I posted this last night on my site, The Daily Elitist, and since so many Kossaks seem to be losing their jobs like everyone else, I thought I'd put it up here as well. Warning: while informative, it may be depressing.
Ah, greetings again, comrades! Very much hope you exploiting proletariat have been successfully as I tell! Since last lesson, capitalist American pig Helicopter Ben Bernanke run printing presses constantly like! But no stop depression coming!
Some say this produce hyperinflation like Mother Russia after tragic fall of glorious Soviet Union, but don’t know about that I! Comrade say such things have not understanding of exploitative workings of exploitative capitalist monies system! Capitalist monies all based on proletariat borrow and paying later monies to bourgeois scum! If credit no work how can be hyperinflation, comrades?! Oppressive capitalist dogs have all monies, none for worker, no price rise! Either way I show though how profit you in deflation AND hyperinflation now capitalist system is fail!
In other words, with all of the funny-money being created by the Fed, it now seems a certainty that we're going to be having either hyperinflation or, due to the fact that there's no way to get the newly-printed money to people who will spend it. For more on that, please check out the post on Credit Money vs. Cash. Either way though, it's a certainty that one or both will happen, so here's how to survive.
Deflation
First off, deflation in this context is a general decline in the price level over time, or an inflation rate below 0%. Hyperdeflation then would be a very rapid decline in prices, loosely defined as a 5% or more decline per annum though economically, the effect really varies based on nominal interest rates. Deflation is the collapse of aggregate, or total demand for goods and services relative to the ability of an economy to supply them. This is usually a result of a collapse in (credit-)money supply, though it could also be a result of a collapse in demand for credit itself and the volume of expenditure (as we're now currently seeing) due to a large imbalance in the distribution of wealth and income - the debtor classes can no longer fund their ever-increasing interest payments to the wealthy investor class no matter how low interest rates are.
Think of it like this - what is money? It's what you exchange for goods and services; if someone owes you money, they actually owe you the product of their production. If you owe someone a debt, you're promising to repay them at a given time with money representing your production. Money then is actually debt, and so is credit. The other side of the credit ledger is always the debt ledger. Since deflation means a decline in prices and demand for products and assets, in a deflationary environment, taking on debt (if even possible) means that one must incur significant loss. Money gains in value the longer you hold it in a deflation, so people aren't very willing to part with it. Thus, the longer it goes on, the more people seek to preserve the cash they have, and we see the emergence of two different economies, or two different economic sectors - a cash sector and a barter sector.
In other words, since cash is scarce during deflation those with it can command a significant liquidity premium, so you want to barter for whatever you can so as to preserve scarce and increasingly valuable cash flow. Since businesses and consumers are giving up an opportunity for economic profit when they part with liquidity, what you want to do to profit yourself in a deflationary environment then is to act as sort of a cashless bank - as one who extends economic, but not financial credit. You want to facilitate the exchange of goods and services in other words, such that people don't have to part with scarce liquidity.
The most important thing here is to think not in terms of market prices in the cash sector, but in terms of debts of physical goods and services. To illustrate, here's an example: let's say you know people at 5 businesses in your area: a farm, a food processing plant, a gas and service station, an machinery parts manufacturer, and a physician's office:
Produces:
Farm - raw agricultural commodities
Food processing plant - manufactured food products
Gas & service station - fuel & repair services
Machinery manufacturer - capital goods & spare parts
Physician - medical services
Wants:
Farm - fuel, spare parts, repair services
Food processing plant - raw ag commodities, capital goods, repair services
Gas & service station - manufactured food, medical services, spare parts
Machinery manufacturer - manufactured food, medical services
Physician - manufactured food, fuel
Now, since liquidity is at a premium, if each of these businesses and their employees were to exchange their respective products for money, they couldn't get enough to cover their expenses, and would go bankrupt. So, what you want to do is to essentially offer credit and facilitate economic activity so that they can all survive. First, go to the farm and ask if they'd be willing to trade a certain quantity of raw ag commodities for the fuel, spare parts, and equipment repairs they need to keep operating. After you strike a tentative deal, you've essentially just bought on credit. Now go to the food processing plant and ask them how much of their product they'd be willing to trade for the things they need, how much raw ag commodity they'd require for a given amount of food.
In the interests of brevity I won't go through the whole process step-by-step, but you can probably see where this is going; you just want to arrange individual barter trades on the basis of your reputation for being able to deliver the goods - exactly what the collapsed financial system did. In this way, you can help others and profit yourself. A few connections and a good reputation is all you need. It's up to you to determine how you'll be paid - you may be able to demand cash for your services only, or you may just get by through keeping a small percentage of the goods in transactions you facilitate for yourself. However, remember, you want to avoid parting with cash and instead deal in goods and services. The most important thing is to maintain a good reputation and to only deal with others who have a reputation for delivering on their promises.
Hyperinflation
Now, in hyperinflation, it's precisely the opposite situation - whether it's due to increases in the money supply, a collapse in confidence, or most likely both, money loses its value very quickly, as people want to part with it as soon as possible to exchange for tangible assets which hold their value. However, for you, it's essentially the same thing, just that you want to avoid holding money rather than hoarding it.
In hyperinflation, you want to arrange barter trades as well, but here you also want to deal in a different medium of exchange than the local currency. If the US dollar collapses, the only universally-accepted money will likely be gold, silver, and other durable precious commodities. As this situation always results in massively inflated demand for such hard assets, you can arrange large purchases of these commodities with the hyperinflating currency slightly ahead of time. You'd then go to places of employment after determining the pay date of the workers, and offer to exchange their rapidly-eroding currency for the hard asset. You then earn a profit off of the spread - the difference between the price for large purchase of, say, silver and small exchanges. Again here, developing relationships is key, because you, as a reputable source of the traded items, can acquire more secure income streams and therefore earn more and more reliable profits of the spread by pricing it lower. Make sense?
One other thing worthy of note is that deflation can rapidly turn into hyperinflation, so you want to keep a close eye on cash prices - if they start going up, or if current events (like a "helicopter drop" of physical cash) suggest they will, start exchanging your cash out for gold or silver ASAP. For your own sake, you want to have a reserve of both cash and tradeable commodities.
All That Glitters...
The difficulty in counterfeiting gold and silver will likely make them valuable media of exchange in all but the most severe of economic crises - those in which the downturn is so severe that basic subsistence is all that matters. For the United States, this would equate to a drop in GDP of 80% or more. Bear in mind though - in an extremely severe downturn, holding gold derivatives or funds as a financial asset won't save you; if things get bad enough, the government or what's left of it will confiscate your holdings or force you to exchange them for government debt, which is probably being inflated away. In a severe collapse, the saying "a bird in the hand is worth two in the bush" has a special relevance.
In addition to gold and silver, the following things will always have value in any circumstance, but are especially valuable in an economic collapse:
- Guns & Ammo
- Booze
- Cigarettes & Tobacco (an especially good one that may even function as liquidity)
- Gasoline & Diesel
- Solar Panels & Small Wind Turbines
- Life-saving Pharmaceuticals (i.e., antibiotics)
- Deadbolt Locks & Reinforced Doors
- Illegal Drugs (or anything else offering a "poor man's vacation")
- How shall I say... "A Woman's Comfort" (i.e., pussy)
If you need a saying to help you remember: Guns, Gas, Grass, and Ass - all things which will always and everywhere have value. Additionally, during a severe downturn, one will likely have to compromise at least some of one's ethical principles to survive; however, this can never include dishonesty. When the financial system breaks down, your word is your bond - always respect the sanctity of the transaction. If you don't come through on a promise, make every attempt to rectify it and then some. Take a loss if you have to - if you make good on a promise you failed to originally deliver on and then come through later plus compensation for the original "default," as it were (i.e., throw in a bottle of scotch or pack of cigarettes), you'll see your business surge. In the sort of environment in question, if you're honest and make a good-faith effort to remedy the situation, people will understand that things happen in extraordinary times.
Get Mad Skillz
Most people in developed nations have a deep knowledge of very narrow skill sets, and while some will become more valuable, many others will become useless. In addition to your barter/monetary acumen, you'll need to develop a variety of other skills very quickly, but you'll also need to strike a balance between breadth and specialization. Generally speaking, the degree of importance can be deduced by their priority in survival - first are the basic "boyscout" skills, as well as self defense, basic agriculture, etc. Knowing how to make dirty or contaminated water safe for drinking is vital; as severe economic collapse will almost certainly result in drastically stepped-up environment degradation, groundwater, lakes, rivers and streams should not be trusted unless known to be safe. Learn how to build a solar still to purify even the most disgusting water. If you must take water directly from an above-ground source, try to put it in transparent containers and leave in the sun for a few hours before drinking - the UV radiation kills nearly all of the bacteria, fungi, and parasites - though it doesn't get rid of non-biological pollutants. In many locales, distilled water could be a hugely profitable commodity as well.
If oil and derivative products are scarce (as they likely would be), energy is especially important. A skill set that can be both vital and profitable is knowing how to construct basic capital goods from readily available energy sources - not fossil fuels. I already mentioned it, but if it looks like a severe collapse is coming, learn how to build a basic generator from scrap parts - it's not hard - all you need is an old electrical motor (itself not much more than magnets, a rod, and conductive wire) and a power source, like an airplane propeller and windy spot, or a sterling engine and concentrating mirror during the daytime. You can also build a parabolic solar thermal heater to generate hot water or electricity relatively easily - you just need a half of a large PVC pipe cut longways, a few metal pipes, and some reflective material.
Without easy access to petro-products though, one of the most profitable or useful devices one could make is a wood gas generator, so called because it turns wood, coal, or just about any other fuel that can be burned into impure syngas. Outfitted on an internal combustion engine, it can be used to power generators and older carbureted vehicles without gasoline. That's another thing to mention for petroleum emergencies - your new Mercedes is probably useless. Old, carbureted, mechanically-governed engines and vehicles are much more adaptable (and therefore useful) than new vehicles with all of the computers and gadgets.
Grow Algae and Pot
Overall though, I think that the most useful skill one could have for surviving and thriving during an extreme depression, especially if petroleum shortages are involved, is algaculture and methanol production. As one would expect, algaculture is growing algae (pond scum) and processing it into useful materials. Algae is an incredibly useful organism - it can be used as a livestock feed, converted into cooking oil or fuel, and even eaten by humans in desperation. It can be grown nearly anywhere in most any quality of water, fresh or salt, and it reproduces extremely rapidly, needing only water, air, and a few hours of sunlight per day. You could grow it just about anywhere, but the most efficient viable, makeshift method would be in a very large, at least partially transparent glass or plastic container. You need to watch it though, as it grows very rapidly. Once you have enough, you can either use it as feed, or squeeze (through a number of methods - Google it) the oil out. If you know how to make methanol (wood alcohol), you can mix the oil with clean water and make biodiesel fuel. Unlike some of the others I've mentioned, this could potentially be a very useful skill, as you could refine and improve your production process, and potentially create a viable business even when recovery commences.
I've already mentioned basic farming and food production, but the final useful skill I'd recommend learning is how to grow marijuana and/or hemp. Marijuana for obvious reasons, as it would likely take over as the predominate recreational and pain-killing drug in most parts of the world. The hemp plant though is exceptionally useful besides - it can be used to make fuel, clothing, storage containers - all sorts of stuff.
Protection, Crime and The Fuzz
I already mentioned guns and ammo, but the issue of protection is an important one as well, since virtually every type of major downturn results in a surge of crime of every type. In a general collapse, government will be hit hard as well, and this will extend to the police. In a moderately severe collapse, the cops may still be on the beat, but will require compensation from the people and businesses they're protecting. Many will still be honest people, but they'll be forced into doing what's necessary to survive, just like everyone else. As with other business/barter transactions, the key is to deal with the most relatively honest and ethical cops, rather than the brutal and corrupt.
Generally speaking, even if the government is still nominally and practically functional, you'll find that the line between corruption and ordinary business is non-existent. For both moral and practical reasons, engaging in what would ordinarily be considered to be corrupt practices in a major downturn is acceptable provided such practices are not zero-sum - provided you're not taking from someone else, but working for the mutual benefit of all. Government in such circumstances becomes essentially a private entity as well, and thus must truly serve the public to survive over the long run. "Corruption" is fine, but aligning or associating with "officials" who abuse their position and their subjects in excess is a huge no-no - it will most certainly provoke retribution from members of the community, and you don't need to get caught up in that.
However, if it gets to the point where the police are non-existent and the government is in a state of de facto or de jure collapse, people owning or controlling physical assets will need to acquire private security. There will be essentially two choices for this - professionals (former cops, sheriffs, military, etc.) and gangsters - though the distinction will be blurred at least to some extent. No matter how much more they cost, the professionals are by far the better choice. Except for the real scumbags, while gangsters will likely shake you down from time to time, those you hire for protection won't clean you out - they're smart enough not to kill or significantly injure the geese who lay the golden eggs.
No, the real problem with going to gangs for protection is that they may be killed, and/or rival gangs may clean you out in retaliation for something one of your protective mafiosos did - or worse. The pros who make it will be those who let the gangs fight their own battles out, and stick to protecting their customers, being careful to remain neutral in both theory and practice. Those are the guys you want to use. Additionally, you want to be as neutral as possible in disputes yourself. Try very hard not to align with any gang or pseudo-political organization that has rivals. Hospitable but armed neutrality is almost always the best policy.
One Final Note...
While the advice I've laid out here is applicable to a varying degree of economic disasters, much of it is for very severe collapses indeed. While I'm incredibly bearish on the world economy, in the developed world, there would have to be multiple simultaneous crises for some of the measures (especially the less trade-oriented, more "survivalist" stuff) to be warranted or necessary. I anticipate an economic depression at least as bad as the Great Depression, yet at the same time, there is also a much longer fall before a subsistence level is reached.
That said, no matter what happens, it's equally important to note that no matter how bad things seem like they are, they can always get worse. There is no intrinsic floor on economic destruction other than hunter-gather subsistence just because we might hope so - just look at Zimbabwe today. However, one should also bear in mind what really matters, and while the ongoing collapse will cause a great of pain for many, one should not mourn the loss of ultimately trivial material possessions too much. And, regardless of anything else, don't forget that whatever human-made problems there may be, they can also be solved by human beings. I hope I'm wrong about where we're headed, but even if I am, it's always best to be prepared, or at least informed about what may lie ahead.