If you’ve read some of my economic posts, it shouldn’t come as a surprise that I think something big is around the corner (before the close of 2019?). I don’t know if it is near hyper inflation, a major stock market crash, or a major loss of economic freedom, but I do think it is already underway and inevitable.
The problem is, even those people who see trouble ahead and think they are preparing for a financial disaster, aren’t preparing the right way. Conventional financial methods won’t work when the problems are at the core of those financial methods.
How NOT to Prepare for the Economic Crisis
Emergency Fund / Savings Account Problems
There are several BIG issues with leaving your money in dollars.
It is easy to get cut off from Accounts
There is a good chance you will lose access to your bank accounts and money market accounts. Just look back in the last few years at Greece’s debt crisis. On June 28, 2015, Greece announced that banks would be “temporarily” closed, ATMs set to a daily withdrawal limit of only 60 euros (about $69USD), and international transfers of funds and cloud based payments (such as PayPal) halted. Suddenly it didn’t matter very much how much money you had in the bank, but whether you could get to a working ATM every day.
Many ATMs ran out of cash. Food and medical supplies were hard to come by. Greeks who were out of the country suddenly didn’t have access to money to get home. The tourist and olive oil industries were shaken. Merchants of nonessential items were out of customers. Things got really hard really, really, fast. A full year later, Greeks were still forced to live off 60 euros/day, but the rules were softened to allow bulk withdrawals of 840 euros every other week instead of daily limits. As far as I could tell, these limits are still in force.
Jim Rickards, A man who experienced from the inside a near financial lock-down scenario in 1998, constantly reminds us that we don’t have any money in stocks, bonds, money market accounts, or even bank accounts. We just own liabilities of other organizations. If those organizations fail, our money is at the mercy of a bailout that may or may not happen. He notes that each bailout has increased in size. Wall Street bailed out a hedge fund in 1998. The Federal Reserve bailed out Wall Street in 2008 (almost 10 years to the day later). Who will bail out the Federal Reserve? Eventually, it will probably be bailed out by the International Money Fund (IMF), but in the months to a year before that happens, don’t count on anything more than just a few hundred dollars a month for gas and groceries. (more info)
Inflation poses a Major threat
Another major threat is runaway inflation. Just look at Zimbabwe’s monetary crisis. Zimbabwe experienced some major economic slowdowns and high war prices in the Second Congo War. In these tight conditions, Zimbabwe was caught printing money to buy US dollars to pay the International Money Fund. Once government printing was exposed, the value of the Zimbabwe’s dollar dropped. In order to maintain government programs and fund supporters, more money had to be printed, declining the value further and tipping the situation into an out of control downward spiral. At introduction in 1980, the Zimbabwe dollar was worth the same as a US dollar. In 2001, a US dollar was worth 100 Zimbabwe dollars. By 2009, The US dollar was worth $2,621,984,228 Zimbabwe dollars.
If the US government is forced to print extra money to pay its massive official debt, it could tip the scales and enter the Zimbabwe death spiral. I would not be surprised at all by this outcome. After all, they’ve already created billions of dollars in recent years with the quantitative easing programs for the 2008 financial crisis. With the decrease in dollar power, more dollars will be needed for medicare, military, and salaries for officials. That money will have to be printed, further decreasing the dollar. How will that sit for your parked cash?
Currently, the United State’s target inflation is 2%, halving your money’s power every 36 years. That sounds like a long time, but it means your dollar loses 81% of it’s power in a lifetime of 85 years. What if inflation were sustained at the 10% of the early 80’s? or the 17% shadowstats.com calculates for an M3 peak in 2008? (why M3 makes a better inflation indicator than CPI) Your bank account would be a lot less appealing. If we hit the Zimbabwe death spiral, no amount of money you have saved or could possibly save now will make a tiniest difference.
Cash holdings are going to be critical in the initial stages of crisis, but you will need a more robust plan to get you all the way through.
Precious Metals Problems
Traditionally, this is where the gold and silver bugs get really excited. A widespread economic crisis is exactly what they think they’ve prepared for. They will use charts of dollars vs. gold prices to show you that precious metals are the way to maintain and grow wealth and cite thousands of years of using gold as money.
A much as I wish the answer were that simple, it isn’t. I wish I could justify buying as much of those brilliant beautiful metals as my bank account can handle and call myself “prepared”. They are a good protection (maintain purchasing power) against a declining dollar, but probably won’t help you during the actual crisis.
Precious Metals don’t Maintain Value in a Crisis
Think of it like this: if you were in a personal financial crisis, what is the first thing you sell? You might part with some extra furniture or toys first, but eventually you will get to the valuables, especially those that don’t provide utility.
At the first scare of economic trouble, people buy gold as a protection, driving the price up. Once you get partway through a recession and large groups of people are needing to sell at the same time, the price tanks… right when people need it the most.
Another way to look at it is in dollar exchange rate on a global scale. When the dollar is strong, gold is weak and vise versa. As people are forced to sell things all at once (asset liquidation), the dollar is also at the peak of strength. As the world’s reserve currency, everyone is cashing out their assets for dollars, creating a shortage. Once the Federal Reserve uses this as an excuse to add more money supply, the relative strength of the dollar drops and gold goes up (source). So the unfortunate people who have to sell their gold to cover their assets (sorry, bad pun) are doing this right when the dollar can buy a lot of gold so they don’t get very many dollars, only to have the dollar plummet soon thereafter.
Owning gold and silver is a fantastic idea, but it cannot be your only defense. Unless you can time the shifts accurately and economic uncertainty doesn’t force you to deviate from your plan, gold and silver do poorly in a recession. You will need something else to get you through those years, then cash in your precious metals into the new economy when it is ready.
Precious Metals as Money
In a complete monetary collapse, many people think the thing to have is junk silver (circulated coins from back when they were 90% silver). They are readily recognized, hard to counterfeit, small in denomination, and usually command fairly low premiums.
The problem is they are scarcely found in American households. Goods won’t be priced in silver or gold because merchants won’t have many buyers using that medium. If you are the only person in your community that knows how much silver is in an old dime, it will be a hard sale. You might convince some people of the value, but will they feel confident that they could turn and use it as money with someone else? Not likely.
Note: If you are ready to pick up some precious metals (recommended 10% of long-term portfolios), see my Beginner’s Guide to Precious Metals, complete with why to buy metal, what type(s) to get, favorite places to shop, and a calculator to compare deals. I’ve picked the brains of quite a few gold/silver bugs online and in person to get this thing together.
Bitcoin, Ethereum, and other digital currencies have been the hot investment as of late. Their rebellion against governmentaly manipulated money certainly has an appeal. The returns some people have seen on these investments have an even greater appeal. Currently though, they are a speculative investment, not actual money. When trouble strikes, do you think the mainstream thing to do is to load up on extremely volatile investments? Probably not. The current buying frenzy by people wanting the same returns as early Bitcoin investors will plunge and so will the price.
Do I believe in cryptocurrency? Yes. Maybe after the disgust of government manipulated money, some type of cryptocurrency will even become the world reserve currency! I certainly see the block-chain concept sticking around for a very long time. But again, you have to take on the huge likely risk that your brand of cryptocurrency won’t be the strong leader out of the economic disaster and may even hit zero value. Bitcoin still has some major flaws to work out before it is ready, so don’t bet too big yet. I personally don’t think any of the cryptocurrencies out there today will be the winner. It will be a currency created on a multinational level, probably through the IMF. If an individual or even a group creates it, there is no way to prevent another group from making one to compete. There is infinite competition and therefore zero advantage past any name recognition you might acquire. (See Bitcoin vs. Gold)
Stock Market Problems
You might be able to do well with stocks, but you have to pick the right methods. If you think the S&P 500 or the DOW Industrial Average will save you in an economic crisis, then I’ll politely assume haven’t learned what a stock market is yet and direct you here for a quick movie explanation.
As we move forward into this slowing economy and businesses struggle, a crash gets more and more likely.
I have faith that many companies will adapt to the unsteady footing, whatever it may be, and find ways to keep going. Many companies will fail though. For the ones that don’t fail, it will be hard to get your money out of the stock market to pay taxes and rent without a huge loss in buying power. That is true even if the stock’s dollar amount goes up (inflation scenario). I guess that beats a US bank account, but I wouldn’t call it much of an investment.
If you want to use the stock market, I HIGHLY recommend looking into the foreign stocks. Jeff Gundlach is a prominent investment authority. He is not sounding warning bells of imminent economic danger, but he even he says to move out of US stocks and into foreign. Here’s why he is shorting the S&P 500 and investing in foreign emerging markets. You can invest in companies with cheaper P/E ratios with currencies that are going to strengthen against the dollar. If he’s right (likely), you will make much more money than domestically. If I’m right, you will save yourself a lot of financial struggle. If Jannet Yellen (Federal Reserve Chairman) is right, pigs will fly and you will make about the same money as you would have investing domestically. Sounds like a no-brainer.
Although US Government Bonds are generally considered the “safe” investment, this isn’t exactly the best time to take on bonds.
The Rates are Low and are going to get Lower
The Federal Reserve is still at near-zero interest rates. You actually lose purchasing power in this investment because it can’t outperform even the official inflation. They are making a big show raising rates to keep people excited about the economy, but the truth is we are still only at about 1%. For the 10 years prior to 2008, the average rate was 3.78% and hadn’t been under 1% since one month in 1958. I guess we are celebrating the fact that we aren’t at 0.07% (a few months in 2011) anymore.
I personally think Yellen is just pushing her luck trying to get away from 0% as fast as she can before the next recession is declared. She needs to be able to drop the rates again without crossing into the baffling negative interest experiments the ECB (European Central Bank) started in 2014. Although, she has officially stated that she is looking into the possibility of negative rates. We might end up paying for the privileged of letting people borrow our money!
Don’t buy Stock in the cause of a Crisis
It is the US dollar that we are trying to get out of. It doesn’t do much good to trade Fed issued notes for Treasury issued bonds. If one fails, so does the other. You may even end up getting a “haircut” and be given back only a fraction on the dollar.
How about other countries? Well if Argentina, on the brink of default, is able to sell $2.75 billion in bonds that won’t mature for 100 years, I’d venture to say there aren’t many good deals out there.
As for other junk bonds, we aren’t doing much better with a 3 year low yield. It simply does not make sense to buy anyone’s debt when it is debt that is crushing the system.
Standard Financial Vehicles are NOT the way to Prepare!!
Or less dramatically, they are just a tiny piece of preparation and without the other types of preparation, you won’t have the chance to use your investments’s power. There’s no way to just throw your money into an investment and passively prepare for a crisis. The good news is that the destruction of most financial avenues means you are just as capable of meaningful preparation as a billionaire.
Don’t worry, the solution will be published in a few weeks. Sign up for my newsletter so you don’t miss it! Till then,
Disclaimer: I am not a licensed or certified financial coach, planner, adviser, or anything else of the sorts. I just love money. Anything I recommend should be personally analyzed and discussed with your financial adviser. I cannot be held accountable for any loss or poor performance.
originally published 17 Jul 2017 @ 18:54