After reading through Rawles' Survivors, I never thought I'd get my wife to pick up another prep/survival related book again. Luckily I married well, and she actually requested that we read Patriots a few days back. I think she's curious to see if it actually is better than the lousy Survivors (it is!).
Anyways, one thing that I noticed a few pages in is that the Grays (the protagonists) don't really have a savings account - their funds are depleted by paying some bills and taxes in advanced, maybe a couple thousand bucks - yet they have massive supplies of guns, ammo, precious metals, BOV, a well stocked retreat, etc. Of course, Rawles' TEOTWAWKI comes by way of hyper-inflation, so they may have just been wise enough to get out of dollars before they were worthless.
On the other hand, many others in the survival world speak very little of having any kind of savings beyond precious metals and preps. This is, I feel, a potentially dangerous and irresponsible message to send. You need savings!
An Emergency Fund is Essential
First off, having an emergency fund of cash is one of the best preps you can have. Cash is the solution for many of the real-life problems that we face, and not having a backup leaves you open to a variety of problems. I'd rank an emergency fund up there with just about any of the prep basics.
In good times, you may have to resort to debt to cover unexpected expenses/cash emergencies. Car breaks down? Need emergency dental work? Lose your job and need to pay rent? An emergency fund is recommended by pretty much any financial planners worth their spreadsheets.
We all have unexpected stuff happen and we want to be prepared for it -- that's what this is all about, right?
Yes, you can take precious metals on down to the local coin/pawn/jewelry shop and sell them off for cash if needs be. You can certainly keep some of your savings/emergency fund in precious metals, but there's a lot to be said for the immediacy of cold, hard cash on hand. And hey, under most disaster scenarios, precious metals buyers aren't going to be open for business and the credit card and ATM machines won't be working - cash is king.
We have an emergency fund that will cover all of our costs for about two months if we tightened up the budget sufficiently. We're working on adding to it slowly and surely. It is about 75% cash and 25% precious metals. We don't have a set amount that we're working towards.
Don't "Prep" Away Your Future
Secondly, we all need to save money, whether its for buying a car, a home or saving for retirement. And even if your cars and home are paid off in full, you should still be saving - your car will need replacing, your home will need repairing/updating and so on.
The retirement piece is a big one that many gloss over--I've heard people talk about clearing out the 401k or whatever and using it to buy preps. That's scary stuff. Don't do that! You can responsibly prepare for bad times without sacrificing your life/retirement savings. If TEOTWAWKI doesn't come and you manage to live to retirement age (likely scenarios!!!), then you will want to be able to retire or at least slow down.
Diversification
Third, we have something called diversification - basically avoiding putting all of your eggs in one basket. If you dump all your normal savings and investments in favor of preps and precious metals, you're essentially just betting on one eventuality - the end of the world. What happens if that eventuality never occurs? You've missed out on a lot of other opportunities and growth that could have happened elsewhere and potentially screwed over your financial future.
So, take a diversified approach to where you put your money. Yes, buy preps and increase your self sufficiency. But don't ignore other areas as well--retirement savings, investments and so on.
Anyways, I'm probably preaching to the choir here. Prep in moderation. An emergency fund is an important prep. Be responsible! Don't dedicate all of your resources to preparing for Armageddon. Plan for the future.
You're absolutely right. I think it's easy to go overboard or justify purchases with the rationale that you are doing it to prepare for disaster. These are noble justifications but you gotta realize that you will probably have to show up to your job on Monday and the credit card company probably isn't going to get hit with an EMP any time soon either. So yeah, it's a careful balance. Great write up guys.
ReplyDeleteI wouldn't trade Preps for money. Money will be worth nothing soon. Very soon by the looks of things.
ReplyDeleteAnon,
ReplyDeleteAlot of people felt the same way you do back in the 70s, most are in the 60s and 70s working as door greeters at WalMart now.
The whole point is balance. I plan for my retirement, my kids going to college, family vacations, emergencies, auto accidents, heath issues, and on and on. If you think the world is going to come to an end and the dollar will be worthless overnight than I think you will be disappointed. The dollar will continue to lose value but it will never be worthless for the simple fact it is the world’s reserve currency and every other nations currency’s value is pegged to how many U.S. dollars their central bank holds. As far as a new world reserve currency it has been estimated that it would take 30 to 50 years to transition from the dollar to another currency. So the bottom line is plan on getting old and plan for those things that happen on the way to old age including those emergencies!
Anon -
ReplyDelete3rdMan has it right.
It's really not about trading preps for money. I'm not saying to go out and sell all your preps for cash. I'm saying take a balanced approach to your finances. Have preps AND save for the future - you'll need to hope for the best but prepare for the worst.
And heck, if you have zero confidence in the US dollar, there are a variety of savings/investment strategies that you can follow to reduce your exposure or even make money off of a market crash.
I agree-great post. A few advisors have suggested taking money out of your 401k plan or IRA or not even contributing. Huge mistake-those withdrawals would be a big taxable event and only benefit Uncle Sam!
ReplyDeleteWhen you have a nest egg it makes everything else in live so much easier to deal with... although you're more likely to tell your boss off when you've had enough! :)
ReplyDeleteAll governments confiscate their citizens wealth, whether through taxes, inflation, outright confiscation, or currency devaluation. If things really get bad, there won't be any warning given - just a bank holiday and everyone is poorer when they reopen.
ReplyDeleteTotal US retirement savings is about 17.5 trillion, the largest source of private wealth now that the housing bubble burst. They'll find a way steal it, count on it. Best to have some savings they don't know about, and in a form they can't control the value of.
Anonymous - Remember, when you hear the sound of hovering black helicopters it will be the authorities coming to confiscate your gold and 5.56 because they have been monitoring your purchases of that stuff too and will come when the time is right.
ReplyDeleteSo there is no hope and you might as well go to South America and join the Mayans in their countdown to 12/12/2012.
For the rest of us, savings is a key to sanity and provides a cushion in tough times. Also, a cache of cash at home or in your BOBs is also a good idea.
IMLTHO, the most likely SHTF experience we will have in our lifetimes will be a extended period where the electricity is out on a municipal or regional basis. This could be cause by anything from aging infrastructure to hacking to solar flares to a major terrorist event.
No, I do not envision a One Second After type of EMP event that plunges us into TEOTWAWKI. But do consider a world where ATMs go down, local banks can not transact, credit and debit cards are useless, gas stations can't pump, food can't be delivered, etc.
In such an environment, cold hard US currency will be the only available medium of exchange. When the Northeast US was hit by the regional blackout in Summer 2003, cash was still accepted at most stores. Thus, cash will be able to buy things for as long as stuff is available to be bought. During this time, all the gold coins in the world will be next to useless because no gold dealer will keep its doors open so you won't have the ability to exchange such coins for cash.
However, given gas/diesel can't be pumped at all and transfer payments can not flow, shipments of goods will be interrupted, if not halted. Stores will run out of foodstuffs within a few days so those who have prepped adequately should be able to weather the period until power is restored. If power is never restored, then it will be like OSA when food, weapons, ammo and medicines were mediums of exchange. (BTW, did you notice that Forstchen never mentions gold at all in OSA?)
Against this possibility, we keep several thousand dollars in cash in the safe in our house.
As for Anon and those who believe in a Patriots-like collapse of the US Dollar, etc., you have to relearn your history. All such arguments use past currency collapses as "evidence" that it could happen to the US Dollar. Whether Weimar, Argentina, Russia, Asia in the 1990s or Zimbabwe, the comparisons are weak because each of the currencies in those episodes were not the world’s reserve currency. None were the medium of exchange for vast trade flows. None were the currency used to price commodities. None made up the majority of the foreign currency reserves of the world’s nations. None had robust and liquid debt markets. So the collapse of these currencies are really bad analogues for the US Dollar’s future.
If you want a better analogue, consider the Great Britain Pound over the past 150 years. Sterling was once the world’s reserve and major trade currency but it is now just one of the majors and has been slowly revalued to something far less than the stature it once had. It slow slide was a function of emerging economies (like the USA), a creeping socialist mindset (like the USA), an expensive foreign policy (like the USA), a dysfunctional political system (like the USA) and a stubborn arrogance that its problems were not as vexing as they actually were (like the USA). While it took Sterling many decades to erode, it never collapsed in the sense of a banana republic. Similarly, it will take a couple of decades for the USA to meet a similar fate, contrary to the notions of many.
(will continue)
As for gold, it is an emotional metal that works well when a fear element comes into the market. It is supposed to be a hedge against inflation and a defense against fiat currencies. Yet, when actual panic occurs, then liquidity is the #1 priority and the rush is to US Dollars and, lately, Yen. Even the Swiss Franc, long a defensive currency, does not act that way because the SNB has said the Swiss can not afford being a safe haven. In the past few weeks we have read of a potential European bank failure, seen a seizing of credit in Europe, margin call induced market swoons, spillover from MF Global, etc. And what is the world’s reaction, sell gold, dump risk assets and run to the safety of US Dollars and US Treasuries. And, selling begets more selling. This is why gold prices collapsed in the second half of 2008, right in the middle of the Lehman/AIG/GSE collapse.
ReplyDeleteGold is not a currency, it is not a LONG-TERM safe haven. It is an emotional vehicle that takes on whatever characteristic the "investor" wants to give it. Think the Fed is “printing money” like Zimbabwe, buy gold to counter the inevitable hyper-inflation that is coming. Think the US fiscal and entitlement challenges mean the Fed will have to debase the currency, buy gold. Think the world’s political system is crumbling, buy gold. Think the European will have to devalue the debt of the PIIGS, buy gold. Think you can not trust any financial institution, buy physical gold and store it in your home or bury it in the woods near the TEOTWAWKI bunker.
But consider something. All of the events depicted above will ultimately lead to deflation. The destruction of monetary value through the devaluing of sovereign debt is, in itself, deflationary. The destruction of monetary value through the collapse of the real estate market is deflationary. The deleveraging of the US consumer and sovereign borrowers reduces the volume of money in the world which is deflationary. The devaluing of the US currency, while potentially inflationary in the short-term, is ultimately deflationary as it leads to economic contraction on a massive scale.
Gold is a indicator of emotional stress and, given the results of the past several years, is justified in its rise from $600 in early 2007. But keep in mind, in August 1976, gold was at $104/oz and then ran up to just over $800 by early 1980, a point where inflation in the USA was in the double digits and interest rates were in the teens (the Volker years). Within two years, gold had pulled back to $300 (-60%). Immediately after the stock market collapse of 1987, gold touched $500 but was back in the mid-300s and did not touch $400 again until 2004.
Note, the peak for gold coming out of the 1970s was in a time of very high inflation and high interest rates (both over 14%). Today, inflation is less than 4% by official measures (or around 7% in real-world terms) and the 10-year US Treasury is below 2%. So to buy gold today at current levels and thinking it could go to $2500 or $3000 or higher requires you to believe that inflation in USD terms will reach 10% or more. To buy told today because you believe the US Dollar will collapse requires another currency to step in in the near future as a new reserve currency. Euro? No, won’t survive as we know it. Aussie or Kiwi Dollars? No, markets are too small. Same for Canada. Yen? Sorry, their demographic and debt problems are worse than the States. Chinese Yuan/Renminbi? Not in our lifetimes because there is a debt bubble that needs to collapse there, there is no sovereign debt market to support currency trading and no one who knows anything trusts their government. That leaves a IMF-led effort to create a tradable currency basket which would take a decade or more to gain any momentum.
(to be continued)
(continuing to end)
ReplyDeleteIn the meantime, all of the things you fear are deflationary and, if they play out, will have a devastating effect on all asset classes, including gold.
Don’t get me wrong, I see some very bad days ahead with the potential for some extremely BAD days. But the idea that the Dollar will collapse in a short span is not one of those things that I see as likely. I put it up there with the potential and desire for some nation to pull off a OSA type national EMP strike – extremely low but a very “fat tail” in a statistical sense. There’s too much joy to be found in life to plan every day for such an outcome. I have my preps, my family understands “life” but we have to live too.
Wow, I got a bit carried away on this (typed in word and lost track of length) and apologize, particularly as I am a newcomer around here. Hope I did not offend anyone.
Enjoyed the OP and the follow ups, even from Anon.
PreppedButHopeful -
ReplyDeleteI think you win for the longest comment we've ever received :D. Good stuff though.
And the Fed Gov has a history of gold confiscation, and the U.S. is one of the only countries where large scale gun grabbing has yet to take place. A bad .gov will take whatever it wants.
Precious metals do have some value beyond just being a vehicle of uncertainty. Their special place in the world of investing is not just a random coincidence, though their current value has almost certainly been driven up by speculation.
Precious metals (gold especially) are a unique vehicle for transporting wealth, through both time and space. They are not readily traceable, have held value for the last several thousand years, can be transported/hidden easily and handle storage exceptionally well. There's some good certainty and peace of mind that comes with PMs - you can bury 'em in your yard for the next 500 years and they'll still be valuable to whoever finds them.
That said, PMs have their share of shortcomings, especially in today's speculative, fear-ridden markets. That's why we have diversification :)
This is an interesting read on Gold vs. the DJIA since 1899.
ReplyDeletehttp://redst8r.wordpress.com/2009/03/15/djia-vs-gold/
May be showing my ignaroance but wth is OSA??
ReplyDeleteOSA = "One Second After", Forstchen's realistic novel on the life of a group of Americans after several EMP bombs wipe out all electric power and devices in the USA. Highly recommended reading for anyone interesting in SHTF, etc.
ReplyDeletehttp://www.onesecondafter.com/
While much of this is evident, the issue of exhausting one's supply of regularly taken medicine was what struck me hardest. Both for diabetics and heart patients but also for those taking psychotropic drugs to deal with mental issues. Given a 30 to 90 day supply for the average person, the prognosis would not be good after that period.
T-blog:
ReplyDeleteA friend pointed me to his discussion so I am a new visitor. I am also in the investment business and appreciate the point being made in the long comment(s). I can recommend reading Ferfal's book on his experiences in Argentina when that country went through a massive devaluation in the early 2000s. His experiences are, IMO, much more like what we might experience in the States than some of the doomsday outlooks. Not good, but not Armageddon either.
That was a good article you linked to but his analysis has a flaw - he only examines the Dow average as an index level ignoring dividends. One of the drawbacks of gold is a lack of interest, income or dividends while you hold it. Further, it you use physical gold, either with a depository or a home safe, there is the cost of storage to consider.
But dividends in blue chip stocks are a large part of their allure to investors. I have access to and index for the DJIA that reinvests dividends going back to 1988. To gauge the impact of dividends on returns, I selected the 1990-2008 period as that is the widest period for which i have data. According to the article, returns were DJIA 233% vs gold 199%. Using the total return index in Bloomberg, the index moved from 3,012 to 14,500 at the end of 2008. Doing a simple % change on those numbers shows 381%, far higher than 233%. similarly, the 2000 to 2007 number would be 37% compared to 23% in the article. Now, this is without taxes paid on the dividends which would reduce the returns by 20 to 30%. However, if this were in a retirement account, taxes would be deferred.
As the article notes, time and time periods matter, and dividends compound over time so longer periods will see larger advantages to a total return index over a price index.
But in real life, no prudent investor has all his eggs in a single asset class. A well diversified portfolio over any of these periods would have included stocks, bonds, cash and precious metals/commodities.
Btw, to the point made by the long winded poster regrading inflation, see the last several paragraphs of the article linked. That writer makes a similar case about the impact of deflation on gold, though he does not state an opinion as to which is more likely. From my perspective, if the euro as we know comes apart in 2012, it is deflation before inflation.
ReplyDeleteEvil wall street banker -
ReplyDeleteGood point about dividends. Gold sure isn't sending you a dividend check on a quarterly basis.
It makes me feel good to see the vast majority of preppers at least on this site seem to have their heads on straight and have not fallen into the Rawles vision of the future.
ReplyDeleteI really appreciate the kind of topics you post here. Thanks for sharing information that is actually helpful for me.
ReplyDeleteGreat post. Love the point about not going all precious metals and neglecting your retirement. We all have to remember, that while we're all pretty sure things are headed south, we certainly don't want to go to any extremes and strap ourselves if things improve.
ReplyDeleteHey PreppedButHopeful. You sure read (and wrote) alot into my earlier post that wasn't there.
ReplyDeleteLet me summarize those 5 sentences, because after reading your very lengthy response I'm still not sure which point you disagree with.
#1, gov't takes money from it's citizens. #2, devaluations of a currency are never pre-announced. #3, Americans have 17.5t in retirement savings. #4, changes are coming to the retirement system in the US, and it won't benefit those that have been prudently saving for the future. #5, my advice: hide some savings outside the system, in a form that can't be devalued or defaulted on.
Which of those do you disagree with? Merry Christmas.
Good post. I think sometimes people can become so focused on the zombie appocalypse, total societal collapse, or nuclear war that they forget to prepare for the most likely SHTF scenarios, job loss, an injury preventing you from working, car or home repairs, etc. Dave Ramsey's Financial Peace program is excellent, and I'd recommend it to anyone interested in an easy to understand course on financial know-how. I'd also recommend listening to his show for a couple of weeks at least. Real people call in and talk about how the SHTF in their lives. It happens every day. IMO, that's the first thing to prep for, because it's the most likely to occur to any of us.
ReplyDeleteThanks for the blog. Some real thought-provoking stuff.