large slice of our savings?  Quite possibly so.

Which might be why the DHS is equipping itself with such an extraordinary amount of ammunition, armored vehicles, and automatic weapons.  Is this the event they are anticipating and preparing for?

The irony is that many of the people who would violently protest are people who would not be affected at all by a government seizure of personal bank accounts.  They’d be opportunistic rioters/looters rather than truly aggrieved citizens facing the loss of a large slice of their life savings.  But in a way, that makes such an occurrence more threatening rather than less threatening, because these anarchistic ‘protesters’ can not be reasoned with and won’t respond to calls for fairness and peaceful protesting.

Clearly, if such a thing happens, no matter what your own feelings on the fairness of the government’s actions might be, you’re going to want to get out of Dodge quickly.  Don’t under any circumstance participate in protests, peaceful or otherwise.  You don’t want to be caught up in any such civil disturbances, and you doubly don’t want to be caught up in any arbitrary ‘sweeps’ by armed-to-the-teeth DHS forces seeking to ‘restore order’.

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 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.