The European stock market is plunging, and bank runs are escalating across the continent. The utility companies have cut the power off in Greece for lack of payment. Factories in China are closing, India is in the tank, Russia is reeling from the drop in oil revenue and even the last BRIC in the wall, Brazil, discovers that stimulus no longer works as well as it once did.
The great global unraveling is under way for real, and the U.S. economy is about to follow the meltdown straight into the pits of financial hell. So how can you best protect your money?
Welcome to the crapshoot
If you wait until all those economic shoes drop – and much of that fancy footwear is already hitting the fan – then your options are pretty much limited to dashing to the bank in the hope that you are faster than your neighbors.
It is far better to anticipate the various scenarios that might happen and think through how they would likely impact you and your family. Instead of Monopoly or Angry Birds, start gaming the possibilities of the Eurogeddon now so that you can take whatever steps you can to protect what you have.
Unfortunately, however, the first rule of Economic Fight Club is that no one really knows what will happen if (or more likely when) the wheels really do come off. There is no one-size-fits-all contingency plan that will guarantee that you can sit back and enjoy your locally grown arugula with a dollop of organic polenta, secure in the knowledge that you and your family are protected.
Reading Business Insider or Zerohedge for any length of time merely confirms that the global economy is no longer a rational and predictable system that allocates resources wisely, if it ever was. It is now instead a casino where machines drive the trading so fast that red and black – and green – become a blur.
In this new casino, the 1% economic elites not only own win because they are the house, but they have been inventing new exotic games (think derivatives and credit default swaps) designed to force you into placing ever-larger bets with “disposable” income like your retirement fund. Meanwhile, of course, they have been placing their collective thumbs on the roulette wheel to ensure those little white bouncing balls come up on their numbers more often than yours.
The mafia moguls at financials casinos such as Goldman Sachs and JP Morgan have also hijacked the government, persuading both the GOP and the Dems to use your money to bail them out if they lose. Meanwhile you are encouraged to revel in your freedom to lose not only your shirt, but your house, your car and your job as well, with no sign of government help in sight.
Yet even for the 1%, there is a danger that rigging the game can tilt the wheel so far off center that it spins out of control and flies across the room, as it did in 2008. Ooops.
When even the rich cannot control the wheel well enough to protect themselves, then there are certainly no safe and sure bets for us. Buy stocks? Buy bonds? Buy gold? Buy vegetable seeds for barter? Buy a (really-really-really big) gun?
The bottom line is that the future is now a crapshoot. The best any of us can do is assess the relative risks of different strategies and figure out where to place our bets depending on the odds based on our individual circumstances.
The first bet you must place in this rigged but unavoidable game is on what kind of potential disaster you think we are facing:
- Sudden or slow?
- Temporary or permanent?
The best case scenario, of course, is a temporary catastrophe that comes on slowly, since it offers a wider margin of error. This would mean a world where the ATMs will keep working, and the pharmacist will still have a functioning computer to verify your insurance for your insulin prescription (though you had better get there quickly, and you will play hell trying to stockpile).
The worst case is that tomorrow brings a sudden and permanent halt to life as we know it. To see what that might look like, you should pick up a copy of William Kunstler’s novel World Made by Hand, to get a jump on what life without power or technology is likely to bring. (I recommend against Cormac McCarthy’s The Road, or you will never sleep well again.)
If you want to wager that the ball will drop closer to the latter scenario than the former, there are steps you can take today that could help. It is likely that the chaos will be worse immediately after the reality settles in that life as we know it is gone, maybe forever. Your immediate goal is to secure your home base (or your bugout cabin) to ride out the initial storm.
In the short term
A good bet is to stockpile some cash at home, how much depends on how much you have, how accessible your funds are and whether you think they are safe anywhere but in your hands. The risks of having too little on hand are obvious, but the risk of having too much is that this could make you vulnerable if word gets out. (Folks down the road endured a brutal home invasion, reportedly because the family’s teenage son boasted to friends about how much money dad kept at home.)
One way to calculate what you will need is to figure out your current weekly expenditures for basics such as for food and fuel, then double or quadruple the amount (in case of gouging or simple inflation) and then multiply by the number of weeks you think it will take for the greatest danger to pass. Two weeks? A month? Six weeks?
Also lay in a stockpile of bottled water and buy enough nourishing healthy food to serve you well if the power goes out and your refrigerator and stove no longer function. An extra supply of hard-to-grow-here staples like coffee, cooking oil and rice (and a manual can opener or two) might also make sense as possible barter. Fill up your gas tanks and gas cans and buy a case or two of motor oil.
Get as many refills of your must-have prescriptions as you can, even if your insurance won’t cover them. Now is also a good time to invest in a thoroughly stocked First Aid kit, if you haven’t already, as well as books on how to treat yourself (don’t forget dental emergencies).
Buy a gun? That decision should not be made in haste, especially if you don’t know how to use one. In most cases, if you don’t already own one, your best bet might be to find neighbors who do. Invite the people who live nearby to a meeting to map out who can help – and who needs help. This is the time to band together like never before.
Use the meeting to organize neighborhoods patrols. Find out who in the community has useful skills – was someone a medic or an MP? Who knows CPR and who can teach it? You also need to develop a plan to care for the elderly and infirm or anyone with special needs.
In the long run
Once the initial situation stabilizes, you must begin to make decisions about money for the longer term:
- Inflation or deflation?
- How much do you have?
- How much will you need?
- How much will continue to come in?
- What are your alternatives?
While authors like the aforementioned Kunstler predict society lurching back to a previous era with no tech and no electricity, my money is on scenarios more like the Great Depression or the Weimar Republic or the more recent collapses in Russia and Argentina. In those cases, there were still people who lived relatively well amid the chaos, but more and more people found themselves out of work and cascading down the economic ladder. And, lest we forget, one in five children in the United States already lives in poverty.
Another bet you will be forced to make is whether the crisis will produce inflation or deflation. Both create relative winners and losers.
Though the economic elites fight inflation tooth and nail, a little inflation in home prices might help people currently underwater on their mortgages. Efforts to fight inflation often result in higher interest rates, which could help people on fixed income earn more on safe investments. But the big fear is runaway inflation – the hyperinflation in Germany’s Weimar Republic that saw the value of the German mark skyrocket from 320 to the U.S. dollar to 8,000 during the last half of 1922. As a child I heard horror stories about how it took a wheelbarrow full of money to buy a single loaf of bread.
With inflation, people spend money today out of fear it won’t buy much tomorrow. With deflation, which occurred during the Great Depression, the opposite happens, as people hang onto their money as long as they can believing that goods and services will likely cost less tomorrow than they do today (which slows growth even more).
Of course, how much money you have, how much you need and how much you are likely to have coming in over time will influence and constrain your decisions. People with lots of money or a solid income may actually fare better in deflationary times.
A former boyfriend whose privileged background I learned to resent used to talk about how his family made out quite well during the Great Depression. His father kept his job as a highly paid engineer for a public utility, so the family found their standard of living improving as their money bought more. In contrast, at the same time, one of my relatives lost his family’s home because he could not afford to make the one last payment on the mortgage. I also remember an older man in Bath tell me how wrenching it was when his father committed suicide after Black Friday destroyed the family’s fortune.
Hyperinflation instead makes everyone paupers. In the Weimar Republic, even the wealthy quickly found themselves unable to buy the basics with paper money that had lost almost all of its value, like the gentleman using marks to paper his walls.
Searching for a safe haven
The major issues with the money you already possess are safety and liquidity (can you get your hands on enough cash when you need it?). Now is a good time to assess whether to shift your assets from one pot to another.
By now, I am assuming you have moved your money out of stocks and mutual funds. Funds that are housed in federally banks and credit unions are relatively easy to access, unless bank runs occur, though withdrawing them from various instruments such as CDs (certificates of deposit) can involve penalties. An individual’s deposits are federally insured up to $250,000 (FDIC for banks and NCUA for credit unions), at least until 2014 when the amount reverts to $100,000. It is theoretically possible that an economic catastrophe could leave the federal government unable or unwilling to pay off on that promise, but if the situation gets that bad, all bets are off.
For most middle-class families, the bulk of their money is locked up in equity in their home and in their hard-to-access retirement accounts. If you are lucky enough to have a home that is completely paid off, that can provide a great sense of security. But if it is the repository for most of your money, it can be hard to access as cash in a crisis. The same, of course, is true for cars and other items that may be hard to sell especially if they are declining in value. We have already seen how difficult it can be to sell a home quickly during an economic catastrophe.
But retirement funds are a different matter. What should you do in the short and long run with your 401k, and what restrictions apply? As a employee of Michigan State University, my retirement account was housed at TIAA-CREF, an insurance company that is therefore not eligible for any FDIC or NCUA federal insurance.Four years ago, when I first applied for Social Security, I tried to move all of my funds from my uninsured TIAA-CREF account to my federally insured IRA at the credit union, but the rules would not allow this. I was able to move a fairly large chunk, but it will take 10 years of annual payments to the move the rest, and people at other universities often find the rules prevent any movement out of the system.
The advisor at TIAA-CREF’s local office patronizingly pointed out that the government had established rules making it harder for people to access their retirement funds, in essence to protect simpletons like me from making foolish investments. (Like CDO’s based on tranches of lousy home mortgages perhaps?)
I politely pointed out that his firm had more lobbyists than I do, and it was to the benefit to the titans of the financial industry to keep as much of our money in their pockets as possible. He didn’t smile.
Perhaps the wisest course, at least at first, is to do what it takes to establish an emergency fund at home and to move anything else you can into the safest possible deposits in a federally insured bank or credit union. There is a danger that it might take a while to access the funds, but keeping them at home not only makes you a potential target but a fire or flood could wipe you out as well.
Converting your money into gold is another gamble. Though gold has traditionally been a good hedge in hard times, physical possession of the gold again makes you vulnerable. While gold is recognized a universal currency, it can also be difficult to prove its authenticity and value. The same goes for other precious metals, diamonds and other gems. At the same time, a friend tells the story about how his mother came home without her pearl earrings but with the passports needed to allow her family to escape the holocaust.
Another important element to factor into your plans is whether you expect to have more money coming in. Will you still have a reliable paycheck (or two or three) coming in each week or each month? For how long? Will you or your partner lose you job or be forced to accept a pay cut?
I now collect Social Security each month, and seeing that direct deposit appear also makes me feel secure. But will it still be there if the global economy goes up in flames? For how long? In full? What about my husband the musician and web designer? Will people still have money for entertainment or music lessons? Will the Internet still function?
The worst-case scenario is that my Social Security checks stop, and our paychecks and other income disappear. At that point, we have to think triage – which bills to pay for sure, which to pay maybe and which not to pay.
I have been there before, when my first husband contracted a lethal form of cancer when he was 24 and I was 18. We had less than nothing to start with, which made the decisions easier. If I see that train coming at me now, I would take proactive action sooner rather than later.
Surviving if things completely fall apart depends on maximizing income and minimizing outflow. Sell your second car, if you have one, especially if it means saving a monthly car payment as well as the car insurance fee.
Cash out of any whole-life policies and cancel term life insurance once it’s clear your day-to-day survival requires getting and keeping as much cash as you can.
The first bills to pay are heat and lights. The first bills you stop paying would be any unsecured debt. Credit cards. Loans without collateral. Failure to pay will blacken your credit score but if things get bad enough for me to consider this, my credit rating would probably be irrelevant anyhow.
I would try to keep paying my property taxes and income tax as long as possible. This would not be a good time to lose the house or have the government come after us. In this brilliant book Reinventing Collapse, Dmitri Orlov compared the collapse in the USSR/Russia to the one he sees coming here. In Russia, the government owned the apartment you lived and didn’t typically make a move to oust you. As the continuing housing crisis here verifies, our rapacious government and venial bankers will not be so kind.
Next on the list for possible payment or non-payment would be secured debt (a home loan, a car loan). Yes, you had better hope the crisis is for real because otherwise you will be a credit pariah. But considering that it already takes almost two years to evict someone from a home headed to foreclosure, it might make sense to stop making payments and worry about the consequences later. If you can pay your property taxes late without any penalty, you should avail yourself of that option to keep cash on hand, since it amounts to an interest-free loan. Not so for the IRS, however, because penalties and interest are quickly prohibitive.
If these choices seem both stark and dire, it is because they are. Let us hope that it never comes to this. But even if it does, the people who start thinking through their options now stand the best chance of surviving to rebuild their lives in the future. Knowledge in this case really is power.
(NOTE: This post also appears on Bonnie’s Surviving Tough Times blog.)