Since I wrote the two-part article on the Great Depression, several people have asked me for thoughts on what to invest their money in, a ‘safe harbour’ when currencies and economies go into collapse.
Many investors have been buying stocks of resource companies, metal commodity futures, and stocks of so-called ‘blue chip’ companies that have done well in previous recessions. The problem with these investments is that (a) these stocks are mostly denominated in US dollars, and (b) speculation has already pushed their prices up to possibly unsustainable levels. Bonds pose a similar problem: If interest rates spike, bond prices have to fall to push yields up to competitive levels.
As this article explains, and as the chart above from that article shows, some Western governments have recently been deliberately underreporting the true rate of inflation (which is likely at least 6%) for political reasons:
Once investors in bonds come to realize this, they will demand double-digit returns on such investments, potentially cutting the price of these investments in half.
Commodities and alternative currencies have had similar speculative run-ups to those of resource company stocks, so these investments are also not for the faint-of-heart. But leaving your savings in US dollar denominated investments is even more dangerous, since the US dollar is the most over-extended and most vulnerable currency. And real estate in most areas is absurdly overpriced — far beyond its replacement cost — and in a downturn real estate is also illiquid, hard to convert to cash when you need it.
So what do you do with your savings? And if your entire net worth is tied up in real estate, what should you do?
I’m neither an expert in investments nor an expert in economic forecasting, so I wouldn’t presume to tell others what to do with their hard-earned money. What’s more, I’m not sure the economic collapse is as imminent as some would have you believe. This house of cards has a lot of carefully-placed cards holding it together, and it could last a while yet.
All I can do is tell you what I’m investing in myself, and thinking of investing in myself. We’re exceptionally fortunate: We have a house on a large piece of land which would cost considerably more to replace than what we paid for it. We have no debts. I have a fully vested defined-benefit (fixed guaranteed annuity) pension that (barring a complete economic meltdown) will kick in in a few years. Most pensions are now, or have been converted into, defined-contribution pensions (like IRAs and 401(k) plans) that in an economic collapse will be relatively worthless. This is what Bush wants to convert the US social security system to, transferring all investment risk in the case of a Depression to the citizen/employee.
Despite our good fortune, we’re not personally out of the woods, not by a long shot. Pension plans can go bankrupt. Living out in the country, we’re close to farms but far from most employers and customers. When the electricity goes out, we’re without heat as well as light. And living in Canada, we can’t live without heat. Like most North Americans, we’ve made out living with our heads, not our hands, so we’re poorly equipped to make and fix things ourselves if we need to.
So here are ten things we’re looking to invest money and time in, all stuff that would be valuable in a Depression:
A lot of these things cost next to nothing, but require a fair bit of time. I’m learning that one of the keys to resiliency, which is what we’ll need most of all in a Depression, is willingness to give up time to save money. When your time is charged out at $200/hour, or when you’re paid $50/hour, it’s easy to shrug off tasks that on the surface don’t seem to be ‘worth’ that much. Why do something yourself when you can pay someone $20/hour to do it for you, better than you could do yourself? Because it makes you dependent. And when the Depression comes and you can’t afford $20/hour, you won’t have learned how to do it yourself.
And time is much cheaper than we think: Every minute we spend walking, cycling, exercising, adds three healthy minutes to our lives.
Investing in these ten things could also make us more dependent on the Internet than we are already. Many readers thought I was unnecessarily worried about the Internet going down in the next Depression the way phone service did (tens of millions cut off for non-payment) in the last one.
I respect the fact that the software of the Internet is resilient and relatively low-cost. My concern is the related hardware, and keeping it running. When the utilities start laying people off, blackouts and brownouts will become more frequent, and last longer. Electricity and telecom costs could soar relative to average incomes, making the Internet an unaffordable luxury for most. The physical infrastructure of the Internet — servers, networks and systems — won’t be maintained if everyone is out of work. And the shoddy computer hardware that most of us are forced to struggle with could easily become too expensive to maintain or replace.
So I’m worried about the Internet, and while our investments in the ten things above will be largely Internet-dependent, I’m also looking at a Plan B that will work even if the networks go down.
If readers have other thoughts on ‘safe harbours’ for investment for when the US dollar, and hence the global economy, goes into free fall, I’d like to hear them. Is gold really a safe investment? What’s the least expensive way to move your savings into Euros? Where else are you moving your savings?
I really hope I’m being unduly pessimistic about all this. The value of any currency is, after all, strictly psychological — it’s worth whatthe people who own it think it’s worth.
Just like in 1929.
P.S. For those who have been asking about my progress with the Shangri-La Diet, my latest update is here.
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