The Iceland Scenario: What Can You Do?

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For those of you who don’t follow international news very closely, Iceland suffered a very rough year in 2008. As recently as early October 2008, Iceland was the sixth wealthiest nation in the world. On October 6, 2008, the prime minister of Iceland addressed the nation, informing the people that they were taking extraordinary efforts to avoid a national bankruptcy. Iceland then nationalized all of their banks (meaning the government directly took control of them) and their currency dropped like a rock compared to other currencies like the Euro. The end result? The people of Iceland are facing double digit unemployment, inflation that’s well into the double digits (and into the triple digits depending on your source, meaning prices on everything are doubling annually), and uncertainty that the nation will even survive this crisis.

What brought this on? The largest banks in the country were unable to handle the economic downturn of the last year and had to be nationalized (bought by the government in order to survive). Much like in other nations (like the United States), so many businesses relied on the survival of these giant banks that they couldn’t be allowed to fail or else many other businesses would be sucked down along with them.

For a lot of people, this reflects the “bank bailout” that the United States passed late last year. Instead of having the government directly purchase the banks to keep them from failing, the United States simply gave bailout money to these large banks to prevent their failure.

This leads to a question from Adam:

I have a lot of family in Iceland and I’m worried that what happened in Iceland will happen in the United States. What can I do to protect myself?

In essence, the question Adam is asking is what can I do to protect myself against hyperinflation and huge unemployment? Both hyperinflation and rampant unemployment occur when financial systems begin to collapse, as has happened (relatively gently) in Iceland and (relatively fiercely) in Zimbabwe.

Here’s what I would do to protect myself.

Work on self-sufficiency. Plan a large garden for the coming summer. Consider renewable options for your home energy needs – solar panels and so on. Buy a deep freezer and stock it. If there are things in your home that need repair, now would be a good time to repair them. Make sure your vehicles are in excellent working order. Make sure there’s extra food in the pantry. Doing things that increase your self-sufficiency means that if an economic crisis does come, you’ll be less reliant on a currency that’s losing value.

Diversify your investments. Make sure that the investments you hold aren’t entirely held in investments in your own country. Include some index funds of foreign investments in your investments. This simply ensures that your financial future isn’t entirely tied to the economic future of your own country, but instead tied more to the economic future of the world. One government’s mistakes won’t entirely sink you.

Build good relationships with the people around you. In a period of rapid inflation, people often turn to bartering for many of their needs. They’ll trade with their neighbors, swapping skills and items to take care of what they need. The best thing you can do right now to build up your value in that regard is to build those relationships now. Even if a bad situation never occurs, you may find many situations where that relationship is beneficial to you anyway.

Don’t be too proud. So often, I see people showing a misbegotten sense of pride, telling themselves that they’re above certain jobs or certain activities. You may find yourself in a situation where the best solution is to take that job or do that activity. Don’t be proud. Instead, take the situation and run with it.

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63 thoughts on “The Iceland Scenario: What Can You Do?

  1. I’m not sure to be thankful we’re not in the same situation or to be frightened that we soon might be. I find myself sitting on the fence a lot here lately. Not quite sure if I should be saving all I can, or if I should act like normal with my spending which is pretty frugal already.

    The job market is so scary right now. Lets hope the economy stabilizes soon for everyone’s sake.

  2. It’s worth noting that on a GDP percentage basis, Iceland’s government had to find somewhere to borrow 5.5 *times* its entire GDP. By comparison, the U.S. bailout of the banks is closer to 5% of GDP.

    That is an enormous difference in terms of the hit that Iceland’s government took having to back its banks, and what the U.S. is taking (even though it is huge in monetary terms) to back its banks.

    I will say that it is likely that inflation, and therefore interests rates, will rise in the future as a result of the financial collapse of 2008. But not to as great a degree as Iceland.

  3. The stuff that you are talking about is indeed very scary. It isn’t within the standard PF realm, more like the militia make sure you’re armed and have a basement shelter with 6 months of food.

    In Zimbabwe people are basically dead. The hospitals are closed and there’s no food, so you either starve or you get sick — likely from the cholera epidemic. Nothing about your investments will help you, which is why I guess you talk about fixing everything, stocking up, getting a barter system going, etc.

    Makes you think. All the assumptions we make and the systems we rely on to keep going. Thanks for the post.

  4. Besides maintaining your vehicles well, how about ‘get a horse and buggy, and learn how to ride’! May seem outlandish, but perhaps not so much…

    Plus if you don’t have a generator of your own, look at food storage options other than freezing (or as well as), and think about what other problems you would encounter in sustained power cuts. And how you could resolve those problems.

  5. Don’t be too proud. I like that one!

    That job you may have thumbed your nose at as being “below you” may be the job that is most needed, and best paid, during a deep recession.

  6. Yes, real and scary stuff and we must prepare.

    Although I am in Canada and we are not getting hit as much but we need to also prepare.

    I have listened to Peter Schiff and Jim Rogers a lot and what they have to say about the coming collapse.
    The suggestions they give are as follows.
    -buy gold, silver
    -invest in foreign currencies

    I don’t remember the rest, but other ideas may be to buy real estate or anything that holds value.

    How I see it, if the dollar collapses, they will replace it with another currency which may be worth less then the equivalence to dollars, so you end up losing money.
    But if you hold real assets like gold or silver, you are not really losing value.

  7. Since they will be on sale soon ayway, even at the thrift shop- make sure you have enough warm blankets to keep you toasty at night, comfortably, without heat.

    Replenish hats and gloves at the end of this season.

    Make sure you have working basic tools.

    Don’t buy one thing that isn’t practical.

  8. I would also be remiss if I did not mention that the best way to avoid the crippling effects of a long period of standard inflation (not just hyperinflation… something relatively unlikely due to my previous post citing GDP differences) would be to GET OUT OF DEBT!

    Imagine if your interest payments on your debt doubled in a year. Assume your paychecks would remain stagnant, or increase only at a rate below the rate your debts are increasing. Would you be able to make it?

    I would stay out of the commodities market (silver, gold, oil, grains) unless you really knew the underlying mechanisms of how it functions. They’re not the best place to be in a recession.

  9. @Rob:
    You make the exact point I was coming in to make. The chances of an Icelandic crisis happening to the US are remote at this stage. Maybe it’s possible for the UK though (where I live), our financial sector is large for the size of our economy. If the £ collapses, we’ll be joining the euro (as the Icelandic may, eventually). Stuff happens.

  10. Rob (#9) -

    Wouldn’t hyperinflation be good for the employed debtor? I would be paying my fixed debts off with vastly inflated currency. That sounds like a deal from the debtor’s side of the equation.

    Now, if you are not employed, it is another story.

  11. Scarry stuff bringing us to reality within the USA. What’s our ability to maintain our standard of living when other parts of the world is outpacing us on education and staying balanced in living gently, etc. Basic economics 101 has always stated that you cannot borrow yourself out of recovery, yet, here we are at the trough trying to drink again. Why do we assume that we’re immune from such that neighbors are dealing with? Global Economy upcoming?? WOW????

  12. There’s a major difference between the financial meltdowns which occurred in Iceland and the US. In Iceland, people took out all type of loans (mortgage, auto, personal) that were denominated in foreign currencies. If you think an adjustable rate option-only mortgage is risky, imagine having that type of loan denominated in another country’s currency. In addition to interest rate risk of an ARM, there’s also exchange rate risk.

    When the Icelandic krona tanked in value relative to the Euro, US dollar, and yen, these loans became completely untenable for the average Joe (Johann?) to repay, and the Icelandic economy collapsed.

    Iceland has been unable to import food or other items unless they are paid in foreign currencies. What was once a high-flying progressive economy is being shoved back 100 years into subsistence fishing, farming, and barter trade.

    I don’t think this scenario is likely to occur in the US. Even in the depths of the Great Depression before all the New Deal alphabet-soup programs took effect in the mid-1930s, the US economy was not paralyzed and the US currency was not worthless.

    Zimbabwe is a different story altogether. Robert Mugabe’s corrupt, dictatorial, and incompetent government has bankrupted the nation and impoverished its people. About 25% of the adult population is infected with HIV, other diseases that ought to be controlled via proper sanitation (e.g typhus, diarrhea) are epidemic.

    Iceland has significant hydro and geothermal electricity generation, first class infrastructure, health care, and very high educational levels. They will come back from this economic crisis in a few years relatively intact.

    After Mugabe and his band of thugs leave power, it will likely take Zimbabwe several generations to recover, and that assumes the next bumch of politicians are honest bureaucrats who do the right thing.

  13. If something like that happened here all bets are off. Forget investments, most likely only tangible things would be worth anything. Food, shelter, clothing come to mind…maybe booze.

    Trent, it would be interesting to write a post on becoming completely self-sufficient (off the grid) and what that would entail. Just getting the discussion going would be interesting, I’m sure the comments would take over pretty quickly and go places some of us would never think.

  14. You can’t eat gold, you can’t live in gold, and you can’t put it in the gas tank. And, if Financial Armageddon hits the U.S. of A, no one of your neighbors who has food, fuel or shelter will likely trade you any of that for some shiny metal. Gold is like any other financial instrument–only worth what the next guy in line will trade you for it.

    Echoing previous sentiments, self-suffiency and a local focus should be your goal. Think like the pioneers and settlers of Australia and the Western Hemisphere: don’t think that you’ll be able to backorder what you need and have it shipped to you via FedEx from China. If you need it, you should be able to make it yourself or know someone who does.

    I think that Trent (and I) may be better off on Doomsday because we live in Iowa. Lots of livestock; lots of arable land. Sure, we might have to plow, plant, weed and harvest it ourselves, but I’d hate to have to live off the land in Manhattan, or San Francisco, or Cook County, Illinois.

  15. I agree with the idea of having discussion living free and off the grid, etc as mentioned in comment #13. I’m hoping our President Barack Obama will wind down the war and having all of us plant a victory garden. Talk about bonding with neighbors and back to basic human needs and support. Even container gardening in areas paved over can be cost efficient.

  16. I’ve appreciated that Trent has until now struck a non-apocalyptic tone about the current economic crisis, even as I’ve thought that he’s soft-pedaled it somewhat. But what I here from most of today’s commenters is this belief that what we’re in for will be by orders of magnitude the worst economic crisis the U.S. has ever faced, worse by far than the Great Depression. I think this is a sort of viral idea that the Internet has spread and that has taken peculiar hold of the minds of people most of whom have never experienced real economic hardship in their lives. I don’t think anyone who knows what life is like in Zimbabwe would be capable of saying half of what’s contained in today’s comments. Self-sufficiency is of course always and everywhere a good thing. Apocalyptic fervor is not.

  17. “I think that Trent (and I) may be better off on Doomsday because we live in Iowa. Lots of livestock; lots of arable land. Sure, we might have to plow, plant, weed and harvest it ourselves, but I’d hate to have to live off the land in Manhattan, or San Francisco, or Cook County, Illinois.”

    As subsistance farmers, you would become what were called serfs in the Middle Ages, share croppers in modern times, because someone else owns all that farm land you’ll need to scratch out a living.

    If you’re really expecting economic doomsday or want to live off-the-grid, get started building a big family and buy up good farmland. You’ll need all the free laborers you can get to work it. Imitate the Amish.

    You’d be surprized how much land is needed to support a family, particularly when animals must be fed off that land as well. The typical residental lot in a subdivision isn’t nearly big enough, a single cow (or horse or mule) requires at least one acre of grassland during the growing season and at least 2 acres more to cut as hay to survive the winter. Of course, everyone would then encourage global warming to extend the growing season – winter is especially bleak when your food larder doesn’t last through to the next harvest.

  18. Trent: We are not Iceland. However that doesn’t mean we’ll be immune from big trouble.

    The advantage we in the US have is that our currency is the reserve currency of the world and the currency used to trade oil (well, mostly). These things will likely change in the future, but for now that’s how it is. Meaning that our debt is denominated in US dollars.

    Iceland owed debts in Euros and British pounds so that when their currency collapsed they now had to pay back much more money.

    Where I’m going with this is that I do not think we’re looking at hyperinflation here in the US anytime soon. In fact we’re facing deflation, and it could last a few years.

    We’re witnessing an unprecedented collapse of credit in the US and the world. There is just way too much debt in the system and that debt either has to be paid down or defaulted before growth can begin again.

    Look at it another way: how can we get hyperinflation when unemployment is rising rapidly and could easily be well over 10% by year’s end? (at the rate we’re going, it wouldn’t be surprising if unemployment was over 12% by years end).

    I suggest you take a look at Mish’s Economics Blog: http://globaleconomicanalysis.blogspot.com/

    Mish recently won Time Magazine’s top Economic blogger award. And Mish is a proponent of the deflation thesis I just laid out.

  19. Actually, if your debt is at a fixed interest rate, you should be fine with inflation (on that score, anyway). If your salary ends up jumping 10 percent in one year because of inflation and the cost of goods rises 12 percent, then you are screwed in that regard, but you are *not* screwed with respect to that fixed 5 percent loan, which has just become much easier to pay off. I’m a little surprised this requires explaining.

  20. Iceland is a tiny island nation with a population comparable to a mid-sized American town, say Stockton, California, and an economy smaller than Haiti, so I’m not sure how instructive their example of a national crisis is for America. Maybe try Russia, Argentina, SE Asia for more relevant examples of a currency crisis for a big country.

    I’d think gold would be highly prized during a currency collapse, because it is a universal currency which has had stable value for millenia and has known scarcity (same can’t be said for Dollar). If you are a farmer and have surplus crops are you going to exchange them for gold? I’d personally rather have a little gold on hand than a basement full of food, and I think it would be a lot more powerful. I don’t see people going to a barter system on a large scale unless there is some physical infrastructure destruction, and also I doubt a financial crisis would cause significant return to subsistence living.

  21. @Dave in post 14

    I agree with your point about the difficulties of growing your own food if you live in the city; however, you can produce a lot of food in the city – if it is in a sunny place. I suppose that greenhouse could substitute in a less hospitable climate. There are several dome-shaped greenhouses with a pool (heat reservoir)and wax-controlled vents to passively control the temperature (throughout the day and minimize drop at night) that will allow to you grow even in cold climates.

    Here is a family in Pasadena, California that produces nearly all of it’s food on one-fifth of an acre and sells the extra for money to local restaurants. It can be done, it’s just not normal for our society:

    http://www.pathtofreedom.com/about/urbanhomestead.shtml

  22. NYC Reader, thanks for posting. I appreciate the clear and concise summary and your opinion that the scenario is not likely to be repeated in the U.S.

  23. Be careful investing in foreign currency. Unfortunately, European nations are not doing much better than we are. Britain’s pound sterling might collapse, and the government might be forced to adopt the Euro, in which case the exchange rate will likely drop. The Euro is weak also, but it is expensive to convert still. Diversifying with foreign currency is about as up in the air as any other stock at the moment.

  24. Right on. Learn to take care of yourself and your community; the rest will take care of itself. I’m adding this post as a postscript to my “How to Survive a Depression” blog post.

    Well done.

  25. Everybody calm down.

    What happened in Iceland had everything to do with it being an independent country with its own currency as an accident of history and geography. (Both Luxembourg and Malta have larger populations.) Kudos to NYC Reader for patiently explaining the facts, not that it seems to have made a big impression.

    Implying the situation in Zimbabwe is due to a financial collapse is like saying that the problem in New Orleans after Katrina was that the power went out. Zimbabwe has had a total collapse of civil society.

    And finally, Rob is spectacularly off base when he says that to prepare for inflation you should get out of debt. In fact, you should get into as much debt as possible. Borrow expensive dollars that you can buy stuff with now and repay cheap useless ones later.

  26. Oh for goodness sakes. Everyone please relax a bit. We will go through some hard times together, things will be tight, and things will get better. No need to freak everyone out with scare stories. Things could come apart, but the odds against it are extremely high. More likely times will be tough, they have been tough before, they will be tough again. 1) Live within your means 2) Save some 3) Take good care of your family & friends 4) Work on being self sustaining. If you do these things, you will be doing great when times are good, and you will get by when times are bad. If you go nuts now, you could really do some damage by ending up in bad asset classes at the wrong time. In diving, we know that fear wastes air. Stop wasting air! Panic will get you. warm regards, jcw now go out and get some hugs

  27. While I agree with much of Frugal Bachelor’s comment, I disagree with the idea that having a little gold on hand would be more powerful than a basement full of food.

    I know I said this before (in response to Trent’s post about gold) but gold is for major purchases, like a down payment on a house or to buy land or a vehicle. For day-to-day transactions in an economic collapse or during price controls you would be far better off with “junk silver”.

    And a basement full of food is probably best of all because you can eat it. Gold doesn’t fill your belly.

  28. Re: Sarah

    I agree. However, the only type of debt that is typically fixed-interest is standard mortgages for houses, and cars. Much of the risk built into the economy right now with respect to aggressive inflation is tied up in adjustable-rate ARMs (both the ones that do reset, and the ones that don’t reset), credit cards (which are tied to the prime interest rate) and most other forms of revolving credit – the same credit which has fed the latest bubble.

  29. Good comment Sarah. In an inflationary environment, fixed-rate debt is exactly what you want to accumulate, if anyone will lend to you in that environment. You want to borrow and buy today, and pay off tomorrow (in inflated/worthless currency). I’m not recommending that at all now, but, if inflation starts to happen, that’s what would be wise.

    When I saw Trent’s post earlier today, I thought one minor amendment I might add to the post under “diversify your investments” is to invest in “real” and “personal improvement” assets. I’d suggest investing in assets you use for your own well-being in any financial environment, such as a home, reliable car, education, tools of your trade, and if you’re really gloomy about the future, a self-sufficiency hobby (gardening, raising animals, etc). All of these diversified assets and the return on investment (or at least the mitigation of the inflation risk, such as buying a car that will last forever) they provide in an inflationary environment will do much better than financial assets.

  30. I like your mention about considering renewable energy options. Conventional energy is obviously such a volatile market (hence the huge fluctuation recently in gas prices), and the supply of energy is certainly volatile as well. Although the cost of installing solar panels and such does typically have a large upfront cost, they definitely can pay for themselves in the long run, especially if a disastrous scenario were to occur in our economy. Our country needs to take renewable energy seriously, and we need to do it ASAP. To me, this is one industry with which so many jobs can be created, let alone the importance of generating the majority of our electricity without relying on other countries. We will always need energy, whatever the source may be.

  31. @ Shevy – what’s appealing to me about gold is that it is portable and dense. A kilo of gold is worth $30,000 and you can slip one (or a dozen) in your backpack and go anywhere on the planet with a harvest. You can get 1/20 oz. coins (~$50 worth of gold) also which is an easy amount to deal with, or even 1 gram bars. It is highly liquid and convertible to local currency anywhere in the world.

    True, food is essential, but what if you are forced to leave your house (due to weather, violence, war, act of nature, or whatever)? You can’t take much food with you. Of course, probably the ideal is to have both on hand.

  32. Hey! I just scored a new idea here: store value as booze. It is always in demand, doesn’t spoil, and is compact. The only real problem is fragility of the containers. I think this would work well as an emergency trade item.

    Otherwise I would repeat what others have written, namely, get out of debt, and reduce your dependencies.

    We are currently living comfortably on $10,000 per year per person, but I am certain that this could be reduced if necessary. I could spend less on clothing (rein in the wife), vacations, educational activities for the kids (notably educational summer camps), heating (lower temperature, fewer rooms, fewer heating hours), electricity (fewer lights, less use of the dryer), groceries (expensive brands vs generics), restaurant food, precooked food, gasoline (drive less), car insurance (get rid of one car), telephone, and even home improvements.

    We already have the economies of not playing golf, not supporting professional sports, not using tanning salons, not using private athletic clubs, not owning a “home theater”, not owning an RV, not owning a boat, not owning a snowmobile, not owning a horse, not owning a swimming pool, not drinking in bars (Mrs Mule anyway doesn’t drink anything stronger than coffee and she puts milk in that).

  33. Listen, I wouldn’t worry too much about the gold. That is a romantic and ridiculous viewpoint. Because the people with the guns will just take it from you anyway. If you really think this is coming down, buy an arsenal and get ready to take whatever you want from whomever you want. A .45 beats 10 pounds of gold in a duel. Also, if you ever read about places where it all comes apart, you are better off with bulk gold jewelery or silver, as mentioned above. You will generally get about the same price for bulk gold as pure gold, and it costs a lot less to stock. Or, you could just take a deep breath and stop worrying about stuff that isnt likely to happen. I have lived through about 5 of these world ending cataclysmic events. This will also pass.

  34. The idea of having tangible gold is sound in that it serves as a portable, stable (its rarity doesn’t change much), non-perishable, non-destructible form of currency that, with the proper equipment, can be divided into any quantity necessary for trade.

    The problem is that almost no one these days has any concept of what gold is worth. If you lost access to the internet, tv, and so on and were cut off from everyone except those in your immediate surroundings, how would you decide what gold is worth? Even with access to information, the distribution of tangible gold would be so lopsided (those who prepared would have it all, and most people would have none) that no one would be able to agree on reasonable terms of trade. In addition, it would be very hard to place value on almost any commodity that couldn’t be produced locally. If I had a basement full of food (or other scarce, valuable commodities.. toothpaste etc), how would I go about deciding how much to give out in exchange for a quantity of gold?

    The obvious solution is to sell to the highest bidder… but what are the chances that those starving, needy people who didn’t prepare happen to have a few shotguns lying around?

  35. Thanks to droughts in California this winter, the summer of 2009 may mean expensive food here in America. America seems to be facing yet another “perfect storm” of financial collapse, just like during the Great Depression (hint: it wasn’t ONLY caused by the stock market).

    Solution? First, follow Trent’s advice, above. I wrote an article on exciting gardening methods that should work in any soil that are relatively weed-free, easy to do, organic and inexpensive. Go to jacksonvilleseedexchange (DOT) wordpress (DOT) com, then scroll down to “Exciting Organic Gardening Methods.”

    Second, brush up on your job hunting skills. I lost my job a few weeks ago, and it’s tough out here. I read “What Color Is Your Parachute,” “Never Eat Alone” and I also dusted off an old copy of “Knock ‘Em Dead” which seems to be VERY good and covers many things that Parachute did not.

    Third, read Matthew 6:19-34 aloud to yourself. I prefer an easy-to-read translation like the ESV. Read it daily. Trust what you hear.

  36. Good post. Regarding the point of building good relationships, in addition to building those relationships, you also need to invest in learning a skill that will be useful and in demand if times are really bad.

  37. I agree with your thought of investing in foreign markets. The next mutual fund I invest in will be some kind of foreign emerging markets fund. I am in domestics only right now. Any specific advice where to start would be great.

  38. I am an Icelander, so this article was of course of interest to me. By the way – on top of the economic crisis we now have a political crisis since our coalition government collapsed yesterday.

    Regarding comment #21: We did not think this could happen here, either. We will recover, and people had been predicting some set-backs, but nobody had foreseen this complete *collapse* of our economy.

    Our interest rates are going up insanely (mortages are at over 20% in calculated “real value” interest), inflation is almost 20% (food and necessities of course included), unemployment is at an all time high (and a lot of companies are lowering salaries and/or hours) – etc etc. Our currency is worth about 50-60% what it was in September – you can imagine the effect this has on all imported goods (not to mention travel costs – but of course nobody is travelling out of the country now, since we can’t afford it)

    One thing that has not been mentioned here, which was the main reason for the complete collapse of the banks, is that they expanded way too mcuh – their loans were at over 10 times our GDP ( I think is the correct term). They were given way too much freedom, the government didn’t pay close enough attention to what was going on and establishments supposed to supervise them didn’t perform.

    Anyway – just wanted to enter my 2 cents

  39. For those of you considering gold ‘the thing to have’ during hard times:

    In the Netherlands, WWII ended in what became known as the ‘Hongerwinter’ (hunger winter). There was almost no food in cities (because there was no transportation) and rations were below 1000 calories per day. People from the cities went to farmers to beg or barter for bread and while some farmers would give it for free to those in need, others would sell: a big bag of potatoes for a gold watch… It’s a bad deal for the city person when you look at the dollar value, but since gold isn’t edible… it wasn’t such a good deal for the farmer either.

    In desperate times, I doubt anyone would want to buy gold (it’s not very useful, after all), so it would be essentially worthless until everything recovered… Unless you’re sure you’ll have plenty of *everything*, it would be unwise to accept gold as payment for useful stuff.

  40. Good conversation starter Trent!

    I would encourage you all to read the book called “Dies the Fire” by E. Stirling, a pretty significant writer of alternative history fiction. In it, an Electro Magnetic Pulse (EMP) basically disrupts civilization as we know it. Some of you may find the set-up somewhat far fetched but I would encourage you to pay attention to the survivalist portion of the book. Most of us have gotten so far from our “conestoga wagon” roots that a melt down like you are speaking of would simply paralyze many, many people. It still amazes me what lengths people will go to when they cannot flip the switch and have their precious electricity…

    But I also agree that we need to take a deep breath and don’t panic. The last thing we need is the “mob” mentality. Start thinking and making plans for you and yours, start laying in extra supplies as you can, building those relationships and updating your skills. Stay the conservative course and probably most importatnly, do what you can to distance yourself from the financial giants that are bound to fall, in other words get to debt free!

  41. I have lived during hyperinflation in eastern europe in the 1990′s and know from first hand experience how one should handle inflation coupled with a complete drop in real earnings,wages, employment and gdp.
    First of all, one should definitely have some tangible land which could be ussed for agricultural productions.
    Second of all one should put all of their salary either in foreign currency/gold or do their shopping as soon as possible.
    Buy candles, as electricity will probably become scarce.
    One should definitely try owning a home, otherwise rents could increase a lot making it impossible to live anywhere. Your mortgage on the other hand would be worthless, and you will be able to own your own home..

  42. I had a 6% fixed rate 30 year mortgage that started in 1967. If I had stayed in that house, my payment in 1997 would still have been somewhere near the original $112 per month (increased a bit because of property tax increases). Meanwhile my salary went from around $5400 in 1967 to around $90,000 in 1997. My cost of housing would have been a mere blip compared to income. The point of this story is that inflation sometimes works in your favor.

    By the way, I changed houses two times in that 30 year period. The monthly payment on the last house was just under $800. As you can see, even this was a smaller percentage of my income than the monthly on the original house was. So, salary inflation was more than mortgage inflation.

    (I was also insistent about keeping the subsequent houses within the mortgage term of the original house, so each subsequent mortgage was for a shorter period than the original. My goal was to avoid reaching retirement age with a mortgage hanging over my head.)

    (I am now retired with a salary of zero and a mortgage payment of zero. So the percentage of my salary that goes to the mortgage is 0/0 which, I’m told, is undefined mathematically; but you could say it’s “vanishingly small”.)

  43. If you’re really interested in helping the economy, follow Bush’s and Guliani’s advice after 9/11: Shop.

    If everyone put a little money into our consumer based economy the ball would get rolling in the right direction.

    Sarah made an excellent point about fixed rate debt. If interest rates begin to move up, your fixed rate loan looks better and better.

    a couple of other points:
    if you’re worried about losing your income, making a large purchase like sustainable on-site energy (solar, wind) doesn’t make much sense. A savings account does.
    Same principle with a large freezer — upfront cost plus the additional cost of running it. Take that cash and put it under your mattress if you’re really, really worried. Otherwise, bank it in an interest bearing account.

    And possibly the best financial advice RIGHT NOW– refinance your home mortgage. Rates are extremely low — sub 5% for conforming loans. Lowering the amount on your single largest monthly expenditure can make a HUGE difference. Savings of hundreds dollars a month. Check it out. It’s true. Just make sure you get a fixed rate.

  44. Its unfortunate that this happens. The biggest problem we face is that everything is so politicized and if you are not part of the elite, you are kind of left out. Maybe the US won’t see the Iceland Scenario, but the sky will start falling for a lot of people that had insane lifestyles. We can not loose faith that things will recover, we already been through two world wars and we are still here. On the end, we will be okay. Pain sometimes is good to make us stronger and smarter in a way where we learn not to depend so much on the corrupt government that we have.

  45. I’d have to agree with NYC Reader and Todo on this one.
    Perspective on these events is what’s needed. Unfortunately it seems like Trent’s post lacks much of that other than some sort of knee-jerk mountain man survivalist junk.

  46. Great point about the GDP. That is also why many of the European countries and England are in trouble. They have borrowed a large amount in comparison to their GDP.

    I wouldn’t worry about inflation, etc per se, but I would prepare yourself and be debt free with a good cushion in your savings account should you lose your job. Worrying isn’t going to do anything. Make a sensible plan and TAKE ACTION. I would defer any large purchases and try to lower expenses. Save as much money as you can!

  47. If the US goes down as Schrift says it will owing gold or CDN dollars won’t make a bit of difference because where the US goes the rest of the world follows.

  48. I agree with Stephen, Todo, and others, that the worst case situation that some folks here are imagining is very, very unlikely. Trent still has some good ideas, though.

    If you have land on which you can garden, it’s probably worth planting a garden, or at least making sure you know how. But if you don’t, the minute risk of all h-ll breaking loose probably doesn’t justify buying land just for that purpose.

    Instead of “don’t be too proud,” I would say: Recognize that there is nothing shameful at all about ANY line of honest work. Why can’t the people who clean the toilets in your office building be proud of what they do? They’re doing a job that needs to be done. Don’t look down on them, and treat them as you’d like to be treated, so that if circumstances someday put you in their position, you might be treated with the same respect.

  49. As NYC reader and others say what happened to Iceland won’t happen to the US because US debt is in US dollars, the reserve currency for the world (although the Euro is trying to get in on that game).

    If you are a government and your debt is in your own currency you can simply create more currency out of nothing to pay for it. This is something the Fed is currently very busy doing to buy mortgages and try and get banks lending. The Obama stimulus package is also money creation, albeit one that should pay off long term.

    Of course you can’t do this for free – creating money leads to inflation, but this is tempered by the fact that the US is a huge debtor nation. Foreign countries won’t stop lending to the US too quickly because their own investment and export dollars go down.

    Eventually all the money creation will reach a tipping point and inflation will hit the US. Hopefully this won’t be catastrophic – the foreign holders of US debt should slowly scale back, rather than dump all their dollar investments wholesale. However as we have seen in the past months global markets don’t always respond rationally.

    Buying investments in foreign currency could work out, but it is too volatile for me. So is gold. As everyone buys gold to simply hold it, its value is very sensitive to variations in supply and demand. I prefer to buy what is undervalued. This means stocks now valuations have dropped and TIPS because they are priced for fears of future deflation (which won’t happen because the delayed effect of the money creation). Of course diversification remains key.

    I simply don’t buy any “going back to the land” doomsday scenario.

  50. Hi Trent,

    I see from the comments that there are a lot of misunderstandings about the economy.

    It bothers me to see people taking other peoples advice to invest in gold or foreign stocks. It also bothers me when people think wages go up when there is inflation.

    You give some really good advice, but I would add one more thing…

    Invest in yourself. Go back to school or put money into a business. Both of those will pay dividends in the future should you lose your job.

    You know, if I could send a memo to everyone out there I would say this…

    “Turn off the news and go back to work” The economy would recover in no time. ;-)

    Cheers,
    Jeremy

  51. “In desperate times, I doubt anyone would want to buy gold (it’s not very useful, after all), so it would be essentially worthless until everything recovered… Unless you’re sure you’ll have plenty of *everything*, it would be unwise to accept gold as payment for useful stuff.”

    Indeed, that’s why I find tips like “buy gold and silver” always a bit odd. Gold is either too valuable to use for day-to-day trade, even silver. You’d have to prove it is real gold (few people handle real gold anymore after all) and everyone would need to know what it is actually worth to consider it as “money”. At best it might be part of a barter system for more expensive things (cars, houses, cattle…).

    You’re better off investing 500 $ in soap, toothbrushes, pocket knives, lighters, toilet paper, nails and other small, non-perisable, useful things that you can trade on daily base and which are needed by everyone if you want to prepare for a completely crashed economy. Simply look at what was valuable in Europe right after WW II.

  52. Some of this thread reminds me of the anticipated Y2K crisis. My mom had an outhouse put on her place (she lives on an acreage) and she bought the Reader’s Digest book “Back to Basics” which gives instructions for all those traditional, homesteading type skills that people don’t know anymore.

  53. My comment is still waiting for moderation? I assume that it automatically was put “on hold” because I added a link. I guess it is only been two days, but…

  54. One has to wonder if the same thing will happen in the US.
    I can’t help but feel a huge ‘adjustment’ is still on the way.

  55. A film was recommended to me recently that was very interesting, called the Zeitgeist Addendum. You can watch it free on youtube – it’s definitely out there, but the basic premise is that our current monetary based society is outdated and failing. Instead they propose getting rid of money completely and trying a resource-based society. It’s not necessarily well thought out and detailed, but it’s very thought-provoking, and I’d love to hear some pf bloggers discuss it!

  56. I know this is a dead topic, but we were pointed back to it, eh?

    My question today is: Mightn’t the rules change next time we have high inflation so that your nice fixed rate mortgage doesn’t stay fixed?

  57. Many, many years ago (high school in the early 80s) I read a book by Andrew Tobias about how to manage your money and investments. Much of it common sense that you see on many PF blogs, but one thing stood out for me that I still consider to this day is buying in bulk and storing up food.

    He gave the example of buying more than a case of tuna when it was on sale. (This was in the days of 8 ounce cans of tuna, too.) As time went buy, inflation set in, and he calculated his rate of return on it. It was higher than a savings account.

    So, I look at storing food and buying in bulk as a long term / sound money management approach. In addition, I have the peace of mind of being able to eat well if unemployed for any length of time, or to give some to unemployed family. My sister is unemployed right now – I bake chicken breasts that are on sale, cut them, and freeze them. It gives her the ‘prepared food’ treat that one sometimes needs.

    Also – there’s a blog by an Argentinian who goes by FerFal (that might be his real name – who knows…) that I read. Argentina experienced a collapse as well, and his real world experience is wonderful. (While perhaps part of the survivalist genre, he focuses on staying put (rather than running for the hills), dealing with brown-outs, dealing with break-ins and crime, etc. )

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