Sunday, November 17, 2013

Cash is King or is it Worthless Fiat Money after an Economic Collapse?


Angel Alvarez said...

Dear Ferfal:
Last October I was furlough, I'm a Gov contractor. I use the lesson learned in your book about cash and food. I use the experience as a dress rehearsal for a major catastrophe. Stored food and water was consumed faster than I expected. I think people thought the Gov was defaulting because there were long lines on the banks and ATMS!. By the second week I have to buy drinking water, I thought I have enough for a month. Lesson Learned, stock up on water, gas for the stove, Oreos, run out of them fast!, later friend.

Angel Alvarez said...

Dear Ferfal:
Cash is huge!, can't stress it enough, unless if is a major calamity, cash is the only thing you need. My latest experience was the Gov furlough, and of friends and acquaintances, the first thing was they started to run out of cash!. Having 3 months worth of money for expenses is part of the EDC!. That was a 3 week furlough, and stressed a lot of people!, can you imagined a calamity of major magnitude?. Cash, food, water, EDC, are a must, should be of you.

Don Williams said...

1) Survivalists tend to have this idea that the world will collapse and they will rise from being low on the income scale to warlords/feudal barons.
Ain't going to happen , guys. World has 7 billion people and there's no way the population in a modern day state can survive with a medieval economy. Germany circa 1920 was in far worse shape than the USA is ever likely to get -- and they put dictator Hitler in charge and
he didn't go to the gold standard.

2) You have to have a fiat currency -- gold and silver don't cut it as a medium of exchange. If one fiat dies then another takes its place. In Weimar
Germany , New Mark replaced Old Mark. In some places, a foreign currency will coexist with the local fiat currency. But note that this is due in part to the
extensive global trading system staying up and running.

Argentina's problem largely was due to her being dependent on foreign IMPORTS and those imports suddenly rising greatly in price whereas her exports earned less because traders knew she had gone deeply in debt and that she
desperately needed to dump whatever products/assets she had
on the market at cutrate prices.

A near-bankrupt debtor never has much negotiating power.
That is why US Banks constantly encourage foreign dictators to put their countries deeply in debt -- with a cut for the dictator put into Swiss bank accounts.

Don Williams said...

3) I don't mean to sound like the arrogant American but I think if the USA goes down she will take the rest of the world with her. Not because we are any
better than other people but because objectively our economy is the largest in the world and both Europe and China earn a lot money selling to us. (They have
relatively little trade with each other in comparison.) That is changing over time and maybe one day the Euro and Yuan will thrive while the dollar collapses but I don't see it in the next five years.

4) Over 40 years ago, a guy named Harry Browne came up with the best ideas I've seen on how to handle the various types of economic changes. Harry was
the Libertarian Party's nominee for US President in 1996 and 2000.

5) Harry emphasized that NO type of investment is best for all circumstances -- it is like a boxer insisting on facing in one direction only while an attacker moves to his left side and punches him in the ear and then moves behind the boxer and chops him on the neck.

6) Survivalists don't realize that you can lose a TON of money by missing out on opportunities. If inflation is low and the economy is improving you need to be in good Stocks -- just look at what the US stock market has done in the past year.

Don Williams said...

7) A central bank like the US Fed controls inflation/deflation by how fast it prints fiat
money relative to the growth or shrinkage in the national economy. But that is also
affected by money's VELOCITY -- by how fast it is being passed around from consumer to consumer. When the US economy took a hit in 2008, the big worry was DEFLATION -- because the US corporations and banks started building up BIG hordes of cash
and that had the effect of pulling big chunks of cash OUT of the economy. The price of
Gold CRASHED in that environment --it fell from $1000 to around $700

8) What does well in Deflation is Long Term Treasury Bonds and , to a lesser extent, cash. When other assets like stocks and gold are taking a nosedive, that nice US Bond is paying out a steady 5% interest. More to the point, its CURRENT VALUE soars as
investors seek security and you can sell it for significantly more than what it cost.

9) Long term bonds LOSE value, however, in times of rising inflation. In part because
their interest rate falls below the rate of inflation and in part because their Current Value falls (since the government has to issue bonds with Higher rates of interest -- to at least match inflation-- in order to raise money.)

Gold, however, does well in high inflation. As does real estate with fixed rate mortgages that lies in areas where the economy will ultimately grow (Silicon Valley.) On the other hand, real estate in declining areas (Detroit) will kill you no matter what inflation/interest rates do.

Note that if inflation is low and the economy
is improving then Stocks are a more promising investment and Gold FALLS as investors
move money to stocks. Which is what we've seen in the past year and what we saw in the USA in the 1980s as we moved from the Carter economy to the Reagan economy.

Note also that in today's globalized world, "economy is improving" is RELATIVE to what other economies are doing. USA is still not in great shape but looks good compared to Europe and Japan and China has tight controls on foreign investors trying to move money into China.

10) And, as Ferfal noted, Cash in king in a recession. If you have it you can buy essential
supplies AND pay your mortgage. If you don't have it, the bank forecloses on your house, sells it for a big loss and you lose all that you invested into it. Corporations and banks have "mortgages" as well -- which is why they desperately twisted the arms of Congress to hand
them $Trillions in taxpayers cash from the US Treasury in 2008 at the same time the taxpaying survivalists were predicting the US dollar would become worthless. heh heh

11) Harry noted that if you don't feel like watching the economy, you can just split your
money into four equal piles and invest each pile into stocks, long term bonds, short term
notes (Cash), and gold. The permanent portfolio, Won't earn you much profit but will keep its value as a store of wealth and will be damm near bombproof to
whatever occurs. Like a canoe with outriggers in all four directions.

If you want to earn profits, put some money in a second pile for Speculation. And recognize that it is speculation and that you may lose it if you don't pay attention.

And that insisting the world conform to some ideology -- as opposed to you adapting to the world -- is taking a Vow to quick poverty.