Hard Core Financial Preparedness—Part II

The Crisis of Uberland

International Business photo c/o faculty.msb.edu

In our last article, I endeavored to demonstrate to you the reality that desperation plays into our international world of finance. It distorts rational thinking and actions.   Today, I’m going to step away from that aspect and put currency in its proper perspective.  Understand that I’m writing these pieces in a methodical order in an effort to give you the best education of these vital money matters.  I have always felt that you can’t bust yourself out of prison if you don’t even know you’re in one.  So read today’s article for what it is on its own and then I’ll tie these all up for you in a subsequent article in this series.

Let’s suppose that you own a small country. We’ll call it Uberland—just because.  Let’s say that like most countries, you have attempted to strengthen your financial standing by investing in the financial systems of other nations which ostensibly possess a strong financial currency and a functioning economics system.  This benefits you by spreading your financial strength into other markets that will have different fluctuations than your own.  By doing so, one catastrophic event in your economy doesn’t need to bring your whole nation to its knees, because you will have invested heavily in the market of other nations as well.  In fact, there are only a few disasters in which this investment strategy wouldn’t prove prudent.  (We’ll address those later.)

Government bonds photo c/o aboutbonds.org

So how does one country invest  in other nations?  Well, essentially they do it one of two ways.  The most common is that they buy bonds/coupons that are backed by the country from which they purchase them. For example, Uberland could purchase $1 billion of U.S. bonds at a somewhat discounted price—say 60 cents on the dollar.  So, they purchase $1 Billion worth of U.S. bonds, or better thought of as I.O.U’s, and they pay $600 million dollars for $1 Billion dollars of I.O.Us.   The strategy for Uberland to take such actions would be multi-purpose.  One benefit of such an act would be creating a strong political alliance. Nothing speaks friendship in international relationships quite as clearly as money.  The other benefit would be financial gain to Uberland.  They would be able to purchase these bonds with a face value of $1 Billion at a discount and upon the bonds aging for X number of years, they would then be able to sell them anywhere else in the world, including back to the U.S., for the realized profit of the difference between the purchase price and the face value.  There’s also an added benefit of the bonds being an interest-bearing instrument.  Even if it’s only a small amount of interest, purchasing a large volume of bonds earning only 1% interest could be sufficient to feed a small nation everyday.  The interest-bearing component incentivizes Uberland to keep the bonds instead of just turning them in upon their maturity date and allow them to continue to accrue interest.  That way the country that has sold the bonds gets to postpone the time in which they have to make good on the bonds. (Yes, even entire nations like to postpone paying a debt as long as possible.)  In addition to the interest earnings, the bonds can actually be placed as collateral by Uberland on an international trading platform and generate additional lucrative profits above and beyond the other profit yields.  Sounds like a great deal right?

Currencies from across the globe photo c/o bus.utk.edu

Another facet of international investments is to literally purchase significant amounts of another nation’s currency—usually at a discount—but without the interest bearing component.  If Uberland were to purchase $50 Billion dollars worth of U.S. currency and keep it in its own homeland coffers, that would be quite a boon financially to the U.S.  After all, the issuance of $50 Billion to Uberland wouldn’t necessarily affect the value of the U.S. dollar  immediately and the $50 Billion could easily just be printed with no accountability for the amount of currency being printed to the United States by the Federal Reserve.  (U.S. Citizens are never informed of such transactions taking place.)  And $50 Billion can buy a lot of things, even by haughty U.S. standards, right? Usually when a foreign nation purchases currency outright, merely keeping the money is the modus operandi—they simply have it on hand for a rainy day.   Having it on their balance sheet is obviously more powerful than spending it in many instances.  But watch out when this normal way of doing things is thrown a curveball.

What if your Uberland was suddenly faced with a serious crisis of a widespread, undeniable food shortage?  When it comes to staving off the dangers of a food shortage, there are only a few viable options available.  I assure you that investing more heavily in the currency of other nations will seem quite insignificant in comparison to just putting food on the table.  It doesn’t matter how much money one has if there simply isn’t any food to buy, right?   In such a scenario, money is promptly put into its proper place of value. (This is exactly why Financial Preparedness isn’t as high in prioritization in the Ten Principles of Preparedness as some might feel it should be.)

Food shortages photo c/o www.mgmbusinesspartners.com

Ok. So you’re the owner/ruler of Uberland. You have mouths to feed. There simply is not enough food you can BUY within your country, and you have to wait for the seasons of Mother Nature to come and go before you can successfully GROW anymore food, regardless of how much money you’re willing to throw at the problem.  So, what does this do to the VALUE of your currency?

Currency's value is based on the tangible things you can purchase with it. photo c/o www.treehugger.com

Currency only holds value based upon what tangible “stuff” it can purchase—especially if the survival of your country is reliant upon food at the present, right? Due to a poor growing season, lack of storing any extra food for a rainy day—or whatever the reason for your looming disaster, ultimately it causes a financial crisis because the strength of your currency is only as good as what it will BUY.  Remember the scenes from Zimbabwe when people had to carry two huge bags of money to the market just to purchase a loaf of bread?  That wasn’t a financial crisis so much as it was triggered by a crisis of access to vital, lifesaving necessities. Such scenarios always go hand in hand. A food crisis will always trigger a financial crisis. Why? Because if your currency can’t provide you with the basics that sustain life, then it’s only worth the small amount of heat it can provide you with when burned.  Again, currency is only as good as the “stuff” it can buy. So, because of your food shortage, you now have a currency problem no matter what some bobble-headed dingbats in Wall Street may post on their statistics.

So, what are the citizens of Uberland to do? How are they going to survive?  Cars, houses, clothing are great so long as they last, but a person can only go so far without food, right? If a nation cannot provide a currency that is valuable enough to purchase the basic necessities of survival, then that currency is useless too.  (I hope I’ve conveyed that message clearly enough to get through to everyone.)

I had one person suggest to me this past weekend that even if money couldn’t purchase “wheat” it would still have value by being able to purchase “passage” to somewhere else for safety. (*sigh* There’s always one in every crowd)  Ok. Let’s think about this for  just a moment. How does one obtain “passage” except by getting such a service provided to them by another living, breathing person who also needs to eat? What would an Uberland citizen use to PAY for passage to another land in hopes of greater access to food? Uberland currency?  Uh. Nope. It’s not worth anything anymore because it can’t even purchase the most important of necessities.  So how about gold pieces?  The person or group that’s providing you with passage services from one nation to another has to eat too, right?  They can’t live off of gold?! So in this instance even gold doesn’t provide you with any salvation.  In other words, currency won’t do you any good. The only currency that will get anything done is FOOD.  In other words, as the ruler of Uberland, you may be wise to dump all of your worthless currency investments and instead take some wise action to invest in that which cannot be replaced by money.  But wait. All of your currency is worthless now just because you have a food shortage?  Yes. Because whether it’s Yuan, Euro or Dollars, you can’t eat it to survive, right? The bonds are worth even less because they aren’t even currency. To put it frankly, bonds are only pieces of paper which represent other pieces of paper which hopefully represent your ability to buy “stuff.”  *heavy sigh*

So, as the ruler of Uberland, how are you feeling right about now? In order to fix your problem, you need STUFF, more particularly food, right? Dying persons aren’t very effective at manufacturing goods and services to export to other nations.  Most nations are highly reliant on their ability to export their goods to other nations, period.  If you don’t find a way to feed your citizens, you could literally cease to exist as a nation. So really, the only option you have is to take action to convert your foreign currency into “stuff” that provides the most food for your citizens so that you can get back to being a productive nation.

Take this article and compare it to your own household scenario as well as that which exists in our world economics right now.  Understand how devastating of an impact that something like a food shortage can have our world economy as we know it.  When you have a shortage of the most basic necessities, new rules come into play, and they do so with very serious ripple effects.  I’ll tie this all together for you in the next two articles in this series.

Hard Core Financial Preparedness Part I

Hard Core Financial Preparedness Part III

Hard Core Financial Preparedness Part IV

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