If things unravel, these risk-reduction strategies quickly shift from “nice to have” to “essential.” But by then, it will be too late to put them in place.
I would summarize the economic flow of recent events as:
2020-21: massive stimulus and pandemic restrictions build up household savings and generate a stock market “meme stock” bubble.
mid-2021-22: “Revenge Spending” splurging generates massive spike in consumption, profiteering and inflation.
2023: Renewed bubbles in housing and stocks, a classic “rebound / echo” bubble. Splurging wanes as savings and credit are tapped out, and higher interest rates finally start affecting behavior.
2024: Forced frugality as jobs are slashed, profits fall, inflation stays sticky, credit dries up, businesses close, Federal Reserve stimulus wanes and soaring government borrowing costs crimps government spending.
I’ve often discussed that the economy and society are cyclical. Nothing stays on the same trajectory forever.
History shows that when prices rise sharply, they rarely return to their previous levels as participants quickly habituate to the higher costs. Taxes, fees, rents, etc. rarely decline. Owners will keep prices high until they go broke rather than lower prices, as their own costs are also sticky.
So what’s the best way to reduce the risks of forced frugality manifesting as recession / depression that affects us?
As those of you who’ve read my book on Self-Reliance know, my approach to Self-Reliance is to differentiate it from self-sufficiency by focusing on:
1) lowering our exposure to the risks created by deglobalization, definancialization, instability and forced frugality
2) taking control of our resources / assets rather than leaving them exposed to the excesses / errors of asset managers, the Federal Reserve, politicians, etc.
These are of course related: by taking control of our skills / resources / assets, we’re accepting responsbility for their management, and the responsibility of lowering the risks of our assets being impaired by events outside our control.
The basics of lowering risk are common-sense:
1. Lower expenses, needs, expectations, obligations: it’s easier to get enough of whatever you need if you need very little.
2. Eliminate debt: Uncertainties abound in our net income, but debt payments are certainties. Fewer bad things can happen to us if we’re debt-free.
3. Have plans in place to respond to much more severe challenges / crises than the mainstream reckons are possible.
4. Avoid relying on speculative gains to provide income and security: easy come, easy go.
The status quo is optimized to function at a low simmer. There are only a handful of first responders and minimal resources available at any one time, and limited institutional know-how to deal with crises that overwhelm the narrow boundaries of “normal” consumption, supply chains, etc.
The wind-driven firestorm that consumed Lahaina on Maui is a tragic example of how thin resources are spread, and how they’re optimized for conventional risks (doe example, a single building on fire). The immediate overwhelming of response resources is only the first domino. All the follow-on responses are equally ill-equipped for any contingency above a low-level event, or series of events.
Consider the limited staff and capabilities of the Maui County planning and building permits department. How is this small staff and limited system going to issue permits for the 1,900 structures that were destroyed?
Even the capacity of larger regions is quickly overwhelmed by even a blip in permit demand. The Malibu (California) fire in 2018 burned 600 residences to the ground, and five years later, fewer than 300 homes have been built or permitted. Bureaucratic inertia and over-regulation are factors that there are few incentives to overcome.
600 homes is a tiny blip of signal noise in the vast megalopolis of LA. Yet even this insignificant number has fatally log-jammed the status quo.
Households, businesses, institutions and government agencies are no longer very resilient. The vast majority depend on global supply chains and services performed by others for virtually everything. Once those break down or are overwhelmed, the majority are helpless as they have few real-world skills, few planned responses and few real-world resources.
4. As I have often noted, many locales are highly vulnerable to disruption because they’re almost totally dependent on long global supply chains for essentials as they lack local sources. Moving out of such locales to places with at least some local resources (water, energy, food, manufacturing, etc.) and a cultural-social memory (values and connections) of self-reliance, self-help, community and sharing reduces risks and increases our options for influencing what happens to us.
I have long held that the “bug-out cabin” is not a resilient option: The Art of Survival, Taoism and the Warring States (6/27/08) Self-reliance is much better served by becoming a useful member of a productive, trustworthy network of productive people and local enterprises in a functioning community.
5. Diversifying our assets is the basic strategy to reducing risk. Much of the investment field is aimed at the top 10% who own most of the financial wealth, so “diversification” means distributing a large nestegg of wealth into conventional “boxes”: some in precious metals, some in income-producing real estate, some in dividend-paying stocks, some in bonds, etc.
