"We can deny our heritage and our history, but we cannot escape responsibility for the result. There is no way for a citizen of a republic to abdicate his responsibilities." Edward R. Murrow
I wrote an article with this title on June 6, 1980 in my
newsletter, “Remnant Review.” It is time for a follow-up.
The four G's seemed prudent in 1980. In early 1980, the
American economy was suffering from the worst peacetime price
inflation in its history. That was about to reverse due to the
Federal Reserve's decision under Paul Volcker the previous
August to reduce the rate of growth in money and let interest
rates soar. This would lead to a recession.
By the end of summer in 1980, the United States was in a
recession. The Carter Administration was running a deficit in
fiscal 1980 of a then-shocking $74 billion.
(http://1.bit.ly/Deficit1980) Prices were then 40% of what
they are today. A deficit that large would be the equivalent
of $203 billion today. A $203 billion deficit would be hailed
today as a political triumph by the Tea Party and cursed as a
job-destroying catastrophe by Paul Krugman.
Had you known generally what was coming in 1980, you
would have put all of your money into 30-year T-bonds. You
would have sold them in mid-August 1982 and bought a no-load
mutual fund in the S&P 500. You would have sold that in March
2000 and put all of your money in silver. That was because
silver had collapsed from $50 to under $5. Or you just bought
Wal-Mart shares in 1980 and nothing thereafter. (I moved to Texas in 1980 and recall seeing a Wal-Mart store in some small
town. I did not follow through. Too bad.)
We are still around three decades later. The Soviet Union
isn't. Red China is now the fastest growing large nation in
history, due to the decision of Deng Xiaoping in 1978 to free
up agriculture. Cuba and North Korea are that last nations
committed officially to communist economics. They are
universally acknowledged failures.
Today, the world is safer in terms of nuclear war. It is
far less safe in terms of the stability of financial
institutions. It is also becoming clear that governments can
default on their obligations. We watch the crisis building in Europe because of the inevitable default of the Greek
government on its bonds. The European stock markets rally when
Merkel makes some vague statement about German's commitment to
something, but not much. The lemmings see what is coming, but
they cannot bring themselves to get out of stocks and stay
out. They buy for a day or two. I call these Merkel's gurgles.
They mean little. Investors believe that something will save Greece and the big banks that stupidly believed the previous
Greek government and bought Greek IOUs. They believe that the
governments of northern Europe can save the big banks of
northern Europe. They believe in deliverance by northern
government debt – to save the banks from southern government
debt.
Why should you care about the four G's? Why should you
imagine that things will not repeat? The financial system
held up after 1980. Why won't it hold up today? Why won't
things be business as usual?
One good reason is that it is clearly not government as
usual. The size of the deficit, the gridlock in Congress, the
desperation of the unemployed, the ineffectiveness of the
Federal Reserve, the inability of the economists to offer a
solution, the unwillingness of small businesses to borrow, and
$1.7 trillion in excess reserves in the banks all point to a
continuing crisis that is not going away. The government is
helpless. The Keynesian solutions are not working.
This clearly cannot go on indefinitely. The federal
government is absorbing too much of America's capital. Its
deficits show no sign of ending. A recession will increase
these deficits.
When a nation's leaders are visibly helpless, a few
people start looking for ways of protecting themselves. The
vast majority have few capital reserves. They live from
paycheck to paycheck. The very rich have their vacation
retreats. They think they are in good shape. The middle class
has little wiggle room.
Along come critics of the system who tell people that
they had better wiggle. This message is not well received.
Many are called, but most are frozen.
GOD
In 1980, I wanted to recommend a good book on God. I
could not find one that I thought spoke to the issues of the
day. As I say, “You can't beat something with nothing.” So, I
decided to write one. I sat down in early July and started
writing. I had no outline. I had an IBM Selectric III
typewriter. Over the next 12 days, I wrote a book,
“Unconditional Surrender.” In 1988, I added one chapter. In
2010, I added another. It's still in print.
(http://bit.ly/gnuncon)
My position is clear: if you think you're 100% dependent
on your own wisdom and efforts, you are asking for trouble.
You have a heavy load. I know that atheists can sober up, but
Alcoholics Anonymous begins with an open statement of
dependence on God. I think that's a good place to begin.
This world is governed by ethical cause and effect. When
people vote for a living, they create an economy that is
dependent on more theft. Theft-based economies are Ponzi
schemes. It's not just Social Security that is a Ponzi scheme.
So is Medicare. So is the FDIC. All governments over-promise.
They ask us to become dependent on government promises. The
governments issue more promises than taxes and borrowing can
fund. Then they inflate.
Government will prove to be the god that fails. That will
be a good lesson in theology for hundreds of millions of
voters. “Thou shalt not steal, except by majority vote” will
prove to have been a destructive principle, although widely
believed.
GOLD
Gold is the asset that has the longest track record in
history. Financial records survive even when written
literature perishes. For as long as we have financial records,
there are entries about gold. Gold has been the commodity of
account in trading societies throughout history.
It is the essence of the arrogance of modern economic
theory that economists have dismissed gold as a barbarous
relic, a thing of the past. It is a thing of the past, a thing
of the present, and a thing of the future. Why? Because gold
is one way that rich people can vote against policies of their
governments. Rich people can buy gold and store it in Switzerland. They can get out of Dodge, wherever Dodge may be.
They can get on a plane and buy their way into anywhere.
The common man could do the same, but he won't – not
until it's too late. He has heard of gold – mostly negative –
and he has stayed on the sidelines, waiting. The common man
can no longer afford to buy a dozen one-ounce gold coins. In
2001, yes, but not now. He missed the boat.
There is no commodity, no strategy, no place of safety in
a world dominated by governments who preach the gospel of
salvation through legislation. There is no hiding place today
in a world that really does believe in safety through voting.
But for those who look for a tried-and-true port in the storm,
gold is better than any other commonly marketable asset.
It has been the focus of a move from $257 to $1600, 2001
to today. This, despite the nay-saying of the talking heads,
the tenured economists, and the financial press. The run up
has come from outsiders With the banks in panic mode, building
excess reserves, prices have not risen much, despite the
enormous increase in the monetary base since 2008.
Gold is a crisis hedge. It is a buy-and-hold investment.
The American public buys gold only when spooked. Then their
fear subsides. That is why it went to $1900 and then fell
back. The late-comers think there is something magical about
gold. There isn't. Gold is an asset that rich people buy when
they get frightened. But then there is a positive press
release from Merkel, or some vague statement from Bernanke,
and demand falls. Prices fall.
The reality is clear: at some point, the vast increase in
the monetary base will be monetized. The FED will inflate more
in order to make a market for Treasury debt. Then gold will
again be the focus of panic buying.
We are seeing the decline of faith in the state, but
nothing has replaced it in the thinking of the elite. They do
not know where to turn. This decline of faith will create a
decline in the demand for digital money. We do not know when.
Prices are not rising much. The economy remains stagnant. But
the central bank cannot keep recession away by adopting stable
money. Volcker's FED did, but that produced two recessions and
also Reagan's $200 billion deficits. The thought of what the
next recession will do to the Federal deficit is frightening
today. But it will come. We will have to deal with it. One way
for people with extra money will be gold.
But gold buyers must think through why they are buying
gold. They must decide which form is best for their purposes.
Here are traditional reasons:
1. To transfer to children at their death. (Buy small gold
bullion coins.)
2. To invest in an SEC-regulated portfolio. (Buy Central Gold
Trust.)
3. To sell for digital money. (Buy one-ounce bullion coins.)
4. To barter in a crisis. (Buy small bullion coins.)
5. To hold outside the country. (Buy GoldMoney or Bullion
Vault.)
6. To sell to capitalize a business (Buy one-ounce bullion
coins.)
7. To sell to pay off a mortgage (Buy one-ounce bullion
coins.)
The third use – barter with gold coins – is a long-shot.
If it comes to that, you will not get a good return, compared
to having the things you are trading to obtain. Think about
such conditions. You are so desperate that you are willing to
surrender gold coins. That indicates a desperate situation.
The seller knows you are desperate. He will drive a hard
bargain.
I tell people to begin accumulating those things that
would be so desirable in a crisis that they would be willing
to pay for in gold. In most cases, these are common things in
normal times. You can buy them at Wal-Mart or even Dollar
General. You can buy them in bulk at Sam's Club or Costco. Why
not buy them now? Why not buy them on sale in normal times?
If your goal is to barter, then buy now. Barter is
inefficient. It takes place when the division of labor has
contracted. If we get to hyperinflation, which I doubt, we
will be far better off with consumer goods in reserve. We can
quietly consume our hoard, never calling attention to
ourselves.
When you go looking for goods that can be bought by gold
coins but not paper money, you expose yourself. You must
locate a reliable seller of desperately needed goods. You will
not find this person on Craigslist. Would you respond
favorably to an ad that announces this? “I can get you
whatever you need for gold coins. Contact me today.” I think I
would skip that offer.
Barter is a limited market. That means that transaction
costs are high. That means losses when compared to
transactions in normal times. Barter may pay better than not
bartering, but not bartering is better if you possess the
consumer goods that people are willing to pay gold to buy.
What do you want to do with the gold. This scenario
should determine how much gold you should own and in what
form.
GROCERIES
I use this in the broadest sense: immediate consumer
goods. These are goods that you must have. To get them, you
must pay.
Think of bottles of water two hours before a scheduled
hurricane strikes. The bottles will not be on supermarket
shelves. It will be illegal for retailers to hike the prices
of these goods. It's first come-first served. Getting in line
early pays. Waiting doesn't.
Most people wait.
Get in line early.
The economic conditions that would make food scarce are
either local (hurricane) or catastrophic (national). There are
scenarios in which catastrophe is possible. Most involve
plague. The recent movie “Contagion,” presents such a
scenario. It is possible; it is not likely.
A complete failure of the banking system is another. This
would be a black swan event. If the banks go down and stay
down for two months, Western civilization collapses. The death
toll would be enormous. Most people could not survive in such
a scenario. I do not think it pays to prepare for such an
event. The likelihood is too low, and so is your ability to
survive for years on end under such conditions.
The great advantage of storing up basic consumer goods is
that you can rotate them. You buy on sale. You use these goods
to replace what you are consuming. You therefore lower your
cost of living by means of bulk buying. This is good
economics. The fact that it serves as a cushion for a time of
disruptions is gravy.
Here is what could happen. You could lose your job. If
you are in that form of crises, you want a cushion. You will
be using money to make payments on your home. Maybe not even
that. Maybe you pay the water bill and electricity. You dip
into bank reserves. You watch every expense. That is when you
start consuming your reserves. This is not eating your seed
corn. This is living on reserves that you built up for a time
of crisis.
I have a theory about the collapse. Cities will keep
public utilities operating. They do not dare let water and
power go down for more than a week. The threat of panic is too
great. Even in Baghdad, there are rolling blackouts, not
constant blackouts. The city fathers know what would happen if
there were no public utilities for a month. People would start
moving out. The tax base would collapse.
The people who have built their careers on getting
elected know what has to be delivered by the state. They will
allocate their money the way that anyone else that is buying
something allocates his money. They are buying votes. You can
be sure that they will not turn off the flow of funds to any
sector of the economy that services the needs of every voter
in the city.
A garden is a way to store up food. It is expensive. Your
time is valuable. But it has its own rewards. The food is
better in all respects. It is there in an emergency. A garden
does not identify anyone as a crackpot survivalist. It is a
point of contact with neighbors. It is something that you can
recommend to a neighbor as a way to reduce the vulnerability
of the neighborhood in a crisis.
I recommend non-hybrid seeds. You can re-plant the seeds
produced by these plants. They build up immunities to local
plant diseases over several seasons.
GUNS
Guns are controversial. I don't think you need an
arsenal. You need a few simple weapons and the training to
master them. This poem gets the point across.
A .45 for the bedroom,
A shotgun over the door,
A 30.06 for distance,
You don't need any more.
I would add a snub-nosed .357 for a lady's purse. Two
shots will normally settle the issue. Either the assailant
runs or else he cannot run.
You do not have to be an expert marksman. If you can hit
a man-size target at 20 feet, you will do just fine.
The idea that guns are required for defense against gangs
is naïve. A gang that comes into your neighborhood to pillage
is going to be better armed than the police. They will be
carrying automatic weapons. You will not win a shootout with a
determined gang. The best you can hope for is that the members
decide that there are lower-risk victims nearby. A shotgun is
your best means of persuasion. There is nothing like the sound
of a shotgun being racked to persuade someone that he has
other urgent business elsewhere.
You do not want to go outside your home to confront an
armed gang. The guns must be defensive. You want the invader
to take the risk of coming through your door. He should bear
the risk.
I think you should take a firearms course from local
authorities. Get certified. If there is a concealed carry
permit in your state, apply for it.
The United States has a long tradition of gun ownership.
I hope this will continue. Support for an organization such as
Gun Owners of America makes sense.
It's not that you need guns to keep law enforcement
officers away. That is suicidal. Guns are necessary to send a
message to the kinds of college-educated voters who favor
using the state to compel people to submit the their social
reform programs. It makes those people very nervous that there
are millions of gun owners out there. This is altogether
positive.
I think of the scene in “The Day the Earth Stood Still,”
when the world comes to a halt. The professor, who knows why
it has come to a halt, asks his secretary if this makes her
nervous. She says that it does. “That's good,” he replies.
If the state can take away our guns it is because we have
moved past the point of no return politically. Owning a gun
testifies to yourself that you have still not crossed the
line. In this sense, gun ownership is part of positive self-
reinforcement.
CONCLUSION
The four G's are important for reducing our concern
against unforeseen negative events. Instead of worrying about
them, we take concrete steps to deal with them. Most of them
will not occur. But if they do occur, we will be in a position
to deal with them in the short term.
Any series of events that cannot be dealt with with a
two-month supply of food, water, and basic necessities will be
so overwhelming as to make extreme preparations problematical.
Most people cannot afford extreme preparations. They will not
take even minimal preparations.
If you are diligent about spending money and time wisely
in order to reduce your vulnerability to the unexpected, that
is sufficient. You cannot afford to deal with every
contingency. But you should deal with those that could disrupt
your life if you had made none.
If you want to plan for a crisis, plan for unemployment
for six months. That is scary enough.
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