Tuesday, February 1, 2011

How to Profit from the Coming Devaluation by Harry Browne

How you can Profit from the coming devaluation(review written 9/25/08)
I can recall, over the last thirty or so years, having seen a book on my Mom's bookshelves in the living room called How to Profit from the Coming Devaluation. Forget the author's name (Harry Browne), but it was written in 1970. Not so coincidentally, Mom pulled it off the shelves and brought it along last weekend, and I found myself browsing through it a bit, just to see if it had any applications to our current "financial meltdown".

The author seems to have a pretty solid take on how the government manipulates the money supply in the U.S. to create inflation/growth, and to a certain extent what the effects of the inevitable deflation/devaluation are on our economy.

The boom and bust cycles of the last few recessionary periods that I'm able to remember are perfectly described in advance in this book. The only bone I have to pick with the author is that none of what he described in the way of truly serious consequences seems to have happened, such as massive rioting, total collapse of the banking system, and so forth, so I'm having a tough time taking his recommendations all that seriously. He'd predicted that these things would happen in the next couple of years - but they didn't. What do we do with false prophets?

Just a few of the things that he said to do:
1) Move away from metropolitan areas.
I've got no beef with this. I'd much rather live in a more rural area, just from a quality of life standpoint. Also, in the case of a natural disaster, such as we've seen with Katrina and Ike lately, one's dependence on infrastructure in rural areas doesn't seem to be quite as bad. Folks out in the country tend to have some foodstuffs stored up - probably home canned - and might have some livestock they can count on for food. Often, they have backup generators and/or kerosene lanterns and heaters, a fireplace and a large woodpile...you know the scenario.
There's no reason a person can't be prepared for a disaster in a metro area, but most folks just aren't. I always figured if we lost power for any length of time, we'd be ok, as I have propane stoves and heaters, kerosene lamps and heaters, and usually a fair amount of canned goods on hand. I should make it a habit to keep some fresh potable water around, too. I used to have it on hand in the drinking water tank of the camper all the time, but since I tore that apart and got rid of it, I haven't.
2) Keep a significant chunk of cash on hand, in case the banks close.
Sounds like a good idea, if one had a safe to keep it in. I think this one is somewhat outdated, with the amount of ATMs in existence. So, if the banks actually closed down nationwide and you weren't able to take your money out, there might be problems. But would the entire electronic banking system collapse at the same time. Would your currency be worth anything in the midst of something that catastrophic?
Which brings us to point 3:
3) Buy junk silver coins or silver bullion in case of a currency collapse.
This might be a pretty good idea, too. Silver will always have some intrinsic value and be useful in barter and trade, should our whole economy collapse. There's a problem with buying junk silver at this point that probably didn't exist back when he was writing - only 8 years past the removal of real silver from our silver coinage - silver coins have gotten to be very scarce. He talks about a premium of about 10% over the face value of the coins to buy junk (circulated) silver, but today $10 in face value coins is selling for $50! That's a crappy investment if I ever saw one. If you happen to have just snagged any real silver coins that came your way over the years and stuck them in your piggy bank, you probably got them for face value, and they're a good investment, but it would be rather impractical to do today.
On the subject of silver bullion. This is a commodity with a well-documented and widely agreed upon trade price, so it makes a certain amount of sense. It generally sells (and has sold) in minimum ten ounce bars, so it's a little more unwieldy for smaller purchases than coins would be. The spot price this morning, when I checked, was $13 per ounce. It fluctuates up and down with world markets, but it's easy enough to buy and to trade with others, I suppose.
Here's the problem for me. My parents did buy some silver bars back in the day, after reading this book. I remember it well because I found out and wanted to buy some, too. They told me that I would have to hang on to them for a long time, and basically never spend them, and that just seemed like it was impossible to me, in my teens, so I didn't buy any. I don't know if my folks kept their silver or sold it at some point to pay for my college, or what, BUT...
They paid $7 per ounce for it. It's worth $13 per ounce 35 years later. It hasn't lost any value, but it really hasn't been a big gainer for them, either. And, the circumstance it was meant to cover never did happen (remember? riots, lawlessness, currency collapse). As insurance policies go, I guess it was cheap peace of mind.
But, to look at it another way. Let's assume they bought a hundred ounces of silver at $7. That's $700, right? If they'd merely put that $700 in a savings account earning 3%, compounded over the last 35 years, they'd have $1969. Silver doesn't appear to have ever quite reached the price of $19 an ounce in that time period. If they'd have been able to invest it instead in a mutual fund that closely mirrored the S&P 500, they'd have $7400! As investments go, silver just hasn't cut it.
4) Don't take on debt.
Good idea. No problems with that.
5) Don't invest in stocks, bonds, mutual funds, money markets...etc.
Diversification is key. Don't get yourself over committed in any one category.
6) Set up a Swiss bank account - in Swiss francs.
Would the modern equivalent of this be to set up a numbered account in the Cayman Islands in Euros? I don't know. Back when he suggested this, the government probably didn't automatically assume that those types of accounts were for nefarious purposes. I think at this point you might open yourself up to some unwanted scrutiny. Maybe if you opened the account while on vacation in the Bahamas?
Do Swiss francs still exist? Or were they devoured by the EU?
And how in the heck do you get your money out of a Swiss bank when civilization collapses?
Upon reflection this morning, there's not a lot of his plan I'm all that jazzed about implementing, even in the face of Wall Street's implosion. The money I'm putting into mutual funds is in the umbrella of 401K plans, with an unfortunately long time horizon before I can start to draw on it. Unless everything collapses, it should generate a decent return in that amount of time. If everything does collapse, I don't think anyone is going to be able to retire, anyway, we'll all be busy surviving. Unless I'm willing to cash it all out, take the tax penalty hit, and go live on a compound somewhere...
If the opportunity arises to buy silver cheaply, it might not hurt to have precious metals as a part of my overall portfolio, but I'm not gonna knock myself out trying to buy some now.
The thing that makes the most sense is to take the LDS church approach of stocking up a bit on canned goods in the pantry. We're in some high inflation times for groceries right now. If you buy things that will last indefinitely on the shelf at a sale price right now, you'll definitely save money in the next couple of years, as you won't have to pay immediately inflated prices. I may stock up a bit on some canned soups and vegetables, and maybe even some canned hams and things. This is not only a good "investment", but will come in handy if we ever have a flood, tornado, hurricane, earthquake, or whatever. I should also make sure my spare propane tanks are topped off at all times, and fill up my five gallon jug of kerosene. Maybe picking up a few more kerosene lanterns at an auction or yard sale wouldn't hurt, either. And, I should pick up a few cases of bottled water to stash in the basement, or work on bottling some of my own in old milk jugs (thoroughly washed), or in my five gallon camp containers. Nothing wrong with disaster preparedness, and if it saves a little money somewhere down the line, that's good, too.

Overall, this is a good book to get you thinking about being prepared for a worst case scenario. Fortunately, the worst case scenario really hasn't come to pass since the book was written, so take it all with a grain (or maybe a 25 lb bag) of salt.

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