23 February 2013

How to Survive a Currency Crisis

Before we dive into the subject on how to survive a currency crisis, let’s do a crash course on how the currency system works and discuss some terms. Paper-currency, fiat-money and paper-money are all terms used to describe the same basic idea of how bank notes are backed.

Paper equals a promise of the government to pay. To pay the promise, these governments must tax the people. Taxing the people means to milk the people of their hard earned money.


The system today works on what is called ‘fractional banking’. This means only fractions of every Dollar, Euro and Pound need to be kept in the bank. For example 2% in Europe is kept in the bank as reserve and the 98% left can be lent out or invested by the bank, which in turn creates leverage for the bank as they can invest this money (from the customer who did the deposit) in whatever they believe is good. And not all of the customers want back their money at the same time plus mostly all the outgoing and incoming transactions more or less balance themselves – things seem fine for the banks.


Here comes the trick: With this same 2% reserve deposit the bank is also able to borrow money from the Central Bank. This creates more leverage. The bank sends 2 Euro to the ECB and gets 98 fresh printed Euro as a bank loan back (at nearly 0% interest in these days). More on fractional banking and how it works can be found here. //en.wikipedia.org/Fractional Reserve Banking.


The danger in this system is, once people need their money back, the bank has to sell all assets that they were invested in. That causes a domino effect as we’ve seen in 2008 when Lehman went bankrupt. And with only 2% reserve the system is highly unstable.


As stated in the last article on the Sovereign Independent News all fiat currencies have failed without exception. All fiat-currencies throughout history have created inflation. The average annual inflation from 1800 to 1913 was 0.71% and increased to 5% (p.a.) in the time between 1913 to
2006 (Source: This time it’s different – 800 years of financial folly).

Gold and silver were being used as money up to 1913 and then the Federal Reserve was founded. This started the world’s biggest fiat-currency experiment.


Sooner or later a fiat currency falters. As more and more debt is incurred more and more currency is created. This is fact. We must recognize the historical paper currency cycles and act wisely with understanding and calmness to stay safe.

The Euro, the US-Dollar, the British Pound and all other fiat-currencies will crash. Crashing means their purchasing power will be devalued by 90 to 99%. An example of a devaluation of purchasing power impacting daily life, would be a pint of Guiness in the pub costing 500 EUR instead of 5.00 EUR as it does in 2011.


Now bear with me for one second as I explain how the Euro works and address the information that has been recently circulating about who is printing old currency right now.


Article 109-I in the Agreement of the European Economic Area says that once the currency union was made it was irreversible. Meaning it’s all or nothing; one country cannot just drop out of the Euro and go back to their old currency. So if the German or Irish governments print their own currency, this would mean the end of the Euro and it's back to our old fiat currency.


(The interested reader may like to know that the German D-Mark was never backed by gold. It was always fiat-currency.) So the governments may be preparing for a fall of the Euro, but who knows for
sure?


Looking closer at Euro notes, we notice a capital letter in front of every number. What many people don’t know is that each and every country prints its own Euros, just as before the founding of the EU Currency Union they printed their own currency. X stands for Germany, N for Austria, S means Italy and T is Ireland.
The full list of codes on Euro notes can be found on Wikipedia here: //en.wikipedia.org/Euro Banknotes

If the current EU system breaks apart, the countries could easily go back to their old currency tomorrow. Then there would be exchange rates between an Italian and a French Euro, or between a German and an Irish Euro. So for example an S-Euro which is Italian trades 10:1 to the X-Euro which is German; just like back in the old days.


After the system breaks apart the government can change the Euros and exchange them into the Pund, D-Mark, Lira, Peseta, Franc etc. But that doesn’t solve the fiat-currency problem as savers in high-debtcountries have lost another hefty portion of their hard earned money. It could be that there is a two step devaluation of their wealth/currency.

First the break down of the Euro into the old currency which devalues especially savings of people living in Portugal, Ireland, Italy, Greece, Spain, France and Belgium.


Second the crash of the fiat-currencies in general. Having understood ‘How the system works’, let’s discuss the signs of a currency crisis and how to survive it.

The signs are:

· High Insolvency rates as that eliminates high debt
· Raising country debt, falling GDP.
· Excessive money printing – the money supply increases by 10% or more per annum
· Rising numbers of unemployed.
· Trading conflicts and social unrest, as seen in Greece, France and the recent demonstrations in New York and Dame Street, Dublin).
· Long recessions and shorter recoveries, meaning high volatility in the stock markets.
· Massive intervention from governments to ‘tackle the crisis’.


We can see and relate to all of the above signs. In my view we are at the beginning of the end of the current era of paper-currency. 

The end of an era of paper money takes place in different stages:

First, systemic risks evolve and investment bubbles pop. We’re past this stage, notably marked by the 2008 housing bubble, the Lehman Brothers insolvency, etc.

Second, governments and central banks try to fix these issues and make it worse. This is the stage we’re in the middle of right now.

Third, inflation accelerates due to increases in the money supply by Central Banks. The Economy slows down again and the outlook worsens which lowers consumer spending.

Fourth, the problems that have occurred are not resolved, the debt goes through the roof, and creditors want their money back. Central Banks print massive amounts of money to pay down the debt and in a short period of time people loose 90 to 99% of the purchasing power of their savings.


The fourth step is called hyperinflation and took only four months in 1923 in Germany. On average hyperinflations take about 10 years to develop but the last phase usually comes very quickly. Germany had over 25,000% (twenty-five-thousand percent) inflation in just one month.


Signs of the fourth stage are already appearing. The EFSF is now in place, another 100 Billion Euro printed – again more paper-currency created out of thin air.

The fifth and final step is the devastating collapse of the currency, rendering it unusable. Meaning even a truck load of cash will not be able to buy you a piece of bread, but an ounce of silver would.
We go from inflation to hyperinflation with deflationary consumer spending at the same time.

In the end prices of daily goods could change 2-10 times a day. More than likely there will be a disruption in supply chains, especially with countries that have high debt, as they can’t import goods and payment
with the country’s currency is not accepted. Portugal, Italy, Ireland, Greece, Spain, United Kingdom, the United States and Japan will be the front runners in this collapse. Then followed by France, Belgium, Austria, Germany and so on. It’s a bit like a domino effect, the question is who is first domino to fall?


You survive a currency crisis with these easy-to-do steps:
· Get a minimum cash reserve in cash, of 6 months of your total monthly expenses, preferably in X-Euros in small 50, 20 and 10 EURO notes. Germany is the strongest Economy in Europe and should therefore have the strongest currency. The cash reserve makes you stable and safe so that, no matter what, you’ll survive in the current climate for at least six months, even if you should loose your job or there is a disruption in the banking system. As the Euro all float around in Europe just pick the ones with an X and stock them.

If you don’t have any cash at all, there is no reason to feel bad about it. Just start with the last bullet point and gradually build up your inventory on barter-goods, cut unnecessary expenses and build a bit of
a cash reserve.

· Get a core position of physical gold and silver – history has shown time and time again that having precious metals will protect your wealth in a currency crisis. In addition to 1oz coins, have some small
fractional coins to barter with such as the 1/10th oz Maple Leaf or Vienna Philharmoniker coins. They are more expensive than 1oz coins but are easy to barter with and circulate.

Gold Coins

· Get a minimum of 14 days of food, water and items to barter with, such as cigarettes, chocolate, rice, sugar, salt, cosmetics, wine, beer, whiskey, soap, oil, etc. Some survival authors recommend holding a 6
months supply. But stock only long lasting foods, like pasta, rice, sugar, salt, flour, etc.

All of the above measures are designed to keep you safe and are outside of the main-stream and system. By system I mean banks, governments and their affiliates.

We have to understand that the very nature of the ‘powers that be’ is control. Restriction is a form of control. So governments will invent all sorts of rules and restrictions. Some of the restrictions may be that we’re only allowed to get 50 Euro/quid/dollars out of the ATM per day. Another example is food stocking being forbidden like in the Second World War.


We’ve got to be creative and keep a low profile to adapt to this coming situation. Please read more about becoming creative in our CELTICGOLD newsletter from 25th September 2011 //www.celticgold.eu/CGNews25thSep2011 page 6.).
After the currencies crash there will likely be little marketplaces people go to barter their goods, and even little exchange places as well. So you go there with your 1/10oz gold coin to the exchange place and trade it for vouchers. A voucher for the chicken farmer for one dozen eggs, one voucher for a steak, one voucher for a week’s supply of veggies, one voucher for milk, cream and butter and so forth.

At the end of the day the sellers go back to the exchange place to redeem their vouchers back into gold and silver.


In Summary: Be prepared and have a core position in precious metals as well as a mixture of long lasting groceries. This will bring you through the toughest of crisis. When the global paper currency systems collapse the net result will be a 90 to 99% loss of people’s wealth. Barter will be necessary until a new system is in place (hopefully a gold standard).


To get your stock of barter goods think of everything that people need and consume and you’re on the right track. To be clear, it’s good and necessary to have money as a medium of exchange. Only a barter system wouldn’t do. Trying to figure out how many carrots and cabbage are good for a pair of shoes, a haircut and monthly shelter is a bit too complicated.


And I’m not sure if the landlord would eat cabbage every day for the next month in exchange for shelter in the same time. But that would depend on the landlord. We can all ask next week, should be fun!

Author: by Stefan Krämer

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