Showing there"s nothing new under the sun, in California"s Mendocino County, some local businesses are using a currency called Mendo Credits that is backed by locally grown grain.4 The paper used for the currency is the same kind used by printers of banking checks and pharmaceutical prescription pads. The special paper is one line of defense; another is that each note gets a unique serial number. Each Mendo credit expires after a year.
Another local currency is BerkShares, which are used in the Berkshire region of Ma.s.sachusetts. You can exchange 95 U.S. dollars for 100 BerkShares. You get a 5% discount, and in return the money is all spent locally.
If you want to find out how you could set up an alternative currency for your locality, you can get a kit from Paul Glover, who started the most successful local currency in the United States, Ithaca HOURs. Paul sells a "Hometown Money Book and Starter Kit" for $25. The Ithaca HOURs system equates one hour of work with a $10 denomination. For more information, you can contact Paul at [email protected] or (215) 805-8330, and his web site is Local businesses have a vested interest in seeing the currencies circulate and succeed. Money and services circulate in the community, boosting the local economy.
Cons: Limited area of acceptance; easier to counterfeit than U.S. currency, though limited circulation limits the appeal for counterfeiters. Also, local currencies can fall out of circulation.
Local mutual credit currencies. This is known as Local Exchange Trading Systems (LETS). Each transaction is recorded as a corresponding credit and debit in the two partic.i.p.ants" accounts. No fiat money is involved.
LETS systems are already in place in some Canadian cities-Vancouver and Edmonton are two examples. In Seattle, the system is called dibits and can be found on Dibs.p.a.ce.com. Basically, it"s a barter system. Reminder: The IRS taxes barter.
Pros: Can"t be counterfeited, and scammers are foiled by letting users dispute a charge or nonpayment.
Cons: Really, really not liquid.
Candy bars, gum, deodorant, razors, and other small items: Russian emigrant Dmitry Orlov draws some eerie parallels between the collapsing Soviet Union and the United States in his book Reinventing Collapse. It"s a fascinating read. One really interesting part describes how people function when paper money becomes worthless.
A Man, a Plan, and a Printing Press Local currencies resurfaced in the United States in 1991 in Ithaca, New York, with the Ithaca HOUR. One Ithaca HOUR is valued at U.S. $10. It is generally used as payment for one hour"s work, although the rate is negotiable. It can be exchanged for U.S. dollars at partic.i.p.ating businesses, including a credit union, in Ithaca.
This local currency was created by Paul Glover, a graphic designer.
"I had a longstanding interest in local initiatives," Glover told me. "And it seemed natural, during the Great Recession of the early 90s, to design money. We didn "t have gold for backing-neither does the dollar-but we had extra hours of time for extra income. As a journalist and graphic artist, it was easy to make the leap from idea to design to launch."
Thanks to the recession, many of Glover"s neighbors were unemployed or short of cash. Glover hoped that the HOURs would encourage local spending and stimulate the economy. The first printing was 2,250 HOURS, but now 10,000 HOURS have been printed, with denominations ranging from one-tenth of an HOUR to two HOURS.
"HOURS bring new skills into the market, reinforce small local business and farms, strengthen community capacity to meet needs with least reliance on distant board rooms and bureaucracies," Glover explains. "And they introduce us to one another as resources for a.s.sistance, rather than as compet.i.tors for scarce dollars."
Glover says interest in local currencies is steady, and increasing "as the formal economy stumbles. I"ve been contacted by many people interested in creating their own cash."
When he talks to potential currency printers, Glover emphasizes that successful currencies will have at least one full -time employee. That"s because, just as dollars have armies of brokers moving money, each local currency needs a regular Networker to promote, facilitate, and troubleshoot circulation.
Does Glover think the U.S. dollar is in trouble? In a word, "yes." "All national currencies will lose value, some faster than others," Glover says. "U.S. dollars are particularly vulnerable since we"ve relied on cheap imported fossil fuels to warm our homes and move our cars. "
Glover believes the future is bright for local currencies. "They"ll move in to take up slack as dollars fade. The more they prove stable and useful, the more they"ll contribute to rebuilding America"s economy."
For example, certain stores would take payment in Snickers bars and make change in chewing gum. If you needed a driver"s license, you"d bring along some nice women"s hygiene products to pay the clerk.
Pros: Easy to stock up on these small items now.
Cons: As long as these are things you"ll use yourself, there aren"t many cons.
Black Market Currencies. Alternative economies are typical of decaying societies. Orlov relates that in the Soviet Union, people would engage in a.s.set stripping-pulling the copper out of the wires of abandoned homes, carrying off the vinyl siding and the fibergla.s.s insulation. In a functioning society, this would be called stealing. In a collapsed society, this is raising capital. This junk was a treasure trove of currency for future transactions over food, water, or medicines.
Black market drugs became a premier currency in the New Russia, and there was plenty of value in drugs, alcohol, and cigarettes. Doctors and nurses traded their services side by side with carpenters and electricians. And since licensed professional currency carried a premium, some consumers chose discounts from back-ally medical pract.i.tioners and Crazy Ivan"s Cut-Rate Carpentry.
Much to my lawyer"s relief, I am not going to recommend anyone engage in the illegal drug trade or unlicensed electrical work. However, you can see how a medicinal herb garden could become a secondary source of income if TSHTF.
Indeed, the black market already exists all around you. Social prost.i.tution is the name sociologists give to the practice of women, mostly single moms, trading s.e.x for getting a broken car fixed, plumbing patched up, etc. We "ll probably see a lot more of it in a collapsed society.
Pros: Just using medicinal herbs as an example, you"ll be able to grow your own money.
Cons: Getting arrested. Also, it"s easy to get scammed by a b.u.m pa.s.sing himself off as a carpenter or electrician.
Note: The police will probably stop arresting people for growing weed about the time they stop answering 911 calls. As with everything else, there are trade-offs in a collapse.
Even more alternative currencies: Copper wire, salt, sugar, chocolate, tobacco, alcohol, bread, and bullets could all become currencies in a real hyperinflation/currency collapse.
Just keep this in mind: As of this writing, we are in a deflationary environment. Inflation is probably a ways down the road, and hyperinflation, if it comes, probably won"t be soon. You have other things to worry about, because your next big disaster could be around the corner.
Could we see hyperinflation? It"s always possible. Widespread hyperinflation would eliminate current debts but it would probably also end future borrowing. And trading with other countries becomes problematic when the currency you use loses its value every day.
This is a real problem for the United States, because we are a consumer-oriented society and we import so many of our consumer goods. But this also represents opportunity for a savvy survivalist.
Inflation takes place, causes, and is caused by credit expansion. A virtuous cycle causes GDP to expand. This is what the government and the Fed are trying to revive.
Hyperinflation takes place when money velocity increases and GDP declines. In a hyperinflationary environment, trading with other countries probably will not work very well either.
Should You Put Your Money in Foreign Currencies?
I think gold, silver, and other investments can insulate you against a potential dollar collapse, but investing in foreign currencies works for some people, especially if their escape plan involves fleeing to another country. Swiss francs used to be held in high regard until it turned out that Swiss banks bought more than their fair share of the toxic debt issued by the banksters in the United States.
I like commodity currencies-currencies where commodities make up a large share of a country"s gross domestic product, particularly the New Zealand and Australian dollars. The Canadian dollar is also a commodity currency, but the United States is Canada"s largest trading partner. Therefore, if the U.S. economy goes south, it"s probably going to drag the Canadian dollar (called the loonie) along with it. Here are three ideas:1. You can buy travelers" checks in foreign currencies. You can do this right now online. American Express will sell you travelers" checks in just about any currency.
2. A foreign bank may open an account in a foreign currency for you. This is prudent if you"re planning on fleeing to that country when TSHTF here in the United States.
3. You can also buy an international bond fund that invests in high-quality, non-dollar denominated government debt securities outside the United States. One example is the American Century International Bond Fund (ticker symbol: BEGBX). Another is the PIMCO Foreign Bond Fund U.S. Dollar-hedged (ticker symbol: PFBPX). Either of these funds could have a place in a diversified portfolio.
You can also trade the FX, or foreign exchange markets. But you have to be a pro (or at least get professional recommendations) to do it well-it"s very easy to lose your shirt and your shorts in the FX markets.
Welcome to Barter-Town Variations of a list of "First 100 Things to Disappear in a National Emergency/Crisis/Power-down" have been around the Web for a while. These lists are quite well thought-out. I fi nd them useful for ideas on things we could barter if the U.S. dollar goes belly up.
A barter economy is not the worst thing that can happen. It may only be short-term, while a new government and/or new currency gets on its feet. If you"re a good haggler-and even if you not-this list will give you some ideas of things you might stockpile to use as trading items. Even better, most of the items on this list are things you"ll use anyway.
1. Generators (Good ones cost dearly. Gas storage, risky. These are also noisy, a target of thieves, and they require maintenance, etc.) 2. Water Filters/Purifiers 3. Portable Toilets 4. Seasoned Firewood (Wood takes about six to 12 months to become dried, for home uses.) 5. Lamp Oil, Wicks, Lamps (First Choice: Buy clear oil. If scarce, stockpile any!) 6. Coleman Fuel (Impossible to stockpile too much) 7. Guns, Ammunition, Pepper Spray, Knives, Clubs, Bats, Slingshots 8. Hand-operated Can Openers and Egg Beaters, Whisks 9. Honey, Syrups, White and Brown Sugar 10. Rice, Beans, Wheat 11. Vegetable Oil (For cooking: Without it, food burns and must be boiled, etc.) 12. Charcoal, Lighter Fluid (Will become scarce suddenly) 13. Water Containers (Any size. If small: hard clear plastic only-Note: Use food grade if for drinking.) 14. Mini Heater Head, Propane (Without this item, propane won"t heat a room.) 15. Grain Grinder (Non-electric) 16. Propane Cylinders 17. Survival Guide Book 18. Electric Lanterns (Aladdin, Coleman, etc.) 19. Baby Supplies (Diapers, formula, ointments, aspirin, etc.) 20. Washboards, Mop Bucket (With wringer; for laundry) 21. Cookstoves (Propane and Kerosene) 22. Vitamins 23. Propane Cylinder Handle - Holder (Urgent: Small canister use is dangerous without this item.) 24. Feminine Hygiene (Hair-care, skin products, etc.) 25. Thermal Underwear (Tops and bottoms) 26. Bow saws, Axes and Hatchets, Wedges (Also, honing oil) 27. Aluminum Foil (Regular and Heavy Duty; Great cooking and barter item) 28. Gasoline Containers (Plastic and metal) 29. Garbage Bags (Impossible to have too many) 30. Toilet Paper, Tissues, Paper Towels 31. Milk (Powdered and Condensed) 32. Garden Seeds (Non-Hybrid) 33. Clothes Pins/Line/Hangers 34. Coleman"s Pump Repair Kit 35. Tuna Fish (in oil) 36. Fire Extinguishers 37. First-Aid Kits 38. Batteries (all sizes) 39. Garlic, Spices and Vinegar, Baking Supplies 40. Dog Food 41. Flour, Yeast, Salt 42. Matches (Boxed, wooden matches will go first.) 43. Writing Paper/Pads/Pencils, Solar Calculators 44. Insulated Ice Chests (Good for keeping items from freezing in wintertime.) 45. Work Boots, Belts, Blue Jeans, Durable Shirts 46. Flashlights, Lightsticks, Lanterns 47. Journals, Diaries, Sc.r.a.pbooks 48. Garbage Cans (Plastic: great for storage, water, and transporting-if with wheels) 49. Men"s Hygiene (Shampoo, toothbrush/paste, mouthwash, dental floss, nail clippers, etc.) 50. Cast Iron Cookware 51. Fishing Supplies/Tools 52. Mosquito Coils, Bug Repellent (Sprays and creams) 53. Duct Tape 54. Tarps, Stakes, Twine, Nails, Rope, Spikes 55. Candles 56. Laundry Detergent 57. Backpacks, Duffel Bags 58. Garden Tools and Supplies 59. Scissors, Fabrics, Sewing Supplies 60. Canned Fruits, Veggies, Soups, Stews 61. Bleach 62. Canning Supplies (Jars, lids, wax, etc.) 63. Knives, Sharpening Tools (Files, stones, steel) 64. Bicycles, Bicycle Parts (Tires, tubes, pumps, chains, etc.) 65. Sleeping Bags, Blankets, Pillows, Mats 66. Carbon Monoxide Alarm (battery powered) 67. Board Games, Cards, Dice 68. d-con Rat Poison, MOUSE PRUFE II, Roach Killer 69. Mousetraps, Ant Traps, c.o.c.kroach Magnets 70. Paper Plates/Cups/Utensils 71. Baby Wipes, Oils, Waterless and Antibacterial Soap 72. Rain Gear, Rubberized Boots.
73. Shaving Supplies (Razors, creams, talc, aftershave) 74. Hand Pumps and Siphons (for water and for fuels) 75. Soy Sauce, Vinegar, Bullions, Gravy, Soupbase 76. Reading Gla.s.ses 77. Chocolate, Cocoa, Tang, Punch (water enhancers) 78. Spam (or other canned meat) 79. Woolen Clothing (sweaters, scarves, earm.u.f.fs, mittens, etc.) 80. Roll-on Window Insulation Kit (MANCO) 81. Graham Crackers, Saltines, Pretzels, Trail Mix/Jerky 82. Popcorn, Peanut b.u.t.ter, Nuts 83. Socks, Underwear, T-shirts (extras) 84. Lumber (all types) 85. Wagons, Carts 86. Cots, Inflatable Mattresses 87. Gloves (for work, warming, gardening, etc.) 88. Lantern Hangers 89. Screen Patches 90. Teas 91. Coffee 92. Cigarettes 93. Wine, Liquors 94. Paraffin Wax 95. Glue, Nails, Nuts, Bolts, Screws 96. Chewing Gum, Candies 97. Atomizers (for cooling/ bathing) 98. Hats, Cotton Neckerchiefs 99. Large Livestock (including big dogs) 100. Goats/Chickens The Least You Can Do * Have some cash on hand-imagine a world with no ATMs or credit cards * When gold prices dip, stock up on gold. And I mean physical gold-the kind you put in a safe. Also, you might want to pick up gold in forms that you can easily barter if paper money becomes worthless-simple gold rings, for example.
* When silver prices pull back, stock up on physical silver. If our economy, financial system, and paper money go south, you"ll want gold and silver. Flashing around too much gold could make you a target. Silver doesn"t attract as much attention and it"s still a precious metal.
* Stock up on potential barter items-tools, wire, toothbrushes, toilet paper, and the like.
CHAPTER 5.
Investing for the Five Emergencies It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself-that is, against human nature.
-Edwin Lefevre in Reminiscences of a Stock Operator There are four intersecting emergencies that will probably exert a great deal of influence on the stock and bond markets over the next five years and beyond:1. Energy 2. Water 3. Food 4. Climate These sorts of headlines and alerts are now part of our everyday world. Hang on; it will be a very b.u.mpy ride.
These four crises will likely be compounded by a fifth emergency: indebtedness. Debt will make society a lot less likely to adapt peacefully to the other crises, and there is less money capacity to invest in mitigating alternatives. And our national indebtedness threatens the very value of our currency. But it "s not easy getting off debt-the U.S. economy is hooked on it, and a potential transition from a society of borrowers to a society of savers would be brutal.
The good news is that, if you have the stomach for risk and volatility, there are investments that can make the most of these emergencies-protecting you by insulating your portfolio, and potentially dishing up nice profits.
We"ve got a lot of ground to cover in this chapter. We "ll look at how the five emergencies will shape our world, and probably Wall Street, too. We"ll look at three dangers that could shake the market to its foundations, as well as three potential profit bonanzas. We"ll look at the three levels of investment risk, six every investor must know about the stock market, whether you should invest in stocks or funds, six stock investor dos, a.s.set allocation, and the pros and cons of exchange-traded funds.
Whew!
Finally, we"ll look at potential investments you can make to protect your portfolio and even profit in the brave new world.
The Five Emergencies
Without energy, there is no economy, and precious little food. Without water, life as we know it can"t exist. When the climate goes to h.e.l.l, the world as you know it could be turned upside down. Now, it"s possible to adapt to change, but in the middle of a debt crisis it becomes a heck of a lot harder. The intersection of all these crises can be a very tricky time for your portfolio. In order to save your money and profit, you must first understand these crises.
Energy Crisis
Worldwide demand for energy will grow 44% by 2030, according to the U.S. Energy Information Administration.1 While I think that energy demand will be capped by soaring prices, the fact is that demand from awakening giants including China and India is relentless, and the world will start using oil at a rate of 1,000 barrels per second within the next couple years. (See Figure 5.1.) The United States is the world"s largest consumer of oil, guzzling more than 7.5 billion barrels per year. We import more than half the oil we use, and that amount is rising, which is why the United States is described as addicted to oil.
Figure 5.1 World Market Energy Consumption Source: Department of Energy.
More than 81% of the world"s discovered and useable oil reserves come from just 10 countries. Most of them don"t like us much. And 30% of the world"s oil is in three countries-Iraq, Kuwait, and Saudi Arabia. Saudi Arabia, home to 15 of the 19 September 11th hijackers and a major source of funds for Islamic terrorists, is the world"s Central Bank of Oil.
The drop in oil prices in 2008 caused the shelving of many important oil projects-projects that won"t be there to fill the pipeline when they"re needed in three to five years. The cheap oil has been found, and new oil fields are both smaller and hideously expensive. The supply chain to your gas tank has never been tighter. Electric cars and trains are nice, but they can"t bridge the gap for a nation built around automobiles and cheap, plentiful gasoline to run them.
Bottom line: The United States (and the world) is headlong on a collision course with a new energy crisis that will make the price spike of 2008 look like a b.u.mp in the road. And companies that depend on cheap transportation are going to get crushed. Oil companies that can find oil for a thirsty world should prosper.
Water Crisis
Americans who think cheap, clean water is an inalienable right are in for a rude awakening sometime in the next decade, and probably sooner than you think. Water upheavals are intensifying thanks to global warming. Dry areas are becoming drier and wet areas wetter as the oceans and atmosphere warm. Meanwhile, the population is growing fastest in places where fresh water is either scarce or polluted. Result: The World Bank famously declared, "The wars of the twenty-first century will be fought over water."2 In 2002, 8% of the world suffered chronic shortages. More than 80 countries, with 40% of the world"s population, are already facing water shortages. This century, the world"s population is forecast to double, though I believe we may hit Malthusian limits. The UN forecasts that by 2050, 4 billion people will lack adequate water as entire regions turn dry.
During the droughts of the Dust Bowl in the 1930s, technology advanced so U.S. farmers could pump water from underground aquifers to save their fields through irrigation. Much of that water is now gone. The Ogallala Aquifer, the giant aquifer that runs under eight U.S. states, will likely be gone in 25 years or less. Other problems are more immediate. Here in the United States, seven states that depend on the Colorado River face potential cutoffs as water levels trend increasingly lower.
Towns and cities across the country with decades-out-of-date munic.i.p.al water systems are finding it difficult in the current credit environment to raise money to do urgently needed work. If water systems fail, or if the outdated power grids that provide electricity to their pumps fail, people will start going thirsty in a hurry.
To see if your area is in danger of a serious drought, check out the U.S. drought monitor map at will impact localities; whole cities may have to be evacuated if droughts get too severe. We see this on a small scale as fires rage across dry landscapes-imagine if a city the size of Los Angeles had to be evacuated because it simply ran out of water.
Bottom line: Bad for localities, but potentially good for water companies.
Food Crisis
Global agriculture entered a new bull market in 2003, and it shows signs of accelerating. Global warming is worsening droughts in countries that are normally breadbaskets (Australia), aggravating stormy weather and flooding in low-lying countries like Bangladesh, and causing crop-eating pests to flourish around the world. All these endanger the global food supply. In addition, a World-Bank-funded study in 2008 noted that rising energy and fertilizer prices and the depreciation of the U.S. dollar have contributed to about 35% of the rise in food prices.
Finally, the world"s population has grown annually at a rate of 1.14% since 1997, and consumers in awakening giants like India and China are starting to eat more and more like big, fat Americans-more people with bigger appet.i.tes means the world needs more food.
The world has been consuming more grain than it produces for years now. The trend in global stockpiles has been lower-hitting 31-year-lows in 2008-as once-mighty surpluses were used up.
And this has to be taken in the context of an expanding global population of 78 million more people every year, who need at least 31 million more tons of grain every year. Is that a long-term boost for prices? I sure think so!
Thanks to a b.u.mper crop in 2008 to 2009, global grain stocks are expected to go up-briefly, anyway. (See Table 5.1.) However, production is then expected to fall again in the 2009 to 2010 growing season.3 Table 5.1 World Grain Production, Consumption, and Balance Source: Compiled by Earth Policy Inst.i.tute from U.S. Department of Agriculture, Production, Supply & Distribution, electronic database, www.fas.usda.gov, updated 11 January 2008.
The good news is that if there were an OPEC of grain, the United States would be the Saudi Arabia! The bad news is that the average U.S. meal travels about 1,500 miles to get from farm to plate.4 Like the rest of our civilization, our food supply depends on tenuous long-distance relationships between supplier and user-relationships that run on fossil fuels.