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Dear Econophile: Advice For the Economic-lorn
I get a number of e-mails from readers seeking advice, usually investment advice. I politely advise them that I do not give investment advice. Last year I received messages of a theme that can be described as folks who felt The Great Collapse was happening. Armageddon and that type of thing.
Here is some correspondence I am excerpting from one of my readers, who will remain anonymous, but whom I think is an exceptional person in his desire to understand what's happening in our world. I recommended to him Henry Hazlitt's Economics in One Lesson, the best little book on economics ever written, and he read it.
With whom do you agree?
From "Travis"
#1
As a member of the Great Unwashed I see no hope that our economy will survive the current parade of fools in D.C. There are two essential ingredients missing. Ethics and economic savvy. So, being a somewhat prudent individual, I am stocking up on food and other of life's necessities. Since my house is not yet paid for, I may need to retreat to mom's house. In the middle of nowhere. There is a survival blog that my wife reads regularly and they have posted several links to news on the economy. Of course, none of it contains anything the least bit encouraging. http://www.survivalblog.com/ Scroll down the page just a bit for the economic news from Financial Times, Telegraph etc.
#2
I'm a slow reader. Last night I finished the chapter on wage laws. That's about 2/3 through [Economics in One Lesson]. I read an interesting piece yesterday on mises.org. Economics vs. Politics. That, together with your post Law of Unintended Consequences, doesn't extend a lot of hope for the future.
The imperviousness of economic law to political law is shown in this historic fact: in the long run every State collapses, frequently disappears altogether and becomes an archaeological curio. Every collapse of which we have sufficient evidence was preceded by the same course of events. The State, in its insatiable lust for power, increasingly intensified its encroachments on the economy of the nation, causing a consequent decline of interest in production, until at long last the subsistence level was reached and not enough above that was produced to maintain the State in the condition to which it had been accustomed. It was not economically able to meet the strain of some immediate circumstance, like war, and succumbed. Preceding that event, the economy of Society, on which State power rests, had deteriorated, and with that deterioration came a letdown in moral and cultural values; men "did not care." That is, Society collapsed and drew the State down with it. There is no way for the State to avoid this consequence—except, of course, to abandon its interventions in the economic life of the people it controls, which its inherent avarice for power will not let it do. There is no way for politics to protect itself from politics.
...
However inevitable the collapse may be, I can't predict how much time is left. 1 month, 1 year, 50 years. Sept. 2008 was somewhat of a wake-up call. But the vast majority have gone back to sleep.
From Econophile
I’ve seen the survivalist groups come and go during all economic cycles. And never has there been the Armageddon they envision. Their rhetoric is always the same.
It won’t happen here.
I can recall the in the late ‘60s and early ‘70s when I first got into free market ideas there were the same types then and I have to admit it made me a bit paranoid. Mostly fantasies of “what if.”
So I would take this stuff with a grain of salt and get on with your life and make the most of it. There is always opportunity even in the worst of times. You are obviously a bright guy and can think for yourself, so I am confident you will do well in any situation. But, heading for the woods? No.
From "Travis"
#3
I was admiring your glass half-full optimism that seems to emanate from your writings on The Daily Capitalist. Personally, I'm a glass half-empty sort. An unfortunate inheritance from my late father. Then, lo and behold, I saw some cracks in that optimistic armor in your last post. Perhaps I'm reading more into it than I should. I think that if Econophile is forming a pessimistic view of the coming year, then I really need to kick the survival prep into a higher gear.
...
If indeed you are concerned with the activities in Washington and have had enough like the rest of us 'right-wing extremists', I leave you with a quote from H.L.Mencken ...
Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats.
[I love Mencken.]
From Econophile
I guess I can’t change your mind.
I don’t see holocaust or Armageddon. Even during the Depression, most people did "OK," just not great. My mother didn’t even remember it well other than she said my father’s business wasn’t good. He was a lawyer in a small firm -- far from "rich." At the worst period of the Depression unemployment was 25%. Things then were much worse than today and there weren’t roving gangs of armed hungry people trying to take food by force, nor was the government seizing food production and handing it out to starving masses.
Things are different now. Look at France, Germany, the UK. More controls than here, but pretty good places to be. I'm not saying they are better than the US, but, all in all, nice places. Again, if you are a half empty guy, I’m not going to change your mind. But … you have to see opportunity regardless of what is happening in the rest of the world. We’re not Somalia nor are we France.
One of my immensely successful friends, a name you’d recognize, teaches a class at several universities on entrepreneurship. In the last class I attended the students, all bright kids looking to be their own bosses one day, were complaining about the economy and how they didn’t see a way ahead. My friend laid into them: “Let’s have a pity party! Let’s give up! I don’t think I’m getting to you guys. Why am I teaching this class to a bunch of losers!” He, pointed out, after his tirade, that there are many ways to get ahead … today. He ticked off a number of opportunities.
If I were looking for something to do here in SoCal, I would be buying homes from banks, putting in cosmetic improvements and flipping them. I’d do as many as I could until the opportunity runs out … knowing that it will. If I didn’t have the cash for the improvements, I’d do it myself. Sweat equity. You get my point?
If you want to run for the hills, if that makes you feel better, OK. But, your time would be better spent figuring out how to cash in from what is happening now.
Travis, I don’t know what’s going to happen. If things go worse in the economy, it won’t mean an “Escape From NY” scenario. I think the recession will be drawn out, as you know. But, so what. Obama isn’t going to seize your property and your guns. Get out of survival mode and get into success mode.
What do you think of my advice to Travis?
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one event: earthquake on/@ san andreas fault line.
tumor,
Your original post was terrific! Self-reliance is a key variable that is missing today.
I think your advice was good, but incomplete. The approach to various scenarios should be one of Risk Management, where if even if the probability of a really bad scenario is low, it is not zero, and therefore some steps and plans should be put in place. Getting to know your neighbors, for example, costs little, has high upside benefits in a disaster scenario, and would probably be beneficial in most cases.
Stockpiling extra food could actually save money if inflation jumps, the only other cost (if you don't end up throwing out food gone bad) is opportunity cost.
I think that recognizing that there is a possibility of disaster is vitally important. At the very least it should help ground you against "irrational exuberance" and keep you nimble.
But if they know about your food supply, and they don't have the same mindset, your hourglass just got smaller. The only kind of neighbor you want in a collapse is the one that is more prepared than you - which is why telling your neighbors about your plan is generally a very, very bad idea.
Which is why you rotate and eat what you store. Canned food that doesn't require you to add water is an unwise investment for long-term survival anyway. But if inflation really does skyrocket you'll need everything you can get your hands on!
Peoples minds are generally swayed by the material they read. Obviously if you are reading survivalist blogs for any length of time then you are going to take on that type of mentality.
Just because you believe the world is so and so, doesn't necessarily make what you believe true. A lot of people used to believe the world was flat and that the earth was at the center of the solar system, didn't make it true.
My opinion would be to suggest to them that they stop reading those blogs, start reading Zero Hedge, then take two aspirin and call back three months later to see if their point of view has changed. (Although after reading Zero Hedge for awhile they'll probably be even more paranoid than now.)
As you pointed out in your column, the natural inclination of human kind is to view the world from the standpoint of fear, it takes a unique individual to see through the darkness to find new opportunities and act on those opportunities.
Luckily the human race is blessed with enough of these leaders that we no longer swing from trees. Without these plucky pioneers where would our light come from, our indoor plumbing, our computers, and any number of other inventions that make life easy.
And if there is any tiny interruption in the system they all become useless.
What makes this blog, and others, so popular is because they make sense. They show us what CNN and CNBC don't. And after some heavy doses of the blogs you can't stand TV anymore anyway. Addiction? Maybe. But it sure is nice to get some straight talk these days.
And you're right, watching Avatar again won't turn your skin blue, but millions wish it did:
http://www.cnn.com/2010/SHOWBIZ/Movies/01/11/avatar.movie.blues/index.html
But we're not talking about escapism, the shape of the earth, or it's celestial movement. We are talking about a currency collapse. What happens when the currency collapses, we don't know yet. But if there is one thing that matters: you better have chair to sit on when the music stops!
I remember late in 2007, when Roubini was predicting the downturn. His estimates were around 500 billion in balance sheet issues.
Where are we now? How many trillion, and still borrowing like drunken lunatics?
Yeah, it can be that bad. Go for success assuredly, but don't be so blind that you haven't some kind of essential physical reserves or battle plan. Battle plan against the elements I mean.
The most likely scenario is that you are right and Travis (and myself) are wrong (or simply missing the forest for the trees) I don't think anyone has ever prospered by heading for the hills and living off the land.
There are some things that I am willing to go with the most likely scenario has the highest possibility for success and let the chips fall where they may. For instance my 401k is in broad mutual funds not penny stocks.
That being said the results of the unlikely scenario could be so profoundly different that I consider having the pantry stocked to last 6 months and a way to deter those who are not well prepared a reasonable hedge.
One would be a fool not to prepare for a "worst case" scenario. That certainly does not mean a retreat to the woods but it sure does mean ensuring the ability to retreat and defend whatever you have left. I live close to a major urban city in decline. In my business, I see the poor and destitute every day--living only off Obama money.
How long can that charade go on? What really happens when there is no money left? In our fiat system we can surely continue to print but there is even an end to that--and major systemic changes that would occur to our economy once we reach that point.
We are a pretty diverse nation these days. Not everyone thinks alike and we have lost most of our defining cultural norms. What that can often spell is unrest in an ugly fashion. When that occurs the state steps in. We can all imagine the consequences of those actions.
I have grown weary of the charts and theories. At this point, the only theory I need is common sense: This economy is in some serious trouble and there is no plan for jobs--the linchpin of everything.
We are much more than a Ponzi scheme. We are a train wreck in the making.
Agreed. We aren't talking about "heading for the hills" or "giving up". Rather, we're talking about "Be Prepared", the same motto to which ten-year-old Boy Scouts subscribe.
Everyone now should understand the stupidity of sitting on your roof during Katrina expecting the Government to come and "rescue" you. That is misplaced faith, IMHO bordering irresponsible (especially if you have a family).
The US Government is leveraged north of 50:1, and dark times are ahead. They will fall, and we're watching it now with California, New York, and other states. It will progress to the Federal (national) level, although rest-of-world sovereign defaults are a tremendous "wild card" (it's not in your best interest to default first).
This is all entirely forseeable.
I find it amazing that the only reassurance is comments like, "We'll figure out something" and "We made it through times like this in the past" and "The people in charge won't let that happen". I hear ZERO plans on how this scenario will actually be addressed.
I know how: Default.
Beaurocracies exist to feed themselves. Later, if sufficient surplus exists, they will consider serving their mission. I find it amazing that humans are so resistent to that concept.
And yet they criticize us for buying cases of baked beans and 9mm.
+1
No reason why a survival plan and a success plan should be mutually exclusive.
double post removed
i agree 100%. we will always need middlemen and producers of essentials, even in "road warrior" scenarios. it is a better use of time, money, and effort to learn how to bake bread than contemplate the economic apocalypse. put some cash aside to buy your first couple bags of flour
Absolutely be sure your storage facility is safe from moisture and buggas.
Sorry, Obama is trying to take your property and guns. Just look at mandatory health care.
You are entitled to your opinion but it's not justified by the facts. Obama has shown that he's a corporatist not a socialist. Health care bill has crept so far to the right the "progressives" are pissed.
All of Obama's friends, associates, mentors and nearly all of his family have had communist connections, to believe that he is immune to this influence is laughable. He is merely executing a policy that will destroy this country so that he or some follow on may rescue it with communist policies which of course won't be called communist. This type of behavior was outlined by Lenin himself.
While I mostly agree with you that we're not likely to see Mad Max 2011, there are some facets to the society of today that must be factored in.
In the 30's,
1. The average American was highly self-reliant. Most people grew at least a portion of their own food, there weren't just-in-time supermarkets, and the ratio of city-rural populations was much lower. It was not regarded highly to be on any form of government assistance, and people simply worked very hard because they believed in the work ethic so strongly. In fact, people were shunned when it was learned they took a gov't check.
2. There was a sense of community. People actually gave a damn about their neighbors. When one suffered, everyone else helped out. Barn burn down? Let's all get together next week and rebuilt it. Company closed down? Come over and we'll feed your family.
3. It was a much more civil time in terms of how average strangers relate to each other. "Sir" was not a sarcastic term, every man wore a hat and tie to work, and people did not automatically register suspicion and hostility on others.
4. The average American was much better educated. My grandfather was taught Calculus and Latin in 8th grade! And this was not a pristine upper-crust school -- it was a one-room shack in central Kansas. Financially there was true understanding of the risk/reward ratio, and kids either worked in the fields or played outside after school.
5. We were a nation of producers and savers as opposed to consumers and debtors. At that time one simply did not buy anything on credit (not that much was available); it was considered a form of insanity to pay more later for what you could just save up for.
6. Instant gratification are 2 words that could not be applied to most of the population. They worked hard, saved, produced, helped each other out, knew a lot of useful skills, and didn't believe that their problems were the burden of others.
I'm not saying that they were necessarily superior, but when the SHTF, the people involved had completely different backgrounds, skills, knowledge, and philosophies than any you'll find today. I find it very credible to be at least concerned about what the future may hold, and although I haven't started digging a bunker, I do possess firearms and will start looking into having at least 1 month of necessities laid away. I can definitely see the large cities with its waves of dependent people (not just the welfare parasites -- I'm talking soccer moms and dads too) panicking when the bread aisle is empty.
You are right that the correct approach is to envision how to attain success given the situation, but it is also prudent to prepare for some degree of the worst-case societal meltdown scenario. There WILL be hungry and selfish gangs prowling in some areas if it gets bad enough. Will it be the end of civilization? No, but I'm gonna have a shotgun ready.
"I'm not saying that they were necessarily superior..."
Well, let me say it for you: BY AND LARGE "they" were better; no doubt about it.
Outstanding contribution to this thread, Anon; dead on accurate.
One thing you neglected to mention - while I'm not sure what the percentage of Americans with military service under their belt was in the 1930's, obviously in the post-WW-2 (and Korean War) decades this nation had a true "militia' (in the Constitutional sense - the American heritage sense) - a SOCIALIZED (as in socialization, not socialism) which would have been ready, willing, and no doubt largely able to "keep the lid on" American society even following a worst case scenario situation.
We're a far different People today... a lesser People in my not so humble opinion.
Oh... as to the original post... bottom line, I don't see the "Mad Max" scenario nor even "Soylent Green" coming to pass anytime soon, however, I give this nation 15-35 years before the shit really does start hitting the fan in terms of the physical break-up of the United States and huge "class" fissions which render this nation but a shadow of it's former "Republican" (as in Republic) self.
BILL
Your thoughts mirror my feelings exactly. I could not have stated it better. Although I am financially secure and prepared for most eventuality, I fear most for the legacy that I have left my grandchildren. I fail to see how an economy can be driven exclusely by trading financial instruments. There is no "real" value created except to those "money changers" that skim the cream off the top each time it is traded. "God's work"? It just seems like a big Ponzi scheme to me.
excellent response. Everyone should remember one thing about the depression, good things happened along with the bad. I take an optimistic approach: I see neighbors talking to each other again, I see people gardening again, canning again, I see farmers markets where people will barter for the goods they produce...not suggesting there will be no form of paper money, just suggesting that folks will trade stuff more. I doubt we will have to fend off roving mobs, but petty theft, home burglary, car theft...etc. will probably increase. People should have some food stored at home...you don't have to be a nut to justify it - just be prepared for adverse events. Many folks are just one severe winter storm away from not having electricity for a month...what will you do? I teach at a small college, and I address all of my students by sir and ma'am. Good things will happen, bad things will happen...people will survive and learn to carry on with their lives.
Cheers,
Average dude just getting by.
I don't think people were better educated. The people who went to, and finished school may have been better educated than those who are in school now. But, in thoses days a large number of people did not graduate high school and fewer still went to college. And yes, both of my parents studied latin, and so did I, 2yrs latin and 3 yrs of French all in 4 yrs of high school. My son, in a public school has no latin, but has already had 2 yrs French and he is in 8th grd.
Math is another topic, just not as good anymore,,,
I was speaking generally and you busted me.....however.....
Who is taking foreign languages in high school now? Potential achievers -- it ain't the average student, and even if they're forced into a year or two of it, there's no real learning going on.
My grandfather and the other kids were farmers -- they weren't going off to college for the most part. Every single kid was taught these things as a natural habit. Did they use it? Probably not, but the idea was still that in that society there was more of a sense of well-roundedness and if nothing else it taught them discipline.
I dunno; I could be all wet, but when I look at my grandfather's tests from 8th grade and realize the questions were harder than my Calc II in college, I stopped and thought for a moment. Gramps wasn't really the brightest guy in the world, but in 8th grade he aced a test that most of my college classmates would've gotten 40% on.....
Haha! I was going to say something but you beat me to it! I do it, too.
So we know that access to what is now regular curriculum in high schools was pretty scarce. Kids didn't sit in a classroom, like the prisoners they are now, for the better part of a day, five days a week. They spent more time learning skills from older generations. Most people tended to be a jack-of-all-trades. Food was grown locally (ice, anyone?) and everyone knew everyone in the town/village. So, I am also generalizing, but before WWII most people "grew up on the farm". The rural way of life was the way of life.
Okay, so back to addressing econophile. It's easy to dismiss "glass half-full" attitudes as unreasonable. It's comforting for most to think, "Well, all the survivalists from the 70's, 80's, and 90's were wrong, so the gun nuts won't be needing their bunkers anytime soon."
If at any point there had been a collapse we wouldn't be talking about this - but does our talking about it now increase the chances of it occurring? Of course not. But the exchange of information between individuals has never been so rapid and enriched. You go to websites like survivalblog and infowars and you do get the feeling that someone is making a lot of money by keeping paranoia front and center, but you still nod your head because a lot of things just don't make sense anymore - and at least someone has the courage to say something about it and propose an alternative!
But what is paranoia?
Should we consider ourselves somewhat insane to imagine a currency collapse in the near future with bankers reaping bonuses larger than yearly earnings, fueled by an unconstitutional "printing press"? Are we unreasonable to scream at the top of our lungs when the aristocracy the Founding Fathers warned us about are not even reading the 2,000 page legislation they will pass anyway? Is it delusional to see 40 million people "surviving" on foodstamps, exploding upwards with no recovery in sight, and wonder what would happen if there was any unforeseen interruption for any more than a few days? To make any comparison to the Great Depression is a naive mistake at best, in my opinion.I mean, 25% unemployment, what did that mean? Did that many people just sit around, waiting for the gov't check in the mail? Was that the national figure? The urban figure? Were they as accurate and honest at estimating such figures as they are today? Tom Joad would have been just fine if it weren't for the dust bowl that sucker-punched him.
FT just pointed out:
http://www.ft.com/cms/s/0/a8486284-fee9-11de-a677-00144feab49a.html
So, we are just fine right now and we'll be okay in 10-20 years, but next year, even this year, we have no idea what's going to happen.
A friend of mine recently shared some sort of story, with the moral being, [if you see the end of life as we know it on the horizon you shouldn't stop planting the tree]. I don't know if that makes any sense to you, but I agreed that it is better to expire doing something good than just standing there. Ever since the 777 point loss on the DJIA I've tried to remind myself that there will always be humans left after every crisis - and I want to be a producer with them. If one has the resources and skill to flip houses in Cali they should go for it - you can always declare bankruptcy and start over because that millstone is far from hitting bottom. There really is no point in sitting around and and waiting for it - don't make Plan X become your only plan. But who am I to have an opinion, I'm quite a ways off from retirement. I can still "go back to school", pick up today and move to a new city, learn a trade, get a job at McDonalds, whatever. That would be hell for someone more than a full generation ahead of me.
So we have the largest demographic in the history of the world entering retirement without any backup plan. The 401k and SocSec promise is the plan, and anyone paying attention knows that there is a high probability they won't get all of it - who cares if the house is paid off, free and clear - they still have to put gas in the car, food on the table, and pay property taxes or move in with the Kidz that don't visit or call anymore. What if they happen to need medical care? Talk about getting boxed in. These days anyone that is well off either gamed the system, or doesn't have any wealth anyway from all the debts they owe. Anyone that did well honestly putting one foot in front of the other most of their life is pretty screwed - and it pisses me off. The corrupters don't go to jail anymore. Taking a look at the whole mess would actually make one proud to max every credit card and then declare bankruptcy.
Depressing, uh yeah? Is it wrongheaded to want to get back to the basics, surround oneself with self-reliant individuals, and get fresh air and sunlight everyday? Looking at our collective situation, it ain't stretching it to compare our society to a drug addict: something's gotta give - what happens, when that happens, is what is easy to ignore. Nobody wants to hear the party is ending.
Is the party ending, or have we somehow entered a phase of unending peace and properity where everything will be just fine because our dear leaders know best?
I think it's wise to hope for the best; that is, a return to free market principles after only a short period of communist / fascist insanity.
Hope is not my only tool. I am confident with a blade and adequate with an assault weapon.
We stopped earning our right to freedom when we ended our right to defense from "taking."
Survival is success. A desire to be self reliant is a move forward. If the fear was not grounded in solid reasoning then you could chalk it up to paranoia, but no one knows how this will unwind so your optimism could prove to be debilitating for those unprepared. Preparing for disaster, whether it be a natural or an economic one is prudent and well worth the effort. Part of survival is to be flexible and adaptive. It requires one to be open minded in order to react to all possible scenarios. Should he head for the woods and start subsisting off his supplies. No. Having a plan at the ready however, is a winning strategy and your advice to not prepare is one for losers in my humble opinion. For you to eliminate one extreme is restrictive and not helpful.
encouraging opportunism!? Thats been the problem all along, everyone wanting more. A sandwich a day and a warm place to sleep tonite is the goal of many americans because of that very attitude, held by those who already have much.
Houses are NOT for turning over, but to live in. Perhaps we need a" must keep 5 years" rule for land.
More and more is not better.
"Is it time to head for the hills, stockpile food and ammo, and wait in the bunkers?"
Most likley it is not time. If and when it is time, there won't be enough time, or food or ammo.