You Can't Eat Gold

Recently I was speaking to a couple of friends about the gold market and the US economy in general, and one of them startled me when he said, "You can't eat gold, you know!" Of course not, I thought, it would just break my teeth! On the other hand, I couldn't think of anything more sickening than eating the usual tattered, filthy Federal Reserve Note. But the comment did get me thinking.

Anyone who considers the US dollar (Federal Reserve Note) to be in any danger of collapsing, or losing purchasing power at all, should be thinking right now about dealing with that eventuality. And the comment about eating gold brings up the question, just how would we pay for food - not to mention the other necessities of life? We take it for granted that everything from aspirin to D batteries to new socks will forever be on store shelves, just awaiting purchase with Federal Reserve Notes, which will always buy anything.

What if that premise is false? What can we do when FRNs will not buy much (if anything) at all, and perhaps the merchandise will not be available for purchase with any type of money? Can we really expect that sitting on a pile of gold will magically fill the store shelves for us? We won't be able to bring silver and gold coins to the stores without being robbed or even killed. Could some exogenous event bring down the whole house of cards, leaving Americans to scramble for the last available goods?

This brought up another question: what is real wealth? If it isn't FRNs and if it isn't gold or silver, what is it? Money, whether hard cash or paper fiat, may be a store of wealth, but it isn't wealth itself. We can't eat it, wear it, live in it, drive it, or use it for much of anything. Wealth comprises all the goods on store shelves, including food, clothing, fuel, matches, auto parts, flashlights, blankets, children's cough syrup, and everything else that provide the comforts of life. It also includes a roof over our heads, some working form of transportation, and perhaps most importantly, the freedom to enjoy the privacy of family life. Wealth also includes the ability to sustain this standard of living, to be self-sufficient, to be able to provide more of all of these things, even in the absence of a common currency. To depend on a currency - any type of currency - involves a loss of control over what will be accepted in exchange for real wealth.

Too many of us think of wealth as consisting of assets falling into one or more of the asset classes - stocks, bonds, commodities, cash, real estate, and so on. If it brings income or growth, we count it as an asset. With the possible exception of real estate, all these assets are not wealth per se, but a means of investment of money (which we would hope could be trusted as a store of value). Real estate, if held as a family home owned free and clear, ceases to be just an investment, and becomes an item of real wealth. If it carries a mortgage, it is simply a liability.

The Problem of Sustaining Wealth

Let us imagine a family that is fortunate enough to have a home, owned free of encumbrances. Perhaps they had enough foresight to stock the pantry very well, and have enough food to carry them for a year or more. If they had accumulated "stuff" at anywhere near the rate that most of us have, they would own enough clothing, medicine, household furnishings, tools, and vehicles to last for at least several years. Let us also assume, as this family seems to be very wise, that they are debt-free and have some cash savings, perhaps even a little gold, bought as an investment.

Along comes the "exogenous event" - war, hurricane, terrorist attack - we have been through all of that in the past few years and survived, therefore it may be a totally different type of event, or a more devastating event. It will be unexpected by most, although many of us know that something, some trigger, must eventually level the imbalances in American and global finance. Perhaps it would be an oil or energy crisis. It may be a dollar devaluation, or both. Our well-prepared family finds itself suddenly thrust into a world where their cash savings buy little, if anything. The transportation system breaks down, and goods disappear quickly from store shelves. If you live in an area that has been recently ravaged by a hurricane, you know just how quickly this can happen!

What can this family do? One or two of them are employed, but the currency in which they are paid buys virtually nothing. Soon, even the employment is lost. They have a good deal of wealth and security in the form of a paid-off home, stockpiled food, and other goods. But let us suppose that winter is coming on, and the home needs to be heated. Perhaps the property taxes are coming due. Or maybe medical care is needed for a family member. None of these things can be purchased in the currency that they have used all their lives.

It could correctly be stated that even a family that starts out with a good deal of wealth, may not be able to sustain it. Anything that requires an output begins to erode their wealth. They may be able to barter with a neighbor for firewood, or find a doctor willing to accept investment-grade gold coins for medical treatment. Then what? They won't be able to turn to FEMA for anything!

If this wise family lacks the flexibility and the know-how to sustain the wealth and the living standard that they have worked so hard for, they will begin to lose that wealth and way of life pretty quickly. If the property taxes cannot be paid, they may lose their home. If they run short on food, they will not be able to re-stock at the supermarket. They may not be able to find the fuel they need for heating and cooking. If this situation persists for any length of time, for perhaps a few years, they would end up destitute.

Unlikely Survival of The Unfit

By now it should be apparent to the reader that having dollars or Euros or gold or stocks or bonds, is not a foolproof method of sustaining wealth. Whichever currencies or assets that survive the financial meltdown that appears inevitable, will be good to save for re-building when the period of devastation is over. There won't be much available to purchase with them in the interim. What is our imaginary family to do during the crisis years, between now and then? How can they stem the flow of wealth out of their pockets, recapture it, extend it, and survive to re-build when the time comes?

Our ancestors had the answers to these questions, but today, we have become fat, lazy, and complacent. During the Great Depression, there were far more family farms in America than there are now. What happened? Oil is what happened! Americans began buying cars and commuting to jobs in the cities, and suburban sprawl was born. Supermarkets stocked the shelves with a far greater variety of foods than could be found locally. Cheap oil enabled all of us to enjoy a culinary abundance, shipped from all over the world as well as the most fertile areas of the United States. We could make more money spending 8 or 10 hours a day in a factory or office in the city than we ever could on a farm, milking cows and hoeing beans. As family farms disappeared, agribusiness took their place. Using cheap petroleum-based fertilizers and pesticides, American farmers were able to supply the world with food. The money we earned in the cities enabled the phenomenon of discount retail to flourish, raising the standard of living for any American who wished to take part.

Today, we have become so accustomed to this way of life that all save the oldest among us knows no other. During the craziness of the recent real estate boom, prime farm acreage was worth more to sell to a developer than it was to use as a farm. Certainly nobody wanted to pay the rising taxes on it. As the old folks passed on and their baby-boomer kids inherited the baby boodle, such large tracts of acreage were sold off to become more suburban sprawl.

That leaves us in quite a tough spot, as oil threatens to reach $100 and more per barrel, as tensions in the Middle East begin to explode. Suddenly, the daily commute to work is getting expensive. Prices of virtually all goods and services are rising too fast for Americans to keep up, as most of those goods and services are dependent upon inexpensive oil in some way. Monetary inflation shares a great deal of the blame here, but not all of it. Our soft lifestyle is also a culprit. At this rate, America is increasingly in danger of losing her middle class, the backbone of the nation. Our wealth is flowing fast out of our hands into foreign ones. And the real crisis has not yet started.

Self-Sufficiency Is The Secret

When goods become scarce, or too expensive to purchase, we must re-learn how to provide the necessities for ourselves. If we are living in a $400,000 home with a mortgage that breaks the budget, the easy answer is to move to something that can be owned outright with whatever equity is left after the sale of the McMansion. Often, there is no equity in it, and other assets may have to be liquidated to get into something - anything - that will provide shelter for no cost beyond property taxes and insurance.

When supermarket shelves become empty because big-time agribusiness can no longer afford the petroleum-based fertilizers needed to grow food or the gas to run the big combines, we will have to grow it again ourselves. If gasoline becomes too expensive to commute to that city job that no longer supports us, we will have to leave that sort of employment for another that does.

Self-sufficiency involves the abandoning of a market economy while turning to a use economy. In other words, rather than going to a city job to earn the money to purchase the goods we need, we produce them directly, for ourselves. This has far greater implications than hard-core survivalism, or hoeing a row of beans. It means that we will have to take a step or two back in time, perhaps to take a lesson from the Amish or Mennonites. We will need a system that will work for us, when the one we have used for so long begins to fail.

And fail it will. We will not be able to depend on the government to step in and do something about it. For all intents and purposes, our government is bankrupt and may not survive in its current form. That in itself is a grave danger to all of us, and a return to a simpler and more self-sufficient lifestyle may become a matter of life and death. Those individuals and families who are unwilling to face this reality will find little sympathy from their more nimble and open-minded neighbors. If America is to survive, it will need citizens willing to do whatever is necessary to survive. The clock is ticking, and we may have a few years - very few - to prepare for a big change. This is how real wealth is going to be defined on the foreseeable future. Don't expect much in the way of a warning. As I have already stated, it will take most by surprise.

August 5, 2006

Dave Andrews

The Power of Gold: The History of an Obsession