Chris’ Note: Take a look at the stock market this year, and it’s easy to believe the next crisis may already be here. That’s why, this week, we turn to our founders – Bill Bonner, Doug Casey, Jeff Clark, Teeka Tiwari, and Mark Ford – to reveal their secrets for not only building wealth… but also for keeping it in times of trouble.
To kick things off, Bill paints a grim picture: America 2023. The money in your bank account is worthless. The ATMs have all shut down. But you don’t have to lose it all…
Germany, 1923 –
He unfolds his pocket handkerchief and lets an object fall ringing on the table. It takes me a while to recognize it. I gaze at it with emotion. It is a gold twenty mark piece. The last one I saw was before the war. “Those were the days!” I say. “Peace reigned, security prevailed, insults to His Majesty were still punishable by imprisonment, the steel helmet was unknown, our mothers wore corsets and their blouses had high, whalebone stiffened collars, dividends were paid, the mark was as untouchable as God, and every quarter you contentedly clipped the coupons for your government bonds and were paid in gold. Let me kiss you, you glittering symbol of a vanished era!”
– “The Black Obelisk,” By Erich Maria Remarque
Money is a dangerous distraction – for an economy and for an individual. You can have a pile of money, and still grow poorer.
The coming crisis will almost surely be a “money” crisis. The best way to survive it is to have your wealth in something other than money.
A small stash of cash could help you survive the first stage. But a large cash stash – or a claim on a fixed stream of income – will probably be a danger to your wealth as the crisis develops.
In the vast panorama of the financial world, with all its jargon and complexities, I keep coming back to the humble ATM. It is where most people now go to get cash.
My hunch is that it is going to be like a gas station during the first energy crisis of 1973 – the point where the rubber of individual lives meets the road of global financial claptrap.
Longtime readers know I’ve dramatized one of the things that could go wrong before. You are standing in front of the ATM. You ask for cash. But the ATM has no cash to give you.
In a financial panic, people tend to want cash. It steadies their nerves. With cash they can buy the things they need… or turn their cash into other financial assets. But there isn’t enough actual cash to satisfy the potential demand. ATMs would run dry.
Then, without cash, the economy could only run on credit. But credit is a “whole ‘nother thing.”
It is not the same as cash. It is a promise to pay, not an actual payment. And in a real financial crisis, promises fall fastest and hardest.
People wonder if the buyer will still be solvent when the bill comes due. They wonder, too, if the credit card company or lender – the bank that makes the credit available – will survive the crisis. And they wonder how much the currency will be worth when they finally get their money back. They sell off these promises in order to get cold, hard cash.
Typically, a financial crisis marks the beginning of a credit contraction. Lenders panic, stopping all credit transactions. Interest rates rise as doubt increases. Then, the amount of credit outstanding falls – as many old loans go bad and fewer new ones are offered.
The ATMs should work again – along with the credit system – as soon as the panic subsides and order is restored.
It might take a week. It might take a month. Or three months. You should be prepared with a quantity of cash for this purpose. It is cheap insurance.
But this period is also the time when the authorities fill the holes that the crisis exposed.
The banks will run out of money and will need to be recapitalized. Large companies will be on the edge of bankruptcy. Tax revenues will collapse. Loan guarantees, medical care, pensions, and general spending commitments will all need to be trimmed or funded.
Where will the money come from?
There are only two sources. Both involve theft.
Either they take it directly from account holders – as they did in Cyprus and Argentina. Or they counterfeit money… and take it from almost everyone – as they did in 1920s Germany.
That’s why you don’t want to have your money trapped in a bank account during a serious financial crisis. As long as you can get your hands on your money, you can react to protect it.
But if it’s locked up in a bank… or other financial institution… you may be forced to experience the crisis as a victim and not just an observer.
Here, we are entering the territory of disaster scenarios. Like the road from Salta to my ranch in Gualfin, the scenery is dramatic but the road is treacherous.
It washes out in rainy season. It disappears completely in fog. There are miles of road on the edge of 200-foot cliffs, with no guardrails. One mistake and you are part of the scenery.
This is not to say that the odds of catastrophe are higher than the odds of “normalcy.” Generally, they are not. Otherwise, catastrophe would be normal and normalcy would be catastrophic.
In any case, I can’t know what will happen. But I would be doing you a disservice if I didn’t spend some time trying to figure out what this catastrophe might look like.
I see several possibilities. Each one could cut you off from your money. Most likely, they will come – like bad news – in groups of three:
A deflationary crunch… with falling asset prices… a rush to cash… and panic among the authorities.
A ban on cash. First, there won’t be enough to go around, and second, the feds will want to be able to force people out of cash and into consumption and investment.
Rising levels of inflation… maybe even hyperinflation.
You should take all of these catastrophic visions in the spirit that they are intended, like the prediction of a concerned mother to a wayward son: “If you keep going like you are, you’re going to end up in jail,” she might say.
She doesn’t know whether he will get jail time, but she thinks he will be better off if he believes that he will.
I don’t know how this episode in monetary absurdity will end. But I do know, as well as I can know anything of this sort, that it will end in some hellish place.
By now you’re probably wondering: What can you do to protect yourself?
Remember, “There’s always money in the banana stand.”
This was a joke on the popular TV show Arrested Development. Cash had been hidden in the family’s frozen-banana stand.
George, the father, tells the family repeatedly that “There’s always money in the banana stand.” But they don’t realize that he means it literally.
He has hidden $250,000 in the stand, which goes up in smoke when it burns down.
But there’s no ambiguity in the version of French economist Jean-Baptiste Say. In 1803, he said that “Products are paid for with products.” To him, “There’s always money in the banana stand” means the only source of wealth is real output.
Yes, you should have some money in cash. And yes, you should own gold, too. Gold is cash. It is still the best form of cash and still the best bet for preserving wealth over the long haul.
But the bulk of your wealth – if possible – should be in banana stands or other things that produce products or services.
Farmland. Timber. Mining concessions. Hotels. Apartment houses. Dry cleaners. Car washes. Pawnshops. Basic things that people want and need.
In the story at the beginning of this letter, in the midst of the hyperinflation in Germany, the narrator worked for a funeral parlor. Money became worthless.
But people still died, and their relatives still wanted to mark their graves with tombstones – including the black obelisk.
When the crisis was over, two things were still valuable – gold coins and the funeral business.
Chairman, Bonner & Partners