Wednesday, November 10, 2010

What Can We Do About Inflation?


In the comments to last night's post on food prices projected by the NIA, reader LeverAction commented,
The only thing I can't figure out is why, after predicting the collapse of society, they then recommend preserving wealth in gold. I would think that if society really collapsed then things of more practical value would be better to have than gold.

Holding gold is a good way to ride out a storm of finite duration, but it carries the assumption that things will return to some semblance of "normal" sooner or later. But if it doesn't, in the case of real 'societal collapse' or 'infrastructure failure', your gold is just a bunch of really dense, heavy metal that you can't eat, can't plant, can't hunt with, and has no value as a tool. If you already have everything else you need the gold might be a good way to preserve the excess wealth, but for goodness sakes concentrate on the practical stuff first.
I envision a multi-layered response.  Gold and silver are part of it.   So are food stores, brass, copper, lead, and a host of other things.  The one common theme is that the response has very little paper; it's all tangible stuff.  Commodities. 

You are right that gold has no inherent worth here.  You can't eat it, you can't plant it, hunt with it, or hammer with it.  It's also so dense in value that you can easily hold $15,000 in one hand.  You're not going to buy a loaf of bread with it.  For that, I think silver coins are going to be well accepted.  I can see both the current silver eagles and the old pure silver, pre-1965, coins commonly sold as "junk silver".  You need to know what they're worth, and the key is that one dollar in face value of the old 90% silver coins held 0.71 troy ounce of silver (silver spot prices are always in Troy oz, not the common avoirdupois oz).  I made a little Excel sheet a while back to do the repetitive calculations for me.  As of right now (spot silver is $27.33) a 1965 face value dollar is worth $19.42 in today's money.  That means one thin dime of junk silver is worth essentially $2.  A silver eagle is going to cost you about $3.50 over spot (you might find a better deal somewhere), so a single one ounce silver "dollar" is about $31 in today's money.  You can find the daily spot price here, fluctuating by the minute.   

If the dollar is collapsing in value, the nightly news is going to be talking about what the closing price for gold and silver are.  The US Silver Eagle will be widely recognized.  Other perfectly good coins, like the Austrian Philharmonic, might not be so widely known.  There's thousands of collectors bars of silver around.  I can imagine them being hit or miss as something you can trade. 

I expect a lot more barter as things get rougher.  We had some major kitchen work done over the summer (a flood/mold issue) so we've worked with several smaller businesses lately.  Most like checks made out to them personally.  Or cash.  I have not broached the subject of "what would you charge me in silver coins?", but I bet that day is coming.  I expect to need to ask my doctor or dentist, someday. 

This website shows projections of how much silver (troy oz) or gold (grams) would be needed by a "typical" family to meet their expenses. 

As barter gets going, depending on how bad the economic mess becomes, then other items of value come forward.  It has been suggested that a round of .22LR will be the quarter or dime of the new millennium.  Consider other common calibers; 9mm, .223 (AR), 7.62x39 (AK), perhaps 12ga, .45 - who knows?  I am concerned about arming people who might want to use it against me, so maybe that won't be my first barter item.  People with addictions to cigarettes will have a hard time and want to trade for them.  Same goes for whiskey, chocolates, and other "traditional" black market trade items (hey - I saw it in a movie, it must be true!). You might trade a loaf of home-baked bread for a can of chili or beef stew or something.  Trade works when each party needs what the other has. 

The nice thing about this system is that you can start from anywhere.  If you're barely able to afford food, get some extra when they have 2 for 1 sales, or other discounts.  You can live on rice and beans in soup for a while if you need to.  If you can afford more, get more.  Junk silver used to be sold only by the $1000 face value bag - which is almost $20,000 today.  Now, you can get $100 face value bag from a major dealer, or buy a few coins at a time from sellers on eBay or other places.  Likewise with Silver Eagles.
90% silver dimes, Roosevelt and Mercury face

4 comments:

Brigid said...

I have to say, I wish I had bought gold earlier when it was cheaper, just as I wish I had not bought a house with a huge down payment (almost six figures, cash) which is now totally gone.

That being said, you are right. When the doo doo really hits the fan gold will be worth little.

I have primers (just the legal amoung mind you ahem :-) LOTS of ammo, more than 5 years of grain, beans and stores, preserves, canned goods. I can fly a plane. Heck I can fly a jet. I can fix a plane. I can fix a car. I'm a Ph.D., not an MD but I took enough basic med courses in the course of that to function as a very basic medic (or identify the bones of mummififed remain, you never know when that comes in handy).

Think practical. Think barterable. Think provisions. In the event of a really bad day my gold tennis bracelet that some idiot bought me instead of the 1911 I wanted is just useless junk.

leveraction said...

It makes a lot more sense to me the way you state it, and hat you say about silver is very intriguing. It seems to me that its less likely to make you a target if word gets out.

More or less, what you describe is what we have done here at the hacienda. We have tubs full of dry beans and rice and various other staples, I have a adequate stockpile of ammo and parts for the firearms I own (enough to barter with if necessary), tools for both agricultural work and game preparation, a decent library of technical books (and some for entertainment), a 3 gallon water filter with replacement elements, a hand grinder for making flour from grain, firemaking stuff, and jars full of pennies that could be melted down for the copper if necessary.

After watching the video at NIA, my wife and I were discussing things that would be barterable and came to similar conclusions as you. She suggested sugar would be worth a lot (how many people do you know that are addicted to sugar - more than you think, I'd bet), along with coffee and spices. I, being a man, of course suggested tobacco and alchohol (I've given these up myself and I have some moral qualms about distributing them, but if it came down to it I think I'd do what it takes).

Good post Graybeard - thanks!

Phil B said...

I think it was Mel Tappan who stated that in the 1890's you could buy a Colt .45 revolver for a gold dollar which was worth one dollar.

Today you could still buy a Colt .45 revolver for a single gold dollar...

I think his point was that both guns and gold have intrinsic worth and value which is pretty much constant, whereas as you correctly point out, paper promissory notes are just that and are prone to be (severely) degraded in value by inflation.

Graybeard said...

Excellent point, Phil B.

Along the same lines, I've read that in the 1890s, you could buy two well made mens' suits for a gold dollar, and you certainly can get two suits for an ounce of gold today.

One that surprised me is that an ounce of gold has always, throughout history, bought a relatively constant number (around 350) loaves of bread. It didn't take long to find a web page with all the details.

After a century of central banks making up currency, we're accustomed to thinking of prices and our pay always going up. That is largely an illusion.