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Our Money Is Dying

Don't let your wealth die with it
Tuesday, July 10, 2012, 10:35 AM

A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets?

As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved.

(Source)

Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s).

This report explores what the dimensions of that risk are. It draws upon both historical and modern examples to try to shed some light on how the currency collapse process will likely unfold this time around. Plus, we'll address how best to avoid its pernicious wealth destroying effects. 

When Money Dies

In the book When Money Dies by Adam Fergusson, which details Weimar Germany's inflation over the period from 1918 to 1923, the most riveting parts for me were the first-hand accounts from the people caught in the storm. 

So many people left their wealth in the system only to watch it get eroded and utterly destroyed over time.  The reasons were many: patriotism, inertia, disbelief, and denial cruelly fed by hope every time prices moderated or even retreated momentarily.

The simple observation is that many people had a blind belief in the money system. They lost their wealth because they were unable or unwilling to allow reality to challenge their beliefs. It's not that there weren't numerous warning signs to heed -- in fact, they could be seen everywhere -- but most willfully ignored them.

Most mysterious is the fact that in Austria and Germany, where the inflation struck most severely, there were numerous borders and currencies into which people could have dodged to protect their wealth. That is, protecting one's wealth was a relatively straightforward and simple manner.  And yet…it did not happen.

The Many Types of Inflation

As always, the landscape of inflation needs to be carefully mapped before we can begin to hope to have a conversation with a destination.  Where the symptom of inflation is rising prices – in fact, rising prices are the only things tracked by the Consumer Price Index, or CPI – the causes of rising prices are many, but they always boil down to the overexpansion of money and/or credit.  Knowing the cause is essential to knowing what to do next.

Here are the main flavors of rising prices that we need to keep in mind:

Non-inflationary price increases – These are caused by demand exceeding supply.  It happens all the time.  A poor harvest driving up the price of corn is not inflationary, but it will show up in the Consumer Price Index (CPI).  These sorts of price movements reverse themselves as markets respond by chasing the price and delivering more of whatever was in short supply.  The only exception is when there is some essential, non-renewable natural resource in sustained depletion -- which means that demand will always exceed supply and prices will rise and then rise some more.  Excessive speculation can also lead to price rises and, as long as the speculation centers on the item(s) involved and not on excessive money/credit expansion, it, too, can be (and eventually will be) reversed.

Simple inflation – This is the 'textbook' case of inflation where too much money and/or credit is created relative to goods and services.  Print too much money or make credit too cheap/easy and prices will rise roughly in proportion to the excess.  Simple inflation operates in the low single digit percentages.  Central banks openly target simple inflation in the 2%-3% range as that level of expansion allows banks to have healthy profits, prevents past loan errors from swamping the system, and generally keeps the exponential money system operating well. 

Loss of confidence in money – A more severe stage of simple inflation takes over when enough people lose faith in the money and seek to actively spend their money on something, anything, before that money loses value.  This type of inflation operates in the high single digits to low double digits, somewhere between 8% and 15%.  This is just simple inflation on steroids.  Not everybody participates in this game yet, as the loss of confidence has not yet reached criticality, but enough people do to keep this process locked in a self-reinforcing spiral that requires aggressive money tightening to halt.  Think 'Paul Volcker' and '21% interest rates' and you get the picture. 

Hyperinflation – Further along the inflationary spectrum is what happens when a critical mass of people within a society lose faith in their money and the monetary authorities are incapable of reducing the money/credit supply, either because there’s already too much of it out there to ‘call in,’ or because they lack the political will to do anything but print more money in response (i.e., there are no Volckers around).  Once this critical mass is reached, every corner of society is participating, and it is no longer socially taboo to talk about the hyperinflation or how to escape its effects.  Everyone is wheeling and dealing, speculation runs rampant in everything from stocks to pineapples, and you cannot possibly spend your money fast enough to avoid the ravages of inflation.  The annual percentage rates for hyperinflation range from medium double-digits into the hundreds of millions. 

Currency destruction – There is another type of inflation that happens when your state currency is shunned by the rest of the world.  While there may be no additional money creation and credit may even be dropping, inflation is still a very serious problem as everything imported goes up in price.  There are many reasons that a currency may be shunned.  It could be that other countries lose faith in the currency due to mismanagement and overprinting.  It could be due to acts of war.  Or it could happen at the end of a very long period of excessive credit and money expansion, when that bubble finally bursts and confidence in the associated currency unit(s) is lost.  There is really very little that local authorities can do to fix things unless the country imports nothing, a condition that applies to exactly nobody.  Prime candidates to experience this form of inflation are the US and Japan; the former because of massive imbalances fostered by its several decades of reserve currency status, and the latter because of persistent and massive over-printing enabled by domestic savings and a once-robust export surplus.  The dynamic of currency destruction is for imported items to rise sharply in price first, with everything else soon following in upward price spirals.  Policy responses are quite limited and are usually ineffectual at preventing a massive amount of economic destruction and wealth loss for the holders of the stricken currency.

It is this last type of inflation – currency destruction – that we’ll explore here, because it represents a severe risk and is very rarely talked about or analyzed.

Spinning in the Water

A modern case study of a shunned currency is Iran.

For a variety of reasons, Iran finds itself the subject of a sustained effort by the US to subjugate its nuclear program to international inspection and curtailment.  Already the target of many overt and covert efforts to bring it to heel -- ranging from two highly destructive and invasive computer worms (Stuxnet and Flame), to stealth drone overflights, to an international ban on oil exports -- Iran now finds that its currency is being internationally shunned.

The impacts are obvious and the lessons instructive. 

Already Plagued by Inflation, Iran Is Bracing for Worse

Jul 1, 2012

TEHRAN — Bedeviled by government mismanagement of the economy and international sanctions over its nuclear program, Iran is in the grip of spiraling inflation. Just ask Ali, a fruit vendor in the capital whose business has been slow for months.

People hurried by his lavish displays of red grapes, dark blue figs and ginger last week, with few stopping to make a purchase. “Who in Iran can afford to buy a pineapple costing $15?” he asked. “Nobody.”

But Ali is not complaining, because he is making a killing in his other line of work: currency speculation. “At least the dollars I bought are making a profit for me,” he said.

The imposition on Sunday of new international measures aimed at cutting Iran’s oil exports, its main source of income, threatens to make the distortion in the economy even worse. With the local currency, the rial, having lost 50 percent of its value in the last year against other currencies, consumer prices here are rising fast — officially by 25 percent annually, but even more than that, economists say.

(Source)

There are several factors feeding into the current Iranian currency crisis, including mismanagement of the economy that has left Iran even more exposed to imports than it otherwise could or should be, and Iran's currency is on the cusp of tipping over into outright hyperinflation.  Ever since the Revolutionary War, when the British printed and distributed cartloads of Continental scrip, currency debasement has been a useful tool of war.  All is fair in love and war, and whatever corrodes your opponent’s strength is a potentially useful tool.

Note that in the above quotes, we find that both the speculation already in evidence plus the 25%+ price increases support the idea that Iran has already tipped past simple inflation.  Whether it can prevent a worsening condition is unclear at this point, regardless of whether or not international sanctions are soon lifted. 

More from the same article:

Increasingly, the economy centers on speculation. In this evolving casino, the winners seize opportunities to make quick money on currency plays, while the losers watch their wealth and savings evaporate almost overnight.

At first glance, Tehran, the political and economical engine of Iran, is the same thriving metropolis it has long been, the city where Porsche sold more cars in 2011 than anywhere else in the Middle East. City parks are immaculately maintained, and streetlights are rarely broken. Supermarkets and stores brim with imported products, and homeless people are a rare sight on its streets.

But Iran’s diminishing ability to sell oil under sanctions, falling foreign currency reserves and President Mahmoud Ahmadinejad’s erratic economic policies have combined to create an atmosphere in which citizens, banks, businesses and state institutions have started fending for themselves.

“The fact that all those Porsches are sold here is an indicator that some people are profiting from the bad economy,” said Hossein Raghfar, an economist at Al Zahra University here. “Everybody has started hustling on the side, in order to generate extra income,” he said. “Everybody is speculating.”

Some, like Ali the fruit seller, who would not give his full name, exchange their rials for dollars and other foreign currencies as fast as they can. More sophisticated investors invest their cash in land, apartments, art, cars and other assets that will rise in value as the rial plunges.

For those on the losing end, however, every day brings more bad news. The steep price rises are turning visits by Tehran homemakers to their neighborhood supermarkets into nerve-racking experiences, with the price of bread, for example, increasing 16-fold since the withdrawal of state subsidies in 2010.

“My life feels like I’m trying to swim up a waterfall,” said Dariush Namazi, 50, the manager of a bookstore. Having saved for years to buy a small apartment, he has found the value of his savings cut in half by the inflation, and still falling.

“I had moved some strokes up the waterfall, but now I fell down and am spinning in the water.”

(Source)

All of the important lessons you need to avoid a currency destruction are contained in those passages above. 

  1. Savings are for losers. 
  2. The more exposure you have to food and fuel price hikes, the worse off you are. 
  3. First movers have the advantage. Get your wealth out of the afflicted currency as fast as possible and then trade back in when needed to make purchases.
  4. Paralysis is a wealth destroyer. 
  5. Fending for oneself is a wealth saver, so faith in authority is best shucked as fast as possible. 

Be prepared to follow those rules and you will do better than most. 

Barter, speculation, and prices that gyrate wildly as formerly expensive things are traded for basic necessities are all typical features of the end stages of a currency.  Crime, social unrest, and sometimes war are handmaidens that accompany the death throes of money.

The basic strategies to protect one’s wealth are deceptively simple.  As soon as the process of money destruction has begun, if not before, all savings have to be moved out of the afflicted currency and into things, especially things that others with wealth or barter items are most likely to want. 

Turning our attention back to the Weimar episode for a moment, the Amazon summary for When Money Dies reads:

When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy.

Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.

The parallels to the Iranian situation are obvious. 

Those without the gift of foresight to identify what is coming, coupled with an inability to take decisive action that cuts against the social grain (at least early on), will simply lose their wealth and not be in a position to buy or exchange anything but their own time and labor in the future.  This leads to the assessment that owning or producing things that people need or want is a good strategy.

Food is always a good play.  In the early stages, we’d also lean towards highly socially desirable real estate and away from middle- and lower-income housing, as ability to pay always get shredded from the bottom up.  Gold performs well in terms of protecting purchasing power.  According to the article above, Porsches work too.  In other words, owning things that wealthy people will desire is a very good idea.

I know this sounds harsh, elitist, and not terribly egalitarian, but it also happens to be how things tend to work out.  Since I have a desire to be in a position to be helpful and of assistance in the future, protecting my wealth is a matter of both self and selfless interest.  So I study what works and begin there, while also seeking a better future.

The cruelest part of a currency destruction is that it will sneak up on most people, their baselines will shift, and they will be confused by false hopes along the way.  This is completely understandable and to be expected.  There's a good chance you're well acquainted with the chart of the value of German Marks against gold during the Weimar hyperinflation.  I want to take a closer look at it by focusing on the wiggles instead of the rise:

Imagine yourself there at that time, getting all of your information from the newspapers and your personal rumor network.  Note that from the early part of 1920, prices fell by a lot over the next six months (note that this is a log chart, so even a little downward movement in the line represents a big price drop). 

Headlines reported that the corner had been turned and that the government programs had been successful in bringing inflation under control.  People wanted to believe that story and so they did. 

It wasn't until the end of 1921 that prices began to rise again, spiking into early 1922 before stabilizing again for approximately eight months.  Again people were calmed by the apparent success of the authorities in controlling the inflation. 

Because there were three pauses and rescues along the way, the price spike from late 1922 and into 1923 caught many off guard.  It was truly shocking.  This is when the critical loss of faith finally happened.  Yet far too many remained paralyzed, certain the government would again get things under control soon.  After all, three times before there had been a recovery, why not this time too?  One must have hope, after all...

In the middle of 1923, with very aggressive government intervention, there was a three-month dip in prices and a pause in the hyper-inflationary process.  Again, another hopeful moment, but it was the final trap for the unwary.

To put this in context, imagine if next month (August) gasoline prices shot up by 300% to roughly $10/gal.  But then, between August 2012 and May of 2013 the price of gasoline fell back to $5/gal.  I'd be willing to wager that many of your friends would be telling you that everything was fine and that "they" have everything under control.  Perhaps your continued concern would be ridiculed or dismissed. 

Then, when prices finally did again breach the old $10/gal highs, some 19 months after the first price spike (in February 2014, in this example), many would have been habituated to the new prices, routines would have been altered, and many would have already inserted a rationalization process into their thinking that would have all of this make perfect sense, albeit uncomfortably.

While not tracking the percentages closely, this example tracks the time frame. 

An important insight here is that baselines will shift, rationalizations will be formed, and explanations adopted, principally by those unable to accept that their money is in the process of dying.  Avoiding this yourself will require tuning those people out and trusting yourself.

In Part II: Positioning Yourself for When Our Money Dies, we identify the most probable markers for identifying when a full-blown currency collapse is imminent.

What indicators should you watch for? Where should you place your capital to best preserve its purchasing power? What will a collapse of the US dollar look like and what will the likely aftermath be? These and other implications are explored.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

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22 Comments

Doug's picture
Doug
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typo

In the third paragraph in the When Money Dies section.  

Quote:
It's not that there were numerous warning signs to heed -- in fact, they could be seen everywhere -- but most willfully ignored them.

Shouldn't that be "It's not that there were not numerous signs...." or "were no signs"?

Doug

[fixed -- Adam]

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Travlin
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One of your best reports

Chris

This report, both parts, is one of your best.  You have covered this topic well in general terms previously.  Here you are more specific about how it works, what to expect, and how to cope.  That is very important to understand, particularly the trap of “normalcy bias”.  As you say, the non-financial ramifications are also critical, as long term stress grinds people down.

I get a sense that your writing is “getting down to brass tacks” as events and forces continue to build.  I think we need that.

Travlin

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pinecarr
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Awesome report, Chris; can't

Awesome report, Chris; can't wait to read Part II.

Also; thank-you.  Many of us "know" to expect the kind sof thing you talk about here, but it becomes so abstract and easy to lose sight of day after day after day after day.  It is so important to get your occassional pinches and reminders "are you awake?"  "Are you paying attention to what is happening?"  "Look at what's happening!"  Your message is so clear and to the point it's like getting a whiff of smelling salts after dozing off...  Thank you.

Erik T.'s picture
Erik T.
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Going past the superficial with Von Mises

Ludwig Von Mises wrote:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved.

I've seen this quote repeated so many times in the last 5 years that I can't help but question whether its profound stylistic appeal actually mutes the more important practical economic reality.

So my question: Has there EVER at ANY time in history, EVER been a case where a DEMOCRATIC government recognized that voluntary abandonment of further credit expansion was the more prudent course of action to respond to an epidemic debt crisis? If so, I am not aware of it.

If not, I humbly propose that Von Mises got it wrong. A more insightful observation might be as follows: While a voluntary abandonment of further credit expansion might appear at first to be a viable option, it is never undertaken in democracy because elected leaders always seek to pretend they can solve intractable problems rather than risking political defeat by admitting reality for what it is. In actuality, the only plausible outcome is the destruction of the currency involved, because in democracy, no incentive exists for leaders to admit policy mistakes, concede defeat and accept the one (and only one) other possible outcome, the voluntary abandonment of further credit expansion.

I'm serious about this: I almost think Von Mises quote borders on misleading, because it implies that maybe, just maybe, political leaders will choose the voluntary abandonment of credit expansion. So far as I am aware, that has never happened in recorded history. Am I missing something?

Erik

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thc0655
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I agree with Erik T.

I agree with Erik.  The alternative to a currency collapse in a democracy is only a theoretical possibility.  The reason for that is that "We The People" will never put up with anyone who talks about or actually attempts to take "The Road Not Taken.'' We are our own worst enemies, because we are ignorant, in massive denial, and too lazy to learn enough to overcome our own ignorance and denial.  Even if someone like Ron Paul were elected, we'd boot him out in a New York minute if he ever tried to voluntarily abandon further credit expansion.  And we'd do that in an election or in an assassination.  So that's comforting to me because in brings certainty.  Either we WILL have a democracy and a currency collapse, or we will have a dictatorship and who-knows-what.  Having that certainty is comforting, but what is coming is the opposite of comforting.  But at least I know much about how to prepare, and that most everyone I try to warn won't listen.

Jim H's picture
Jim H
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CM, and Erik...

Chris,  I agree with Travlin... one of your best.  Your drawing a comparison between what has happened in Iran recently, and what has happened in the US, was I think brilliant, and for me eye opening;

Iran has columns of Turkish trucks and the US has jammed ports, but the dynamic is the same.  Where Iran went on an oil-price-fueled spending spree that killed its domestic manufacturing, the US abused its reserve currency status to support a massive and growing trade deficit with the same result.

Erik,  I do think your interpretation of the Von Mises quote is correct in practice now, but I think you are forgetting the role the central bank plays, or is supposed to play (vs. our elected officials) and the fact that maybe, just maybe, Paul Volcker did just what you are positing has never been done before (though again, he is not elected by the people) when he raised interest rates to an astounding level in the early 1980's. 

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e_r
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response to Erik T

Erik T. wrote:

So my question: Has there EVER at ANY time in history, EVER been a case where a DEMOCRATIC government recognized that voluntary abandonment of further credit expansion was the more prudent course of action to respond to an epidemic debt crisis? If so, I am not aware of it.

Please consider the book by Congressman Ron Paul here

Specifically the chapter "An Historical Precedent".

At the end of the Civil War, the government stopped inflating and stated that people can redeem their dollars into gold. Then slowly the greenback came back to $100 per ounce of gold.

It was an event that happened under a gold exchange standard and we don't have that now.

The question is: has there ever been a voluntary abandonment of credit expansion under a purely fiat currency regime? and I am afraid the answer is no. US also enjoys the exorbitant privilege of being able to print the world reserve currency, which is even more dangerous.

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e_r
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Erik T's interview with EJ

Quote:

The US abused its reserve currency status to support a massive and growing trade deficit with the same result.

Erik,

I heard your interview with Eric Janszen a few weeks ago and I thought it was an excellent interview, but one spot where I felt you could have asked EJ to expand more was on this trade deficit issue.

EJ's view was that the policy is to gradually depreciate the dollar down to 60 by 2016 or so, thereby improving net export position. Move more towards energy independence, by reducing the dependency on foreign oil and therefore improve our net balance (import vs. export) position.
 

The USG today is spending $3.6B more than it is taking in, each and every day. How does our net balance position improve, when there is waning structural support for the $3.6B per day emission?  Any improvement in the export side of the equation is dwarfed by the USG over-spending, yes?

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spinone
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No worries

As long as OPEC only takes dollars for oil, no worries.

anexaminedlife's picture
anexaminedlife
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On a more practical level

Setting aside the theortical tone of this article and the following discussion regarding the nuances of Austrian economics theory, I would like to bring this down to the level of practical action. As I understand the gist of what is said here, we are going to experience a currency collapse and to use my own analogy, we should be wise like the Jews in early Nazi Germany who could see the writing on the wall and brave enough to take action and left despite the soothing words of family, neighbors, and friends that it really wasn't that bad. So too, we should be attune to the impending disaster and wise enough to take action.

However, what I also understand from this article is that you need to have the financial resources to take action now. Otherwise, we poor smucks who can't purchase a porshe or property in high-priced neighborhoods or other things we can sell to wealthy people (or even purchase a small and somewhat self-sufficient homestead) are going to be left holding the bag and unless we know how to hustle like the Iranian fruit seller, we are the losers in what is to come.

I suspect that the Jews who were wise enough to escape Germany, and did so, had the financial resources that allowed them to leave. I also suspect there were others who saw the writing on the wall and would have liked to have escaped but could not afford to do so. (Don't misunderstand - I am not comparing being gassed at a death camp to losing all your financial wealth, I just use the analogy of the Jews who left Germany when the opportunity was still there despite the mainstream view that everything would be okay as a useful touchstone for understanding the need for similar action today.) My point is driven home by the fact that the practical advice, Part II, requires a subscription that those of us who probably can't do much to withstand the collapse anyway, cannot afford. (Not picking a bone at all with the subscription service, just making a point.)

Small caches of gold and/or silver will only go so far. Even those of us who are aware, but by circumstance or misfortune, are not all that financially secure (i.e. middle-class) will likely gain nothing just by virtue of the fact that we are aware of the potential collapse of the dollar. 

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sand_puppy
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how to prepare when broke

anexaminedlife,

I appreciate your comments and have been pondering the issue of how to prepare for change with limited money.  A couple of thoughs on this:

1.  Prepare to produce things that you now pay for.  Growing vegetables, fruit and raising chickens or goats.  Can you sew or work leather?  Are you physically strong enough to chop and carry wood?

2.  What skills do you have that can be used to barter or help others?  Could you repair a plumbing leak, assist a carpenter in building a house, cook for a group of people, weld, run a drill press, repair a bicycle, make pottery?  Being an excellent shot with an inexpensive .22 rifle might become a much valued skill.  Can you watch children, clean house, train dogs?

3.  Prepare for intermittent interuptions in supply of common things like water (store 5 gallon jugs), heat (buy or gather a cord of wood), food (build a deep pantry by buying a bit of extra food every week so that the supplies accumulate--and set up a rotation system so that it doesn't go bad).

4.  Prepare for the possibility of scare gas.  Locate your home or apartment so that you can work, shop, bank and live in a small area--one that can be reached by bicycle.  Get two used bicycles of the same make and model so that one can be used for spare parts.

5.  Security.  Live with friends and neighbors, or get to know neighbors well, so that you can form a neighborhood watch should this become necessary.  Find a place to live that is not an isolated rural or overly crowded urban setting.  Can you rent a room in a house that is well prepared in exchange for watching the children and cooking?

Please let me know other ideas that come to you.

sand_puppy

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JAG
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It's Just A Game

Personally, I don't waste a minute of my time worrying about a currency crisis. Why should I bother when everyone else is doing it for me? 

I mean, when was the last time that the "crowd" saw a crisis coming? I choose to concentrate on what everyone is dismissing as impossible as that is where the investment banks make their money.

Forget the politicians and "what is politically feasible", the bankers run the show. History has proven that the big banks can profit nicely from deflation (a decrease in credit money supply) or inflation (an expansion of credit money supply). Politicians don't control the money supply, the banking system does.

Reports like this one do nothing but feed into the banker's game. Everyone gets hysterical about rising prices and that causes prices to rise even higher. Then the market makers pull the rug out under the market and make billions. Does anyone remember 2008?

The time to prepare for inflation was during the deflation hysteria of 2009. Now is the time to be saving money for the next buying-opportunity/crisis. 

This game has at least 20 more years to play out, then I'll worry about a currency crisis.

Best....Jeff

Jim H's picture
Jim H
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It's not a game.. it's your savings.

I understand what JAG is saying, and I do think that the bankers have made some money on both the upside and downside of this inflationary/deflationary roller coaster.. but I don't think that the banker's Hubris will continue to serve them indefinitely.  CHS wrote a very good piece yesterday that uncovers the trick behind the bankers continuing ability to live another day... that of increasing systemic leverage;

http://www.oftwominds.com/blogjuly12/leverage7-12.html

Any loan is fundamentally a claim on future income. Interest and principal will be paid out of future income.

The key to keeping the leverage-based system afloat is to lower interest rates. Let's say a household has $10,000 in disposable income to spend on housing. If mortgage interest rates are 15% (as they were in 1981), the household can only leverage that income into a $50,000 mortgage. That's all the debt that can be prudently leveraged from the $10,000 in income.

That inhibits "growth," so let's drop the rate to 1%. Presto-magico, the household now "qualifies" for a $500,000 mortgage. Wasn't that easy?

You see the problem here: once rates fall to near-zero, the leverage-income-into-more-debt machine runs off the cliff.

JAG sees no cliff ahead that the bankers can't handle... I do.  When it comes... your dollars won't be able to buy you the things you need.   

kennyq's picture
kennyq
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how to prepare when broke

anexaminedlife,

    my personal  approach is this:

A, While the fixed interest rate is still low, borrow as much as possible. (equity out from my house, and go for 30 yr. loan). Put the fund in the bank(s) as emergency money. The worse situation is that I lose the interest on the loan ( two or few thousand dollar?). If everything is fine in the future, I will put it back to the house (loan). If thing go bad, I have extra fund to support the family. The interest on the loan becomes a family life insurance (premium) for the coming depression.

      Trust me, when things go bad, most people won't pay their mortgages (majority of americans don't have more than two month savings) and people will still live in their houses. (in Chinese, it said, dead pigs don't afraid hot water.) Banks will not take your house if too many people don't pay mortgages.

B, My wife grow vegetable in our back yard (her hobby). It proves that it is easy to support a family of four with vegetables. As long as we have enough rice at home,we will be ok. Rice is cheap,less than $20/50LB. I didn't do a good job to seal my rice few year ago. I found many bags are leaking air. I need to do again. So you can spend minimal $ to prepare the worse easily. I bought a water filter and two fresnel lens for emergency cooking.

C, Keep in low profile. Install solar panels,emergency generator and fancy gadgets..etc is an indication that you have more money than others, and you are a target. There is no such thing as "security" in neighbourhood when things go sour. Now most people don't believe what we said anyway. The best we can do is prepare for them. Buy extra rice and store for them.

   Besides store rice, now I store vegetable oil and waste vege oil. Oil will last long time and is cheap to do.  I spent $3000 and bought a 1983 mercedes diesel and converted to run vege oil and wasted oil for emergency as a generator and transportation in case there is no diesel and gasoline. I drive it everyday to work and learn to take care of it. Is it better than invest $ in solar panels?

D, My question is: deflation will set in, cash is the king. When is the best time to buy? Silver is touching $26 zone now, buy?

hucklejohn's picture
hucklejohn
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Joined: Dec 13 2008
Posts: 281
Excellent Article

I agree with the others above that this is an excellent article.  However, I have to agree somewhat with JAG's point of view.  Chris has written many articles along these same lines describing the on-going slow train wreck in the financial world.  Each article keeps describing the same thing in more and more detail.  Each of us has to tell ourselves that we cannot live day to day in a panic mode.I realize Chris and others have made this point many times.  This is not meant as a criticism.  We can each pick and choose what we want to read.  And no doubt there are always new readers and subscribers to the site to whom this information is new.

herewego's picture
herewego
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Posts: 81
more time, less of everything else

What came to me after reading this article is that when it comes to pass that money is just not that useful anymore, I will be left with the option of self-employed homesteader.  No Porsches here.  Just me, my tiny corner of land, whatever skills, tools and materials I've gathered and the community around me.  Sobering.  Sounds warm, dry, comfy and - hungry....

It also dawned on me that we will have much more time, if our paying jobs disappear.  So if we have tools, motivation and know how, we can apply ourselves to activities that are MORE productive than most jobs.  If there were food and water for all, that could be fun and interesting.  What might any given community do if it had unlimited time?  No doubt the disruption and hardship will mess with the fun.

These reports help keep me from falling asleep and getting lazy in the new norm that used to scare me sh#^less.  It's not about panic though.  Even if we have 20 years before the cracked and teetering global financial edifice falls flat (unlikely), I still need to head in the direction of capable farmer with her resources invested in useful tools/skills working with a well-prepped community living a life that this planet has a chance of sustaining.  The undoing of the dollar and the market strike me as very brief happenings in the big story of human civilization.  Whatever happens to our currency, we still live on the Earth.  Got soil?

As always, much appreciate everyones' contributions here.

Susan

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CaptD
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Posts: 32
How Will The US $ Decline In Value?

With its use as THE Worlds currency, the US $ is now king, but we all know what goes up can also go down; so the the real question for me is, "How will the US $ decline in value"?

A.  If it slowly slides in value, (which I see happening now) then things will get ever more expensive and our Leaders will impose ever more restrictions upon us so that we cannot share our complaints.  Gold and or Silver will continue to climb in value despite the phantom paper trading by the large Banks designed to slow currency "flight".

B.  If the US $ plummets in value, say because of a Global Financial Insider Trading Scandal, (Like Lie-Bor), then I see a run on all US Banks as folks try and withdraw as much of their money as possible (like the Greeks did before their Euro vote) which will quickly be stopped as the Fed limits the amounts of all withdrawals; in fact I would be very surprised if the Fed did not already have a plan for this already in effect (Any Bankers out there with insider knowledge?).  Gold and or Silver will cease trading except "under the table" and its value will be set at whatever folks can get.  Expect to see some form of fuel and or food rationing/stamps as the Government seeks to "control" the pent up anger/crime caused by these disruptions to all the basic services we now take for granted.  I expect to see the poor and or unprepared take to the streets as their money runs out and or they get hungry.  Expect to live under marshal law and all curfews will be severely enforced at least in the beginning by huge numbers of armed people that have been "deputized" to help Law Enforcement protect the general population (spelled wealthy).  By controlling Electricity, Gas and Water, local officials will be able to "encourage" residents to relocate to FEMA-type holding camps where they will stay until a new "system" processes them out…

Remember there are 100,000+ "Nuclear Refugees" still living in "camps" almost a year and a half after the 3/11/11 Fukushima disaster in Japan, it can happen in the USA too because MSM will not be discussing it publicly.

Some related links:

New KBR Document Confirms FEMA Camps Soon to be Activated Nationwide

http://wp.me/p13lMl-eoE

DHS Purchases Bullet Resistant Checkpoint Booths Amid Large Scale Ammo Buildup

http://www.shtfplan.com/?p=13657

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CaptD
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Posts: 32
More PREP ideas. Perhaps we should start a list...

Ask yourself what you would need the most should things get dicy and then see if you can stock up on them.  All these items will make great barter items because others will need them also.

Here are one of my favorites:

  • Buy a supply of Bic lighters at Costco (50 for ~$35)  Being able to start a fire is huge.
  • Buy and store big bags of anything that you really enjoy eating when camping...
  • Buy and store big bags of charcoal and or propane tanks, cooking fires will be very important.
  • Buy and store Clorox, ($0.99/gal) it is low cost and has many uses like purifying water.
  • Buy and store Hydrogen Peroxide,  ($0.99/qt) it also has many uses.
  • Buy and store first aid supplies and learn how to use them.
  • Buy used CB and or Ham radio gear, you will become a local hero should things get tough.
  • Buy and store Kitchen trash bags, they and a 7 Gal plastic bucket makes a great porta potty.
  • Buy a "seal-a-meal" and use it to seal just about anything.
  • Buy some seeds (veggie  and anything else you want to grow) to eat and or trade.
  • Buy an extra small (used?) laptop and back up your computer, then wrap it in aluminum foil and seal it up inside an ammo box or other waterproof case, imagine having a working computer when all others are not!  Also consider packing up several extra hard drives .
  • Buy a used kindle (or something similar) and Start downloading "how To" ebooks.  The newer ones will even read to you.
  • Buy 12VDC charger converters so you can charger your electronics from 12 volts.  Check local RV suppliers and or recharging "systems' like iGo, that has different "tips" for different items.
  • Buy and store good quality rechargeable batteries in the sizes you need (Costco) most.
  • Buy at least one good solar panel that puts out 12 VDC.
  • Buy a "solar" hot water bag to take warm showers.
  • Convert some of your flashlights to LED's because the bulbs last a long time, they are durable and the batteries will power them longer!
Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1840
Analogies

I think the Jewish analogy of "escaping early" may be the wrong one to use if you happen to belong to the dominant religious/ethnic group in the location that you live. You do not necessarily have to leave. There may not be a place that is safer than where you are right now or at least the country you are in right now.  You may stick out like a sore thumb out there.

Jews in 1930s Germany made up less than 2% of the population (522,000 out of some 66 million). The persecution of that distinct religious/ethnic minority came in stages - from social annoyances to specific laws to deepening persecution to imprisonment and death.

I don't currently see any beginnings state-sanctioned persecution of a distinct religious/ethnic minority increasing in stages such as these within the United States. Except maybe for Muslims since 9/11 - but it looks like the TSA is trying hard to target everyone else from toddlers to grandmothers and pregnant women just in order to not appear to be "profiling".

The closest potential candidates today in the United States are the Muslims and the Chinese (the constant political tirade that "all our jobs are going to China"). Hispanics and Blacks don't count because there are far too many of them, and a significant number of them occupy positions of power in the state.

Poet

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 1482
Poet..

So you think Hispanics are immune?  Think again;

http://market-ticker.org/akcs-www?post=208575

The BATFE has "updated" the 4473 form.  For those of you who have never bought a gun, a 4473 has to be filled out by anyone who buys one at a store or otherwise from a "FFL" (a licensed dealer.)

Now, suddenly and out of nowhere, there's a Question "10a" on the form where there used to be just a "10" (Race).

And guess what "10a" is?"

Are you "Hispanic or Latino" -- or not.

What does being Hispanic have to do with purchasing a gun?

Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1840
Interesting...

Thanks, Jim! Didn't know about that!

Wonder if it's part of that "fast and furious" tracking going on... :P

But as always only law-abiding Hispanics or Latinos would mark "Yes". Even so, in Arizona, a person can buy and resell guns as they wish, regardless of race.

Poet

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timeandtide
Status: Bronze Member (Offline)
Joined: Apr 3 2010
Posts: 53
A very disappointing article
Dr Martenson is making much of his comparison of the Weimar hyperinflation and what is happening now. I struggle to find any similarity. The Weimar hyperinflation happened because the state printed money at an astonishing rate over and above taxation revenue and that money ended up in the hands of the German public. Nothing like that is happening today. The media talks about money "printing" when, in fact, nothing is being printed. Credit is being created via the double entry system that conjures money out of thin air and allows the Fed to buy assets off the commercial banks who then park the funds back with the Fed. The only money that escapes into the economy is that which the government spends from thre proceeds of Treasury note, bill and bond sales which is considerably more than the taxation revenue but not enough to create an inflation, judging by the most recent CPI figures, let alone a hyperinflation.
 
What we are going through is more like the 1930s but stretched out.  Economists such as Milton Friedman later placed some of the blame for the length of the depression on the Federal Reserve for losing their nerve and allowing the money supply to fall. Murray Rothbard argued that the American population lost faith in the banks and began hoarding cash.
 
I think we will see a similar scenario again. I cannot see why it is taken as a given that the Fed will be creating more ledger credits to buy even more "assets" - the gap between worldwide borrowings and the reserves upon which those borrowings rest is just too far apart. While it is extraordinary that bonds have not sold off in a big way so far, it is also true to say that the interventions through 2008-10 each saw falling bond prices as the Fed made purchases. The media called them purchases but in reality they were sales by financial institutions off-loading to the Fed and prices dropped each time before rising again.
 
It is also wrongly assumed that the Fed drives interest rates - look at a graph of 3 month Treasury bill rates against Fed Funds and you will find that the Fed follows the market. Paul Volker has been credited with bringing the runaway inflation to a halt with his rapid escalation of rates in the early eighties. Actually, he was following the market.
 
The Fed will follow market rates up too and the market will sell off bonds and go into cash as it realises the deflation is real. The brains trust of Beernanke, Gethner et al may have misread just about everything over the last few years but they are not completely stupid. Their nerve is faltering - they seem most reluctant to engage in another round of QE. Wall Street and many pundits may wish for it but Bernanke would have totup the ante to an extraordinary degree to have any effect. He knows what the side effects of that would be so damaging that any gain interms of inflating debt away would be lost. It is highly debatable whether it would even be possible to inflate to the extenet required because the bond market would simply sell off thus reducing the money stock which would be deflation. I simply could not make sense of Paul Brodsky's article - a case of wishful thinking I guess. I can only say that you should be careful what you wish for. 
 
Most people seem to expect gold and silver to climb while sharemarkets, commodities and the dollar are expected to fall. If precious metals climb then so will eqities and commodities while the dollar will fall. It is often forgotten that for the dollar to fall, the euro and other currencies must rise. The only situation in which you could get a complete collapse of a major currency is if all the majors were to collapse together. In other words, there was such a loss of faith that everyone suddenly wanted to barter real things like food, shelter, water, energy, labour etc. This also means that the internet as a medium of doing business also curls its toes and dies. Does anyone really think this will happen? It may well happen to try to prevent bank runs - the shifting of funds online to other safer institutions but by the time anyone does that it is way too late. We will continue to use money and we may get used to using a lot more cash rather than electronic transactions, at least for a while. I would advise people to take out sufficient cash to last 3-6 months. That may be far more useful than speculating in gold or anything else.
 
I have no doubt that we are in for a very tough period in which the nominal values of most things will be substantially lowered and relativities may change. I am also equally sure that people will organise and co-operate. It is actually what we are hard wired for. It is only those who became so gripped by the virus of cynicism and greed that infected the financial districts of the world who have totally lost the plot. 
 
It is disappointing to see that Dr Martenson has changed the name of the site to Peak Prosperity.  What a weasel word prosperity is - a product of the consumer culture of Madison Avenue.
 
"Insights for prospering as our world changes" - the irony in that statement appears to have been missed.
 
Prosperity is built on real wealth that comes from setting some seed corn aside which is the fruit of past endeavour. The modern version of prosperity is based on credit which is imaginary money drawn from the future. 

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