(Survival manual/1. Disaster/High inflation-Hyperinflation)
A. How to survive runaway inflation
February 9th, 2010, Capital Flow Watch.net, By John Schroy.
“At this writing (February 2010), it seems possible that there will be runaway inflation in the United States by the end of the decade. Americans are accustomed to low-level inflation of 2% to 5% a year — a rate common in developed nations over the last half century.
Many have tried to understand inflation, with varied results. I define ‘runaway’ inflation as endemic, “controlled” inflation at a rate inexcess of 20% a year.
Beyond ‘runaway’ inflation, we have ‘hyperinflation’ which I take to mean “uncontrolled” inflation at a rate of 100% to 10,000%, or more, a year. (Note: there are no precise boundaries between this concepts.)
By “controlled” inflation I mean inflation that is permitted by the monetary authorities to vary between some target range. For example, mild inflation of 2% to 5% is the target range generally regarded as acceptable by monetary authorities in the United States, while inflation in the range of 20% to 40% was considered acceptable to monetary authorities in Brazil during the years of the “Economic Miracle”.
When inflation is caused by government spending not being financed by taxes or bond sales, it becomes a surrogate for taxation.
Deficit spending not covered by borrowing or bond sales results in the government ‘printing money’. This occurs automatically as the government issues checks to pay its bills.
The practice debases the currency, making money worth less.
When the shortfall results in inflation of 20% to 40% a year, it is a tax that transfers wealth from creditors to debtors — a form of wealth distribution that Barack Obama seems to admire.
Living with inflation
In the early years of long-term, runaway inflation, when there are more debtors than creditors, inflation can be beneficial, even popular, with that part of the public that has been profligate with credit cards and that owns homes with sub-prime mortgages.
However, once the debt-wipe-out phase is over, inflation of 20% to 40% works to the disadvantage of the working classes, benefitting the self-employed and entrepreneurs — a type of hidden taxation that does not favor public employees and wage earners.
Eventually, the population becomes accustomed to living with inflation of 20% to 40% a year.
During these years (1965-1979), I was able to successfully set up and run two businesses, earn a good living, marry a wonderful lady, raise two children, afford two maids and a chauffeur, and
accumulate sufficient assets to retire at 40, starting from scratch.
I never considered inflation a problem, having learned to live with it. Inflation was a fact of life, like the air or warm breezes in summer. Of course, this was not hyperinflation, which is entirely different
Controlled inflation: what to expect
People who have lived anywhere on earth since 1971, when the world went off the gold standard for good, know about controlled inflation and how to survive when money is constantly losing value.
As long as inflation is controlled — that is, varying between expected guidelines — people can use commonsense and figure out the best course of action.
Controlled inflation, whether on the order of 2% or 20%, has certain constants:
- Business cycles persist. There are still economic ups and downs. Employment levels fluctuate. Salary and wage levels still follow the laws of supply and demand.
- The rate of inflation is not fixed, but varies. The importance given to this variance depends upon the expected range of inflation in a particular country.
- Interest rates usually reflect the rate of inflation and taxation. Generally, the higher the inflation, the higher the rate of interest. Nevertheless, interest rates still fluctuate with supply and demand.
- The higher the rate of inflation, the shorter the tenure of bonds that are marketable, unless some form of monetary correction is applied. Contracts may be drafted in terms of currencies with lower rates of inflation, when permitted by law.
- The higher the rate of inflation, the shorter the terms of insurance policies that are available.
- Budgets must take inflation into consideration.
- Generally, people who are self-employed and run their own businesses can adjust income to inflation more readily that those who work for others or who live on pensions. Business cycles persist, even in inflation.
- Contracts that provide fixed income (rentals, annuities, bonds, pensions) become progressively less valuable at higher rates of inflation.
- Real estate and other tangible assets provide better protection against inflation than monetary assets. However, this protection is not absolute. For example, the value of real estate will still vary with rentals, location, supply and demand, and age.
The important thing to note here is that once an economy settles into a certain, more or less, predictable range of controlled inflation, ordinary investment logic can be used to set up portfolios and select securities.
However, it is the periods of transitions to higher or lower rates of controlled inflation, or in and out of periods of hyperinflation, that pose the most danger.
Surviving transition points
At the time of this writing (2010), there is a general expectation that higher inflation lies in the future. However, how much higher and whether this inflation will be controlled or slide into hyperinflation is unknown. Although Obama’s policies of higher taxation and bashing business is expected to keep unemployment high, deflation seems unlikely — excesses in government spending are simply too great.
Therefore, a strategy for transiting into higher inflation would be:
- Avoid long- and medium-term debt and equities.
- Avoid fixed annuities.
- Borrow against real estate long-term, with fixed interest rates — as long as you can be assured of the ability to make the payments.
- Hold gold, silver, and other precious metals.
- Hold cash in money market funds. (When inflation hits, short term interest rates should rise quickly, protecting this investment.)
• If it appears that hyperinflation may be developing, get out of cash held in money market funds, except for modest amounts for day-to-day needs.
• Once it seems likely that the economy will settle into controlled inflation and that prices of the
various asset classes will adjust to levels appropriate to current rates of interest, you should consider quickly getting out of gold, silver, and other precious metals. This type of asset pays no income and has a carrying cost.
• Holding gold once there is hope that inflation will be contained can be extremely risky. As fear of inflation subsides, gold often falls in value, sometimes precipitously — well before inflation is under control.
• During a hyperinflation, everything is greatly diminished: your savings account, your safety and your lifestyle. You feel that there’s no safe place. It not only destroys the wealth you’ve amassed, but robs you of any sense of security and order. It takes you for all you’ve got.
The acceleration of hyperinflation
Below is a table of the acceleration of hyperinflation in Zimbabwe – this was a multi-year breakdown and we can expect something similar here:
year rate of increase in prices
2008 231,150,888.87% (July)
B. The Worst Episode of Hyperinflation in History: Yugoslavia 1993-94
Thayer Watkins, Ph.D.
Between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. That’s a 5 with 15 zeroes after it!
Under Tito, Yugoslavia ran a budget deficit that was financed by printing money. This led to a rate of inflation of 15% to 25% per year. After Tito, the Communist Party pursued progressively more irrational economic policies. These policies and the breakup of Yugoslavia (Yugoslavia now consists of only Serbia and Montenegro) led to heavier reliance upon printing or otherwise creating money to finance the operation of the government and the socialist economy. This created the hyperinflation.
By the early 1990s the government used up all of its own hard currency reserves and proceeded to loot the hard currency savings of private citizens. It did this by imposing more and more difficult restrictions on private citizens’ access to their hard currency savings in government banks.
The government operated a network of stores at which goods were supposed to be available at artificially low prices. In practice these store seldom had anything to sell and goods were only available at free markets where the prices were far above the official prices that goods were supposed to sell at in government stores. All of the government gasoline stations eventually were closed and gasoline was available only from roadside dealers whose operation consisted of a car parked with a plastic can of gasoline sitting on the hood. The market price was the equivalent of $8 per gallon. Most car owners gave up driving and relied upon public transportation. But the Belgrade transit authority (GSP) did not have the funds necessary for keeping its fleet of 1,200 buses operating.
Instead it ran fewer than 500 buses. These buses were overcrowded and the ticket collectors could not get aboard to collect fares. Thus GSP could not collect fares even though it was desperately short of funds.
Delivery trucks, ambulances, fire trucks and garbage trucks were also short of fuel. The government announced that gasoline would not be sold to farmers for fall harvests and planting.
Despite the government’s desperate printing of money it still did not have the funds to keep the infrastructure in operation. Pot holes developed in the streets, elevators stopped functioning, and construction projects were closed down. The unemployment rate exceeded 30 percent.
The government tried to counter the inflation by imposing price controls. But when inflation continued, the government price controls made the price producers were getting so ridiculous low that they simply stopped producing.
In October of 1993 the bakers stopped making bread and Belgrade was without bread for a week. The slaughter houses refused to sell meat to the state stores and this meant meat became unvailable for many sectors of the population. Other stores closed down for inventory rather than sell their goods at the government mandated prices. When farmers refused to sell to the government at the artificially low prices the government dictated, government irrationally used hard currency to buy food from foreign sources rather than remove the price controls. The Ministry of Agriculture also risked creating a famine by selling farmers only 30 percent of the fuel they needed for planting and harvesting.
Later the government tried to curb inflation by requiring stores to file paperwork every time they raised aprice. This meant that many store employees had to devote their time to filling out these government forms. Instead of curbing inflation this policy actually increased inflation because the stores tended to increase prices by larger increments so they would not have file forms for another price increase so soon.
In October of 1993 they created a new currency unit. One new dinar was worth one million of the “old” dinars. In effect, the government simply removed six zeroes from the paper money. This, of course, did not stop the inflation.
In November of 1993 the government postponed turning on the heat in the state apartment buildings in which most of the population lived. The residents reacted to this by using electrical space heaters which were inefficient and overloaded the electrical system.
The government power company then had to order blackouts to conserve electricity.
In a large psychiatric hospital 87 patients died in November of 1994. The hospital had no heat, there was no food or medicine and the patients were wandering around naked.
Between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. This number is a 5 with 15 zeroes after it. The social structure began to collapse. Thieves robbed hospitals and clinics of scarce pharmaceuticals and then sold them in front of the same places they robbed. The railway workers went on strike and closed down Yugoslavia’s rail system.
The government set the level of pensions. The pensions were to be paid at the post office but the government did not give the post offices enough funds to pay these pensions. The pensioners lined up in long lines outside the post office.
When the post office ran out of state funds to pay the pensions the employees would pay the next pensioner in line whatever money they received when someone came in to mail a letter or package. With inflation being what it was, the value of the pension would decrease drastically if the pensioners went home and came back the next day. So they waited in line knowing that the value of their pension payment was decreasing with each minute they had to wait.
Many Yugoslavian businesses refused to take the Yugoslavian currency, and the German Deutsche Mark effectively became the currency of Yugoslavia. But government organizations, government employees and pensioners still got paid in Yugoslavian dinars so there was still an active exchange in dinars. On November 12, 1993 the exchange rate was 1 DM = 1 million new dinars. Thirteen days later the exchange rate was 1 DM = 6.5 million new dinars and by the end of November it was 1 DM = 37 million new dinars.
At the beginning of December the bus workers went on strike because their pay for two weeks was equivalent to only 4 DM when it cost a family of four 230 DM per month to live. By December 11th the exchange rate was 1 DM = 800 million and on December 15th it was 1 DM = 3.7 billion new dinars. The average daily rate of inflation was nearly 100 percent. When farmers selling in the free markets refused to sell food for Yugoslavian dinars the government closed down the free markets. On December 29 the exchange rate was 1 DM = 950 billion new dinars.
About this time there occurred a tragic incident. As usual, pensioners were waiting in line. Someone passed by the line carrying bags of groceries from the free market. Two pensioners got so upset at their situation and the sight of someone else with groceries that they had heart attacks and died right
At the end of December the exchange rate was 1 DM = 3 trillion dinars and on January 4, 1994 it was 1 DM = 6 trillion dinars. On January 6th the government declared that the German Deutsche was an official currency of Yugoslavia.
About this time the government announced a NEW “new” Dinar which was equal to 1 billion of the old “new” dinars. This meant that the exchange rate was 1 DM = 6,000 new Dinars. By January 11, the exchange rate had reached a level of 1 DM = 80,000 new Dinars. On January 13th, the rate was 1 DM = 700,000 new Dinars and six days later it was 1 DM = 10 million new Dinars.
The telephone bills for the government operated phone system were collected by the postmen. People postponed paying these bills as much as possible and inflation reduced their real value to next to nothing. One postman found that after trying to collect on 780 phone bills he got nothing so the next day he stayed home and paid all of the phone bills himself for the equivalent of a few American pennies.
Here is another illustration of the irrationality of the government’s policies: James Lyon, a journalist,
made twenty hours of international telephone calls from Belgrade in December of 1993. The bill for these calls was 1000 new dinars and it arrived on January 11th. At the exchange rate for January 11th of 1 DM = 150,000 dinars it would have cost less than one German pfennig to pay the bill.
But the bill was not due until January 17th and by that time the exchange rate reached 1 DM = 30 million dinars. Yet the free market value of those twenty hours of international telephone calls was about $5,000. So despite being strapped for hard currency, the government gave James Lyon $5,000
worth of phone calls essentially for nothing.
It was against the law to refuse to accept personal checks. Some people wrote personal checks knowing that in the few days it took for the checks to clear, inflation would wipe out as much as 90 percent of the cost of covering those checks.
On January 24, 1994 the government introduced the “super” Dinar equal to 10 million of the new Dinars. The Yugoslav government’s official position was that the hyperinflation occurred “because of the unjustly implemented sanctions against the Serbian people and state.”
C. The Nightmare of the German Inflation: How Investments Fared
In the short period of about a year, from 1922-1923, the German people suffered under the torture of hyperinflation. The snippets below help the reader to begin to understand the hell the average German citizen experienced:
- In September 1922, a loaf of bread cost 163 marks. One year later in September of 1923, this figure had reached 1,500,000 marks. A few months later at the peak of hyperinflation, November 1923, a loaf of bread eventually cost an inconceivable 200,000,000,000 marks!
- People were paid by the hour and rushed to pass money to loved ones so that it could be spent before its value meant it was worthless.
- People had to shop with wheel barrows full of money.
- Bartering became common – exchanging something for something else but not accepting money for it. Bartering had been common in Medieval times!
- Pensioners on fixed incomes suffered as pensions became worthless.
- Restaurants did not print menus as by the time food arrived…the price had gone up!
- The poor became even poorer and the winter of 1923 meant that many lived in freezing conditions burning furniture to get some heat.
- The very rich suffered least because they had sufficient contacts to get food etc. Most of the very rich were land owners and could produce food on their own estates.
At the start, it is important to understand how hard it was to obtain real income during the inflation. Professionals, skilled workers and others used to enjoying good income found their real salaries disastrously cut. Those who depended on savings, pensions or investment income for a living faced a terrible situation.
Interest from bonds or savings deposits soon depreciated to where they had no real value. Stocks paid meager dividends or none at all; corporate managements needed the money for working capital, or used it for capital building and speculation. Owners of rental property fared no better; the government froze rents, which soon meant that tenants were occupying premises virtually rent-free. Dipping into capital led to big losses, since cash, bonds and even stocks quickly shrunk drastically in value. The urgent need for income had important effects on the true prices of various types of property and investments.
Cash: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous.
Bank Deposits: In theory, bank deposits became as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority of depositors withdrew their funds at some time during the inflation, after much of the value had been lost, and exchanged them for goods. Few Germans held money in deposits through the entire period.
Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government bonds were reimbursed to the extent of 2.5% of the original bond values.
Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years. Here again, few investors held bonds or mortgages throughout the entire period; most holders got rid of them for whatever pittance they would bring during the inflation.
Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.
Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
Personal Property: Capital was preserved by those who early changed it into objects of lasting value–rare coins, stamps, jewelry, works of art, antiques–or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.
Common Stocks: In an inflation, common stocks are generally considered a desirable hedge to protect against or even to profit from the rise in prices. In practice, it is not so simple. In this country stock prices have been known to fall violently just when inflation was most evident (1946, 1957, 1966, 1969). Market fluctuations–the rise of exciting new speculative stocks, waves of fear or greed–all make it much too easy to buy or to sell at the wrong time or to go into the wrong stocks.
Getting down to specifics, we can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.
Many very sharp but brief advances and declines in the market led to widespread speculation, and well-intentioned investors often wound up as traders. Naturally most of them did as badly as amateur speculators generally do. Many decided that speculation was the only sensible approach; when the entire economy and financial structure was visibly crumbling, who could wait patiently with confidence in the long-range value of anything?
D. The Steps Toward Hyperinflation
Hyperinflation’s Deadly Ingredient #1: The Creation of Fiat Money
Citizens generally know that the paper currencies they are forced by law to use aren’t quite as good as gold. There is an oily, slippery quality to the paper. It’s been that way since the very first paper currency was used in China during the Song Dynasty, but at least then there was metal backing the paper. In the following Yuan Dynasty the government forced citizens to turn in their gold and silver and use the world’s first fiat currency: the Chao. The same thing would happen again in the U.S. under FDR some six centuries later.
That unbacked paper money’s value will go down gradually over time is a given, but most folks delude themselves into believing it’s for the best and that the government has it all in hand. They come to expect this gradual inflation of the money supply and decline of their currency’s purchasing power. But
eventually a nation has to face the inevitable outcome of government trying to manage an economy and print wealth into existence; centralized planning leads to misinvestments on a colossal—even global—scale, and this sort of planning can only be sustained by a fiat currency since the unfettered market would never allow for it. Eventually the whole thing collapses.
You see, when money supply is fairly fixed, it ties government’s hands. When you ant a strictly limited constitutional government, that’s a good thing. Of course, if you want centralized planning, market interventions and wars, gold standards are horribly restricting. That’s why governments get rid of them as quickly as they can. Then there is absolutely no need to be fiscally responsible. Then governments can use all the usual means to grow in scope and reach: the wars, welfare the market intervention previously mentioned…And the creation of credit
Hyperinflation’s Deadly Ingredient #2: The Easy Availability of Credit
Credit distorts prices. It’s how the banks—under direction from the central bank—get the disaster rolling. Fractional reserve lending laws allow banks to make loans far beyond what they actually have on reserve (a fraction of those reserves, hence the name). Assets get bid up with credit and bad business ideas get funded. People get all sorts of false signals because of the availability of credit and bad decisions get made. Debts grow on all sorts of unproductive purchases and ventures. The Fed is ultimately responsible for inflating explosively unstable financial bubbles.
The artificially low rates — set by a board of Fed governors, not the free market – allowed people borrowed beyond their means. To the average American, it all seemed to make sense. All their assets were going up – stocks, real estate, overall net worth. But what goes up, must always come down.
Hyperinflation’s Deadly Ingredient #3: Bursting of the Credit Bubble
This can’t go on forever—borrowing on reserves that aren’t really there. When it stops working, those debts have to be worked out somehow. This “somehow” manifests itself as losses and write-downs. Borrowers can only service these debts for so long when the debt-fueled activities and questionable investments inevitably fail to produce enough income and returns to pay the debt and interest. When the debts can no longer be serviced, then violent reallocations occur. Businesses, livelihoods and homes are lost.
Hyperinflation’s Deadly Ingredient #4: Sharp Contraction of Available Credit
Seeing billions disappear from your balance sheet is a hard pill to swallow. And when the banks were forced to wash it down, an funny thing happened: they stopped lending. They stopped lending to each other. They stopped lending to consumers. And they stopped lending to businesses. The entire system goes into shock. As mentioned above, credit becomes scarce as banks worry about every getting their money back. Without credit, both prices and economic activity start to decline.
Hyperinflation’s Deadly Ingredient #5: The Deflation of Asset Price
Strictly speaking, deflation is a contraction in the money supply. Of course “money” can different meanings and include different measures. If available credit is counted, then deflation does indeed take place when that credit ceases to be available.
Credit can and does deflate and the effect on the economy is indeed very deflationary as prices bid up by credit collapse (housing is a very obvious example, but luxury items and even needed commodities are affected by availability of credit) and activity dependent on credit ceases, and the jobs attached to those activities disappear.
Hyperinflation’s Deadly Ingredient #6: The Rapid Printing of Money Out of Thin Air
Asset values and economic activity have to fall to painfully low levels in order for all the excesses of easy credit to be cleared away. After a while a sound economy can then be rebuilt on the basis of honest money and market-determined interest rates. But that’s not the sort of thing governments subscribe to in the Keynesian era. Governments and the rabble who elect them, believe that it’s possible to get something for nothing and that it’s possible to print wealth into existence. The average person really believes that all the government has to do is print money and take over production in order to keep the party going.
An easy way to devalue the debts is to make them easier to pay. A little inflationary easing thus seems like a really good idea. That’s how governments make inflation palatable to their subjects. It makes the weight of bad financial decisions easier to bear.
The government borrows money into existence (from the central bank) and then spends it into the economy.
The government labels this sort of thing as “economic stimulus” or “quantitative easing”, though a more honest description would be “defrauding the minority of savers” and “prolonging the inevitable painful outcome of propping up misinvestments.”
The new administration has decided to “monetize the debt.” They are going to create new money in order to bail out various banks and businesses and even mortgage debtors. But again, governments may be able to create money, but they cannot create wealth or purchasing power; they can only steal it outright with taxes or subtly with monetary inflation. It’s a swindle. The money they create dilutes the value of that already in existence. It is a way to siphon purchasing power from those trusting souls who have saved in the currency. It’s an indirect and subtle tax. This is wrong in principle and disastrous in
Hyperinflation’s Deadly Ingredient #7: The Acceleration of Money Into the Market
It may not come tomorrow. Or the day after. But be sure that our current monetary trajectory puts us on pace for the acceleration of money into the market. And that’s when things get really scary. Hyperinflation takes off when the entire population gets wise.
The money supply might have been growing in fits and spurts for decades, but the hyperinflationary storm happens when that money really starts to move around as people try to get rid of it. The prices of useful goods get bid up to embarrassing levels. The process accelerates when governments try to stabilize markets…often by adding more paper…because honestly, what else can a government do? Mismanagement and fraud are the only things governments really get right consistently. So for the government a problem that’s caused by the theft of inflation can only be solved by…more mismanagement and fraud. The entire process is self-reinforcing and results in the hyperinflationary death spiral to which all currency is heir.
The effect is that savings in the currency rapidly lose value. In an effort to sustain pretend wealth, the government wipes out real wealth. The only way to avoid this destruction is not to put one’s trust in the paper the government and the central bank issue. At some point in the future literally everyone everywhere will be rushing to exchange paper for things of real value. The trick to survival is to start before they do.
E. How To Protect Your Money
If you’re thinking that this whole fiat currency deal and the hyperinflationary death or money is an abomination, you’re right. If you’re thinking that there’s something you can do to prevent it, then you’re absolutely wrong.
This sort of thing just keeps happening over and over. Human beings seem to love making themselves slaves to the state and believing in the false promises of that false god. The rulers want more power and the ruled want something for nothing. Fiat currency has proven the most efficient way for advanced
civilizations to ruin themselves. Fiat seems like instant wealth, but it’s just sure death.
Like anything else, liberty and the sound money upon which it is built, seem destined to atrophy and die. All the individual can do is be aware of the lessons of history and to take the appropriate steps to protect themselves. You obviously need to deal in currency on a day-to-day basis, but a portion of the your savings should be in things of lasting value.
U.S. Hyperinflation Hedge: Long Precious Metals / Short the Dollar
Gold and productive farmland have been much more reliable stores of wealth than paper for several thousand years. Gold is just a bit easier to hide, however, should the need arise. And right now it’s the better buy.
When speaking of the collapse of a currency, people often trot out the adage “you can’t eat gold.” By this they mean that in a true currency crisis and attendant collapse, only fuel and food and the arms to protect them will have any value. Gold, despite being branded a barbarous relic by Keynes, is actually a symbol of civilization and trade. Therefore it won’t perform its monetary function when civilization and trade break down.
In a true collapse, there may be no trade at all or what little trade there is could be limited to barter. As long as there is any exchange being done, people will find something to use as money; the guy with the cows that produce the milk you want is not always going to want the furs you have to trade. If trade
goes on at all, even if barter is a large part of it, precious metals will have a place. They’ve been used as money for thousands of years because they perform the function of money so well.
On the other hand, a common assumption is that gold is absolutely the best thing to hold during hyperinflation. Not necessarily true. It will do a lot better than the failing currency…but a hyperinflationary scenario means that just about everything is doing better than the failing currency…the currency is the one thing that no one wants to hold. Depending on where things are at the start, however, it may not do the best. Right now, real estate is still in the process of falling from a extremely high levels fueled by the credit that is still vanishing. The simplest way to diversify out of the dollar is to trade it for precious metals which have proven to be a much more enduring form of savings, especially in times of crisis.
The first step you should take is to trade some of the fiat currency in your possession for something of lasting value. Buy some gold. Non-perishable food items are also a good idea, but gold (and silver) do much better as money.
F. What becomes money when the system collapses?
Economist Mike Shedlock defines money through the eyes of Austrian economist Murray N. Rothbard as “a commodity used as a medium of exchange.”
“Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.”
What is money when the system collapses and the SHTF?
In disaster situations, the value of money as we know it now changes, especially if we are dealing with a hyperinflationary collapse of the system’s core currency. This article discusses money as a commodity in an event where the traditional currency (US Dollar) is no longer valuable.
In a collapse of the system, there will be multiple phases, with the first phase being the “crunch”, as discussed in James Rawles‘ book, Patriots. The crunch is the period of time directly preceding a collapse and the collapse itself.
Initially, the traditional currency system will maintain some value, though it may be rapidly depreciating in buying power. For those with physical, non-precious metal denominated currency on hand (paper dollars, non-silver coins), spending it as rapidly as possible is the best approach.
It is during the crunch that ATM machines around the country will run out of currency as people aware of the rapidly devaluing dollar will be attempting to withdraw as much money as possible. This immediate increase in money supply, coupled with the population’s general knowledge of the currency depreciation in progress, will lead to instant price increases for goods, especially essential goods.
If your physical cash has not been converted into tangible assets, this would be the time to do so. Acquiring as much food, fuel, clothing and toiletry items as possible would be the ideal way to spend remaining cash before it completely collapses to zero, as it did in the Weimar inflation in 1930’s Germany, or Zimbabwe’s hyperinflation in recent years.
During the initial phase of the ‘crunch’ precious metals will be a primary bartering tool, but this may not last long. The old survivalist adage “you can’t eat your gold” will become apparent very quickly. In a total breakdown of the system, food, water and fuel will be the most important tangible goods to acquire.
Consider someone who has a two week or one month supply of food on hand. Do you believe they would be willing to part with that food for some precious metals? The likely answer is no. There will be almost no bartering item that one would be willing to trade their food for once it is realized that food supply lines have been cut.
That being said, since most will not barter their food, not even for fuel, the next recognized medium of exchange by merchants, especially those selling fuel, will be precious metals.
For the initial crunch, silver coins, especially recognizable coins like pre-1965 90% silver quarters, dimes and half dollars, along with one ounce government mint issued silver coins like the US Silver Eagles, will be accepted by some, probably most, merchants. For those trying to flee cities to bug-out locations, silver coins of the aforementioned denominations may be a life saver, as they can be used to acquire fuel.
While we recommend having gold, as well, the issue with gold is that its value is so much higher than that of silver, that breaking a one ounce gold coin into 10 pieces just to buy a tank of gas will not be practical. It is for this reason that having silver on hand is highly recommended. Packing at least $25 – $50 face value of silver coins in each bug-out bag would be a prudent prepping idea.
In a total SHTF scenario, silver and gold may eventually break down as a bartering unit, as contact with the “outside” world breaks down. One reason for this, is that the fair value price of precious metals will be hard to determine, as it will be difficult to locate buyers for this commodity.
This, however, does not mean that you should spend all of your precious metals right at the onset of a collapse. Precious metals will have value after bartering and trade is reestablished once the system begins to stabilize. Once stabilization begins, the likely scenario is that precious metals will be one of the most valuable monetary units available, so having plenty may be quite a benefit. At this point, they could be used to purchase property, livestock, services and labor.
Water is often overlooked as a medium of exchange, though it is one of the most essential commodities for survival on the planet. Had individuals in New Orleans stockpiled some water supplies during Hurricane Katrina, much of the loss of life there could have been avoided.
For those bugging out of cities, it will be impractical to carry with them more than 5 – 10 gallons of water because of space limitations in their vehicles. Thus, having a method to procure water may not only save your life, but also provide you with additional goods for which you can barter.
An easy solution for providing yourself and others with clean water is to acquire a portable water filtration unit for your bug-out bag(s). While they are a bit costly, with a good unit such as the Katadyn Combi water filter running around $150, the water produced will be worth its weight in gold, almost literally. This particular filter produces 13,000 gallons of clean water! A Must have for any survival kit.
Because we like reserves for our reserves, we’d also recommend acquiring water treatment tablets like the EPA approved Katadyn Micropur tabs. If your filter is lost or breaks for whatever reason, each tablet can purify 1 liter of water. In our opinion, the best chemical water treatment available.
Clean water is money. In a bartering environment, especially before individuals have had time to establish water sources, this will be an extremely valuable medium of exchange and will have more buying power than even silver or gold on the individual bartering level.
In a system collapse, food will be another of the core essential items that individuals will want to acquire. Survival Blog founder James Rawles suggests storing food for, 1) personal use, 2) charity and, 3) bartering.
Dry goods, canned goods, freeze dried foods can be used for bartering, but only if you have enough to feed yourself, family and friends. They should be bartered by expiration date, with those foods with the expiration dates farthest out being the last to be traded. You don’t know how long the crunch and recovery periods will last, so hold the foods with the longest expiration dates in your possession if you get to a point where you must trade.
Baby formula will also be a highly valued item in a SHTF scenario, so whether you have young children or not, it may not be a bad idea to stockpile a one or two week supply. (For parents of young children, this should be the absolute first thing you should be stockpiling!). In addition to water, baby formula may be one of the most precious of all monetary commodities.
Another tradeable food good would be seeds, but the need for these may not be apparent to most at the initial onset of a collapse, though having extra seeds in your bug-out location may come in handy later.
Fuel, including gas, diesel, propane and kerosene will all become barterable goods in a collapse, with gas being the primary of these energy monetary units during the crunch as individuals flee cities. For most, stockpiling large quantities will be impractical, so for those individuals who prepared, they may only have 20 – 50 gallons in their possession as they are leaving their homes. If you are near your final bug-out destination, and you must acquire food, water or firearms, fuel may be a good medium of exchange, especially for those that have extra food stuffs they are willing to trade.
Though we do not recommend expending your fuel, if you are left with no choice, then food, water and clothing may take precedence. For those with the ability to do so, store fuel in underground tanks on your property for later use and trading.
Firearms and Ammunition
Though firearms and ammunition may not be something you want to give up, those without them will be willing to trade some of their food, precious metals, fuel and water for personal security. If the system collapses, there will likely be pandemonium, and those without a way to protect themselves will be sitting ducks to thieves, predators and gangs.
Even in if you choose not to trade your firearms and ammo during the onset of a collapse, these items will be valuable later. As food supplies diminish, those without firearms will want to acquire them so they can hunt for food. Those with firearms may very well be running low on ammunition and will be willing to trade for any of the aforementioned items.
In James Rawles’ Patriots and William Forstchen’s One Second After, ammunition was the primary trading good during the recovery and stabilization periods, where it was traded for food, clothing, shoes, livestock, precious metals and fuel.
Clothing and Footwear
We may take it for granted now because of the seemingly endless supply, but clothing and footwear items will be critical in both, the crunch and the phases after it. Having an extra pair of boots, a jacket, socks, underwear and sweaters can be an excellent way to acquire other essential items in a trade.
As children grow out of their clothes, rather than throwing them away, they will become barterable goods. It is recommended that those with children stock up on essential clothing items like socks, underwear and winter-wear that is sized a year or two ahead of your child’s age.
Additional Monetary Commodities
The above monetary units are essential goods that will be helpful for bartering in the initial phases of a collapse in the system. As the crunch wanes and recovery and stabilization begin to take over, other commodities will become tradeable goods.
In A Free Falling Economy Makes Bartering Go Boom, Tess Pennington provides some other examples
of items that will be bartering goods during and after a crunch including, vitamins, tools, livestock, fishing supplies, coffee and medical supplies.
Another important monetary commodity after the crunch will be trade skills. If you know how to fish, machine tools, hunt, sew, fix and operate radios, fix cars, manufacture shoes, or grow food, you’ll have some very important skills during the recovery period.