We Should Start Trading Silver Now

One of the goals of MicroSecession is not to profit off of the coming crash, but to avoid it as much as we can by implementing today, in our own communities, the solutions to our problems. Focusing on value instead of money, of purchasing capital assets rather than consumer goods, building up community, and looking at long-term rather than short-term values.

Historically, for just these reasons, silver has been the primary unit of trade. Silver’s value is stable because it isn’t printable. It is valuable in itself rather than representing value elsewhere. It is long-term because it doesn’t decay. It is, all in all, a better form of currency than our current paper money.

The problem is, we shouldn’t wait until the market crashes to start using silver. If we wait, then there will be a period of uncertainty and volatility as we make the switch when we aren’t prepared for it. We need to make the switch now when we have some wiggle room and adjustment time.

The question is, how do we move into silver trading? Since no one is doing it, it is hard to setup. It is a bit of a chicken and egg problem – no one uses silver as a currency coin because no one takes it as a currency coin. No one takes it as a currency coin because no one uses it. Just FYI – if you want a copy of the book, I will sell it to you for one half-ounce of silver.

In any case, to see how to move the market in the direction of silver, we need only to look at why the world is so heavily invested in the dollar – it is because the world needs it to buy oil (oil is only sold for dollars). What is needed for a catalyst is something that everybody wants which is only sold for silver. This would jumpstart the trade for silver – people might not be interested in silver, but they would be interested in the product, and therefore would buy the silver to get the product. Now we just need a killer product…

In any case, the sooner we can start making silver a legitimate tradeable commodity the better. I suggest we look at ways individually which we can settle with each other in silver.

The Inflationary Effects of Deflation

I am a huge Peter Schiff fan, but one area where I think he is wrong is on his discussion of deflation. Deflation, depending on who you talk to, is either reduction of the money supply, or the reduction of prices. Peter Schiff and I agree that the money supply is the more accurate way to talk about inflation and deflation, so that is what I want to focus on.

Right now, Peter Schiff is critical of the Federal Reserve because they won’t tighten the money supply. He says that the Fed fears a false bogeyman of deflation. Schiff’s main argument is that a decrease in the money supply will cause a decrease in prices for the consumer. Therefore, while Wall Street mavens may hate the deflationary effects of tightening because their asset values will go down, the average person on the street will get a benefit of lower prices.

The problem, however, is that the idea of deflation causing decreasing prices is only true when sound money is involved, and, even if it were to be true, it would still be the death of both Wall Street and Main street. Before I go on, please understand that I don’t think that the Fed’s current money-printing policy is the answer. In fact, for reasons that will become clear, I prefer the deflation to the inflation. The only real answer, though, is to change the money system to one based on assets rather than debt.

So, first of all, why does the Fed fear deflation?

Our economy is based on debt. This means that nearly every dollar issued is based on a debt of money. The Federal Reserve’s balance sheet shows (assuming it is correct) that it has $11 billion in gold reserves and $3 trillion in debt assets. It has other assets as well, but they are dwarfed by these. I also think that this does not include the amount of revolving debt through its discount window program. For those that don’t know how this works, money is created when the Federal Reserve buys an asset. If the Federal Reserve buys gold, they print the money to purchase the gold. Therefore, they now have an asset (the gold) and a debt (the dollar, which, if you look, is a “Federal Reserve Note”). However, usually, rather than buying assets, the Fed buys debt, usually Treasury bonds. In other words, the “asset” that the Fed has is not a physical object like gold, but a promise to repay the dollars and more. If I give you a loan for $100 for 1%, that means you have to pay me back $101. This is normally not a problem, unless the only way that money enters the economy is through debt!

Let’s look at a small economy – Margaret, Bill, and Fred. There is no money in the economy, so they are bartering, which is very inefficient. Therefore, Sam enters the picture, taking the role of the Federal Reserve. “I’ll give you money,” he says, “but you have to pay it back!” Now, remember, this is currently an economy without money. And Sam’s a nice guy, so he will only charge 1% interest. So, he loans Margaret, Bill, and Fred $100 each at 1% due at the end of the year.

How much money is in the economy? The economy now has $300 in it. How much debt is in the economy? $303. There is now more debt than there is money to pay it back. So, at the end of the year, let’s say that Bill has been especially industrious, and he now has $200. Margaret and Fred both worked hard, but not quite as much as Bill, so they have $50 each. Now it is time to pay Sam back. Bill does fine, and has $99 left to spare. Margaret and Fred, however, are both $51 short. However, since it is the start of the new year, Sam will loan everyone $100 again, and even offers to loan Margaret and Fred an extra $50 to cover most of their losses. So now, Bill has $199, and Margaret and Fred both have $99 each. Now the economy has $397 in it, but $404 are owed.

As you can see, if the person issuing the money charges interest, there is literally no way to clear the debt obligations. In fact, the debt obligations will just keep growing until they take over the whole economy. That is basically where we are right now.

What happens in a few years, when they each have $50, but owe the bank $75? There will be less money in the economy, so will they lower their prices? Probably not. They will probably raise their prices, in order to cover the debts that they owe. But fewer people will be able to manage their debt obligations, and there will be very few winners – pretty much just the bank.

Now, the cure for this that the Federal Reserve and the federal government are proposing is that they just increase the amount of money in the economy every year. So the banker loans out money in increasing supply every year. The problem is that this compounds the problem for the future, and does not solve it for today. It brings inflation today, but at the cost of dramatic deflation tomorrow.

The Federal Reserve is right to be worried about deflation. In addition to the Federal Reserve’s $3 trillion in debts that they have purchased, total US debt (public and private) about $50 trillion. I also don’t know if that number includes obligations such as pension payments. Smart US households are getting out of debt. The problem is that there is much less total money than there is total debt. In other words, if we all decided to be good financial stewards and pay back our debts, there would come a point, long before the $50 trillion was paid back, that there would literally be no money left in the system. When we start teetering on that point, then everyone starts grabbing for cash just to make payments. The price of basic goods will skyrocket because everyone must hock their wares at higher prices to pay down the crushing debts. However, no one can afford to buy anything.

So what’s the Fed’s solution? Loan more money to fix the problem! When there is money back in the system, people can go about their lives more freely. But that just sets us up for another failure in the future. The alternate method is the one that Schiff recommends – for the Fed to tighten (i.e. increase interest rates). This will drain even more money from the system, because no one will be able to afford to revolve their debt at the new rate. This would be a disaster to anyone with debts, and those on main street are likely to have debts. Imagine if your credit card rate went from 20% to 40%? Or if home loans went to 25%? Or even this – let’s say that prices go down as Schiff assumes. Your wages will also go down. However, since your debt obligations are in dollars, your debt will not go down. So your debt will consume an even greater percentage of your take-home pay. Now, I actually agree with Schiff that tightening is the better alternative. But it is not because I think it will fix things, but rather because I think it will help us see the problems as they really are, rather than papering over them over and over again.

Now, as individuals, there are partial solutions. The first is to get out of debt. Those who have no debt will be the winners when deflation happens. This includes your home mortgage. I am paying a little extra each month to try to get out of debt earlier. The second is to switch all your loans to non-recourse loans. This means that if you default on your loan, the only thing they can go after is your collateral. You might not be aware, but normally, if your collateral does not pay your loan obligation, they can still go after the rest of your assets. So, if the housing market goes down and you default on your loan, if they can’t sell your house for what you owe on it, then you still owe the rest of the money! In a non-recourse loan, the collateral is all they can go after. I haven’t tried switching any of my loans to non-recourse loans, but it sounds like a good idea, though I don’t know that anyone is doing it for individuals.

The next thing is to store up physical cash. If the great deflation does come, you will need cash, and cash in the bank may not cut it (in Cyprus, they limited withdrawals). The third thing is to store up physical precious metals. Gold is the only physical asset that the federal reserve holds. Because of the debt-to-asset ratio of the federal reserve, I imagine that in a highly deflationary environment, gold will go up about 30x (basically, if a bank holds a 10% reserve, that means that it must have 10% of assets for every dollar it loans out. If you use this basis to *value* the fed’s holdings of gold, then it would take a 30x rise in the price of gold [the Fed’s only real non-debt-based asset] to give them the reserve holdings normally required). In other words, if you have gold, you may be able to pay off your debts. For individual transactions, I would hold silver. Hopefully in the future, silver will also be usable as a reserve asset, but for now it should be viewed as a tradable asset if money breaks down (or, in my next post, sooner). If any central bank decides to hold silver as a reserve asset (and China has thrown that idea around), then this will also be beneficial, as you could sell it to that reserve bank for their own currency, and then convert that to gold or US currency, and then pay down your debt with it.

So, as you can see, presuming that societal structure holds, in a deflationary event, you are screwed now, and in an inflationary event, you are screwed later. The only real solution is to not hold debt but only hold real assets.

Hiding Inflation

The fact is, producers don’t like to raise their prices. However, because of the devaluing of the dollar, things cost more to produce. Therefore, the goal is to, rather than raise prices, deliver less without letting anyone notice. ZeroHedge had an article on how Kleenex dropped their tissue count by 13%, but made the tissues themselves “15% fluffier”. Which of those points do you think are advertised on the box? So, consumers think they are getting a more high-quality product (and perhaps the are), but the untold story is that they are getting much less of it.

This is similar to airlines now charging outrageous prices for luggage. They don’t want to raise ticket prices too much, so they charge you for luggage. In food, everything is moving to cheaper ingredients. If you want to know how much price inflation has occurred with boxed foods, go to Whole Foods and find things that are (a) organic, (b) made without corn syrup, and (c) don’t have a lot of food coloring or manufactured ingredients. That used to be the norm. Now it is a specialty item. That’s hidden inflation.

Babies for Free

Many people think that having a baby is an enormously expensive ordeal. However, one woman found that it costs less to raise a baby in their first year than it does to have a cup of coffee each day. Read her story about how individual frugality and community value merged together to help Naomi raise her baby for next to nothing.

Here’s what she said about toys:

I didn’t buy any toys. Your friends and family will take care of that. And the funny thing is, toys are nice, but what they really want to play with is real stuff, like Tupperware, car keys, books, and the baby wipe container. Why buy toys that will just add clutter? Plus if you are home with your baby, you don’t need so many toys to entertain them because YOU get to play with them!

A simple life, without too much stuff, can be very enjoyable. My daughter certainly isn’t deprived. She’s very happy, always looks cute, enjoys her food, her library books, going outside and playing with Mommy and Daddy. And I can’t even begin to tell you how much we enjoy her. Everyday she does something new and her smiles and laughter lift us up like nothing else. I look forward to spending these years with her discovering the whole world and the One who made it, for about the price of a coffee a day.

My Chicken Coop

I’m rather proud of my chicken coop. Most chicken coops are either purchased or built from scratch. Mine is neither. Mine is a repurposed structure, which also hasn’t lost its original purpose! My children have a playset in the backyard which has a ladder, a fort, and a slide. However, they never played underneath the playset. Therefore, I simply enclosed the bottom with chicken wire and added a door. Viola! A perfect chicken coop. And the kids can still use the fort and the slide.

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Interview on Blog Talk Radio

This morning (Thursday, July 11) morning I’m talking again with Joe Cristiano, but this time I’ll be chatting on his channel on Blog Talk Radio. Click here to listen in. The show starts at 6:30 AM central time, and I will probably be on around 6:45 AM. If you can’t make it to the live broadcast, the link should have an archive of the show afterwards.

Real Estate as an Investment

One of the goals of MicroSecession is to move value into real, tangible goods. Land is certainly one of those things. However, for someone practicing the principles of MicroSecession, owning land is a different beast than traditional real estate investment.

The problem that will be faced is that the value of land is probably going to drop precipitously. Think about this – how many homes would be bought if the required down payment went to 20%? What if the interest rates went to 15%? Such figures would put an absolute break on new home purchases in the United States. Why would I want to move to any other house for 15% if I am currently paying 5%?

Thus, if the interest rate markets rise to their natural level, rather than the current fed-reduced level, the home prices will dramatically fall.

But that’s not all.

There is a “shadow housing market”. These are houses which the banks have repossessed, but which have not been sold on the market. The banks don’t want to do a big housing dump, because that will put downward pressure on the price of real estate, and they want to get as much as they can from these houses.

There is also an even shadowier housing market – these are houses which are behind on their mortgage, but which the banks haven’t bothered to repossess.

So, if you add this giant number of homes together, that creates significant selling pressure. If you then suppose that no one will have the finances to buy one, you then lose all your buyers. And that will cause land prices to drop like a rock.

This does not mean you shouldn’t own land. If you can pay cash, any real, fixed asset is worth more than the worthless money you purchase it with. It does mean you shouldn’t buy land on a loan, because you may be stuck having to pay the money, but without income to support it. Imagine if you took out a $250,000 loan for a real estate buy. Then there is a crash, and your real estate is now worth $100,000. Plus, no one has the money to buy or rent from you. The result? You now owe $150,000. You have not seceded from the financial system, you are now squarely stuck within it.

So, if you do have land investments, here’s my suggestion – do whatever it takes to get your loans paid back. There may come a time when the land’s credit-worthiness is less than you think, and owning it outright will allow you to continue to use it when everything else goes south.

Larry Burkett once told a story about a car dealer. Burkett asked the car dealer about his debts, and the car dealer said that all of his inventory was from loans. Burkett advised him against debt, and the dealer said there was no way that he could purchase all of the cars – he just didn’t have the money. Burkett asked him if he could purchase any cars. The car dealer said he could purchase a few – I think it was eight. The car dealer slowly increased the number of cars he owned outright until, after several years, his entire inventory was paid for. Then, the massive 20% interest rates of the 1970s hit. Many car companies went out of business, because they were all highly leveraged. But this one, since he owned all of his vehicles outright, was able to thrive even in that economy, offering deals that no other dealer could match due to current interest rates.

I believe that a similar time is coming soon, and real estate will probably be the hardest hit.