Recently by Gary North: Government Money Masters: Anti-Gold Videos that Thousands of Tea Party Voters Think Are Conservative

I wrote an article with this title on June 6, 1980 in my newsletter, Remnant Review. It is time for a follow-up.

The four G’s seemed prudent in 1980. In early 1980, the American economy was suffering from the worst peacetime price inflation in its history. That was about to reverse due to the Federal Reserve’s decision under Paul Volcker the previous August to reduce the rate of growth in money and let interest rates soar. This would lead to a recession.

By the end of summer in 1980, the United States was in a recession. The Carter Administration was running a deficit in fiscal 1980 of a then-shocking $74 billion. (Table 467.) Prices were then 40% of what they are today. A deficit that large would be the equivalent of $203 billion today. A $203 billion deficit would be hailed today as a political triumph by the Tea Party and cursed as a job-destroying catastrophe by Paul Krugman.

Had you known generally what was coming in 1980, you would have put all of your money into 30-year T-bonds. You would have sold them in mid-August 1982 and bought a no-load mutual fund in the S&P 500. You would have sold that in March 2000 and put all of your money in silver. That was because silver had collapsed from $50 to under $5. Or you just bought Wal-Mart shares in 1980 and nothing thereafter. (I moved to Texas in 1980 and recall seeing a Wal-Mart store in some small town. I did not follow through. Too bad.)

We are still around three decades later. The Soviet Union isn’t. Red China is now the fastest growing large nation in history, due to the decision of Deng Xiaoping in 1978 to free up agriculture. Cuba and North Korea are that last nations committed officially to communist economics. They are universally acknowledged failures.

Today, the world is safer in terms of nuclear war. It is far less safe in terms of the stability of financial institutions. It is also becoming clear that governments can default on their obligations. We watch the crisis building in Europe because of the inevitable default of the Greek government on its bonds. The European stock markets rally when Merkel makes some vague statement about German’s commitment to something, but not much. The lemmings see what is coming, but they cannot bring themselves to get out of stocks and stay out. They buy for a day or two. I call these Merkel’s gurgles. They mean little. Investors believe that something will save Greece and the big banks that stupidly believed the previous Greek government and bought Greek IOUs. They believe that the governments of northern Europe can save the big banks of northern Europe. They believe in deliverance by northern government debt – to save the banks from southern government debt.

Why should you care about the four G’s? Why should you imagine that things will not repeat? The financial system held up after 1980. Why won’t it hold up today? Why won’t things be business as usual?

One good reason is that it is clearly not government as usual. The size of the deficit, the gridlock in Congress, the desperation of the unemployed, the ineffectiveness of the Federal Reserve, the inability of the economists to offer a solution, the unwillingness of small businesses to borrow, and $1.7 trillion in excess reserves in the banks all point to a continuing crisis that is not going away. The government is helpless. The Keynesian solutions are not working.

This clearly cannot go on indefinitely. The federal government is absorbing too much of America’s capital. Its deficits show no sign of ending. A recession will increase these deficits.

When a nation’s leaders are visibly helpless, a few people start looking for ways of protecting themselves. The vast majority have few capital reserves. They live from paycheck to paycheck. The very rich have their vacation retreats. They think they are in good shape. The middle class has little wiggle room.

Along come critics of the system who tell people that they had better wiggle. This message is not well received.

Many are called, but most are frozen.

GOD

In 1980, I wanted to recommend a good book on God. I could not find one that I thought spoke to the issues of the day. As I say, “You can’t beat something with nothing.” So, I decided to write one. I sat down in early July and started writing. I had no outline. I had an IBM Selectric III typewriter. Over the next 12 days, I wrote a book, Unconditional Surrender. In 1988, I added one chapter. In 2010, I added another. It’s still in print.

My position is clear: if you think you’re 100% dependent on your own wisdom and efforts, you are asking for trouble. You have a heavy load. I know that atheists can sober up, but Alcoholics Anonymous begins with an open statement of dependence on God. I think that’s a good place to begin.

This world is governed by ethical cause and effect. When people vote for a living, they create an economy that is dependent on more theft. Theft-based economies are Ponzi schemes. It’s not just Social Security that is a Ponzi scheme. So is Medicare. So is the FDIC. All governments over-promise. They ask us to become dependent on government promises. The governments issue more promises than taxes and borrowing can fund. Then they inflate.

Government will prove to be the god that fails. That will be a good lesson in theology for hundreds of millions of voters. “Thou shalt not steal, except by majority vote” will prove to have been a destructive principle, although widely believed.

GOLD

Gold is the asset that has the longest track record in history. Financial records survive even when written literature perishes. For as long as we have financial records, there are entries about gold. Gold has been the commodity of account in trading societies throughout history.

It is the essence of the arrogance of modern economic theory that economists have dismissed gold as a barbarous relic, a thing of the past. It is a thing of the past, a thing of the present, and a thing of the future. Why? Because gold is one way that rich people can vote against policies of their governments. Rich people can buy gold and store it in Switzerland. They can get out of Dodge, wherever Dodge may be. They can get on a plane and buy their way into anywhere.

The common man could do the same, but he won’t – not until it’s too late. He has heard of gold – mostly negative – and he has stayed on the sidelines, waiting. The common man can no longer afford to buy a dozen one-ounce gold coins. In 2001, yes, but not now. He missed the boat.

There is no commodity, no strategy, no place of safety in a world dominated by governments who preach the gospel of salvation through legislation. There is no hiding place today in a world that really does believe in safety through voting. But for those who look for a tried-and-true port in the storm, gold is better than any other commonly marketable asset.

It has been the focus of a move from $257 to $1600, 2001 to today. This, despite the nay-saying of the talking heads, the tenured economists, and the financial press. The run up has come from outsiders With the banks in panic mode, building excess reserves, prices have not risen much, despite the enormous increase in the monetary base since 2008.

Gold is a crisis hedge. It is a buy-and-hold investment. The American public buys gold only when spooked. Then their fear subsides. That is why it went to $1900 and then fell back. The late-comers think there is something magical about gold. There isn’t. Gold is an asset that rich people buy when they get frightened. But then there is a positive press release from Merkel, or some vague statement from Bernanke, and demand falls. Prices fall.

The reality is clear: at some point, the vast increase in the monetary base will be monetized. The FED will inflate more in order to make a market for Treasury debt. Then gold will again be the focus of panic buying.

We are seeing the decline of faith in the state, but nothing has replaced it in the thinking of the elite. They do not know where to turn. This decline of faith will create a decline in the demand for digital money. We do not know when. Prices are not rising much. The economy remains stagnant. But the central bank cannot keep recession away by adopting stable money. Volcker’s FED did, but that produced two recessions and also Reagan’s $200 billion deficits. The thought of what the next recession will do to the Federal deficit is frightening today. But it will come. We will have to deal with it. One way for people with extra money will be gold.

But gold buyers must think through why they are buying gold. They must decide which form is best for their purposes. Here are traditional reasons:

To transfer to children at their death. (Buy small gold bullion coins.)To invest in an SEC-regulated portfolio. (Buy Central Gold Trust.) To sell for digital money. (Buy one-ounce bullion coins.) To barter in a crisis. (Buy small bullion coins.) To hold outside the country. (Buy GoldMoney or Bullion Vault.) To sell to capitalize a business (Buy one-ounce bullion coins.) To sell to pay off a mortgage (Buy one-ounce bullion coins.)

The third use – barter with gold coins – is a long-shot. If it comes to that, you will not get a good return, compared to having the things you are trading to obtain. Think about such conditions. You are so desperate that you are willing to surrender gold coins. That indicates a desperate situation. The seller knows you are desperate. He will drive a hard bargain.

I tell people to begin accumulating those things that would be so desirable in a crisis that they would be willing to pay for in gold. In most cases, these are common things in normal times. You can buy them at Wal-Mart or even Dollar General. You can buy them in bulk at Sam’s Club or Costco. Why not buy them now? Why not buy them on sale in normal times?

If your goal is to barter, then buy now. Barter is inefficient. It takes place when the division of labor has contracted. If we get to hyperinflation, which I doubt, we will be far better off with consumer goods in reserve. We can quietly consume our hoard, never calling attention to ourselves.

When you go looking for goods that can be bought by gold coins but not paper money, you expose yourself. You must locate a reliable seller of desperately needed goods. You will not find this person on Craigslist. Would you respond favorably to an ad that announces this? “I can get you whatever you need for gold coins. Contact me today.” I think I would skip that offer.

Barter is a limited market. That means that transaction costs are high. That means losses when compared to transactions in normal times. Barter may pay better than not bartering, but not bartering is better if you possess the consumer goods that people are willing to pay gold to buy.

What do you want to do with the gold? This scenario should determine how much gold you should own and in what form.

GROCERIES

I use this in the broadest sense: immediate consumer goods. These are goods that you must have. To get them, you must pay.

Think of bottles of water two hours before a scheduled hurricane strikes. The bottles will not be on supermarket shelves. It will be illegal for retailers to hike the prices of these goods. It’s first come-first served. Getting in line early pays. Waiting doesn’t.

Most people wait.

Get in line early.

The economic conditions that would make food scarce are either local (hurricane) or catastrophic (national). There are scenarios in which catastrophe is possible. Most involve plague. The recent movie “Contagion,” presents such a scenario. It is possible; it is not likely.

A complete failure of the banking system is another. This would be a black swan event. If the banks go down and stay down for two months, Western civilization collapses. The death toll would be enormous. Most people could not survive in such a scenario. I do not think it pays to prepare for such an event. The likelihood is too low, and so is your ability to survive for years on end under such conditions.

The great advantage of storing up basic consumer goods is that you can rotate them. You buy on sale. You use these goods to replace what you are consuming. You therefore lower your cost of living by means of bulk buying. This is good economics. The fact that it serves as a cushion for a time of disruptions is gravy.

Here is what could happen. You could lose your job. If you are in that form of crises, you want a cushion. You will be using money to make payments on your home. Maybe not even that. Maybe you pay the water bill and electricity. You dip into bank reserves. You watch every expense. That is when you start consuming your reserves. This is not eating your seed corn. This is living on reserves that you built up for a time of crisis.

I have a theory about the collapse. Cities will keep public utilities operating. They do not dare let water and power go down for more than a week. The threat of panic is too great. Even in Baghdad, there are rolling blackouts, not constant blackouts. The city fathers know what would happen if there were no public utilities for a month. People would start moving out. The tax base would collapse.

The people who have built their careers on getting elected know what has to be delivered by the state. They will allocate their money the way that anyone else that is buying something allocates his money. They are buying votes. You can be sure that they will not turn off the flow of funds to any sector of the economy that services the needs of every voter in the city.

A garden is a way to store up food. It is expensive. Your time is valuable. But it has its own rewards. The food is better in all respects. It is there in an emergency. A garden does not identify anyone as a crackpot survivalist. It is a point of contact with neighbors. It is something that you can recommend to a neighbor as a way to reduce the vulnerability of the neighborhood in a crisis.

I recommend non-hybrid seeds. You can re-plant the seeds produced by these plants. They build up immunities to local plant diseases over several seasons.

GUNS

Guns are controversial. I don’t think you need an arsenal. You need a few simple weapons and the training to master them. This poem gets the point across.

A .45 for the bedroom,A shotgun over the door,A 30.06 for distance,You don’t need any more.

I would add a snub-nosed .357 for a lady’s purse. Two shots will normally settle the issue. Either the assailant runs or else he cannot run.

You do not have to be an expert marksman. If you can hit a man-size target at 20 feet, you will do just fine.

The idea that guns are required for defense against gangs is naïve. A gang that comes into your neighborhood to pillage is going to be better armed than the police. They will be carrying automatic weapons. You will not win a shootout with a determined gang. The best you can hope for is that the members decide that there are lower-risk victims nearby. A shotgun is your best means of persuasion. There is nothing like the sound of a shotgun being racked to persuade someone that he has other urgent business elsewhere. The goal is not to convince the gang not to come through your door. The goal is to convince the first three members not to come through your door.

You do not want to go outside your home to confront an armed gang. The guns must be defensive. You want the invader to take the risk of coming through your door. He should bear the risk.

I think you should take a firearms course from local authorities. Get certified. If there is a concealed carry permit in your state, apply for it.

The United States has a long tradition of gun ownership. I hope this will continue. Support for an organization such as Gun Owners of America makes sense.

It’s not that you need guns to keep law enforcement officers away. That is suicidal. Guns are necessary to send a message to the kinds of college-educated voters who favor using the state to compel people to submit the their social reform programs. It makes those people very nervous that there are millions of gun owners out there. This is altogether positive.

I think of the scene in The Day the Earth Stood Still, when the world comes to a halt. The professor, who knows why it has come to a halt, asks his secretary if this makes her nervous. She says that it does. “That’s good,” he replies.

If the state can take away our guns it is because we have moved past the point of no return politically. Owning a gun testifies to yourself that you have still not crossed the line. In this sense, gun ownership is part of positive self- reinforcement.

CONCLUSION

The four G’s are important for reducing our concern against unforeseen negative events. Instead of worrying about them, we take concrete steps to deal with them. Most of them will not occur. But if they do occur, we will be in a position to deal with them in the short term.

Any series of events that cannot be dealt with with a two-month supply of food, water, and basic necessities will be so overwhelming as to make extreme preparations problematical. Most people cannot afford extreme preparations. They will not take even minimal preparations.

If you are diligent about spending money and time wisely in order to reduce your vulnerability to the unexpected, that is sufficient. You cannot afford to deal with every contingency. But you should deal with those that could disrupt your life if you had made none.

If you want to plan for a crisis, plan for unemployment for six months. That is scary enough.

October 8, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North