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• Preface
• Introduction
• Chapters
• 1: Goalsetting During Inflationary Times
• 2: Capital and Interest
• 3: The Danger of Debt
• 4: Saving and Hoarding
• 5: Labor Income and Markets
• 6: Starting Your Own Business
• 7: Financial Statements and Budgets
• 8: Taxes
• 9: Insurance
• 10: Law Suits and Lotteries
• 11: Wealth Protection Devices and Financial Privacy
• 12: Bankruptcy
• 13: Having Children: Can You Afford Them?
• 14: Who Needs a Will?
• 15: The Economics of Divorce
• 16: How to Handle An IRS Audit
• 17: The Ethics of Inflation
• 18: Investing in Gold and Silver
• 19: Philanthropy
• 20: Misinformation About Inflation
• 21: Conclusion

Chapter 4: Saving and Hoarding

It used to be that a person could become rich just by saving and investing in the tools of his trade, in rental properties, or by purchasing “safe” blue chip stocks.

In fact, I’m reminded of a story my dad used to tell about two college professors: King and Brown (names are made up to save Brown). The professors were hired at about the same time (mid 1950s) and received roughly the same salary. King, being a thrifty man, saved and invested a portion of his income and lived below his means. In fact, he set up what he called a “forced savings plan” by purchasing rental real estate. (To compare saving 10% of your income with 30% of your income, click here.) This way, he had to make mortgage payments each month. He bought rental houses, fixed them up, and rented them out. Thus, he earned rental income in addition to his salary. Over the years, the value of the property grew, there was increased rental income, he received tax deductions for depreciation and repairs, and he continued to buy more rental properties—ten in all.

Professor Brown, however, went on vacations every summer and spent all his income. He had a good time, and even bought an RV. Brown drove around the country, and traveled to other countries using his income to finance the trips. He did not save or invest any portion of his salary.

In the long run, after 25–30 years, Brown was still working and living comfortably on his annual income. On the other hand, King—who had invested—by then was retired and living on his rental income alone, traveling frequently. The return on the property, rent, and houses was high enough for him to live comfortably from the proceeds of his investments.

This is no fairy tale, nor was King’s method a pipe dream. By wisely saving and investing a portion of his income, it was possible for King to increase his living standard over time with the proceeds of his investments. By foregoing a more affluent lifestyle in the short run, and instead living frugally, saving and investing, King could obtain a more comfortable and secure lifestyle and retirement.

[Note the difference between King’s method of saving and the concept of hoarding. Saving, by definition includes investing in something productive, while hoarding is merely not spending or investing all of the assets at your disposal. The distinction is similar to the distinction between a productive asset and a consumptive asset—it depends on the use to which the asset is put. Purchasing gold coins and storing them away for a rainy day is hoarding. Purchasing gold coins for resale as part of a business inventory is productive (assuming they are sold at a profit).]

During inflationary times debtors gain and creditors lose. In the case of King and Brown, if King used debt to purchase his rental properties, it became easier for him to pay off his debts as his income and rents rose (assuming a fixed payment). Even if his interest payments were adjusted every three to seven years, his debt load was easier to pay off in time. In the long run, King would have the complete (inflated) cash flow from his debt-free properties and houses that were worth (in inflated dollars) many times what he had paid for them. By investing in appreciating assets, King would have improved his lot during inflationary times.

Brown, on the other hand, would barely be able to make ends meet because of the higher costs of living, the higher costs of traveling, and an income that wasn’t rising as quickly as inflation. Consumers do more poorly than savers/investors during inflationary times.

I’m reminded of another story my dad told me about two brothers who lived in Germany during the early 1920s, when Germany experienced hyper-inflation. One brother was a frugal fellow (having survived the shortages experienced during World War I) who saved his hard-earned money in the bank. Prior to the inflation, he was earning 3% interest. Without inflation, he was earning 30,000 Marks per year on his one million Mark investment.

The other brother was an alcoholic who spent his earnings on wine and put his empty wine bottles in his basement (there was no recycling in those days, and garbage disposal is expensive in Germany ).

After the hyper-inflation in Germany , the brother who had his savings in paper Marks in the bank had lost his purchasing power (it took billions of Marks to buy a cup of coffee). The brother who had drunk his way through the hyper-inflation had a basement full of wine bottles, which he was able to sell at a good price—hard assets were in short supply after the hyper-inflation. The moral of the story? Drink your way through inflationary times? No! The moral of the story is to keep your wealth in hard assets; e.g., wine bottles, sugar, coffee, silver, real estate (watch out for rising real estate taxes), lumber, etc. and that hoarding may be easier than saving during inflationary times.

People who accumulate hard assets as a hedge against rising prices are hoarders. While hoarding is generally not as productive as saving, hoarding of hard assets during inflationary times is good. By hoarding, people have a reserve for barter, later consumption, or sale at inflated prices. Hoarding is similar to an insurance policy—you may not need the hoarded assets, but if you do need them, it sure was great foresight to have set them aside!

While hoards of hard assets may not be earning a return, their prices go up (some faster than others) and, upon sale, their owners may earn a profit. The real question is whether they earned a profit after adjusting for inflation and paying taxes on the gain recognized from an inflated sales price.

Another concern for hoarders is their fate during the third stage of inflation. In France , during the 1790s, hoarders had their assets seized and they were eventually put to death. Consider the following excerpt from Fiat Money Inflation in France:

In the municipality of Quilleboeuf a considerable amount in specie having been found in the possession of a citizen, the money was seized and sent to the Assembly. The people of that town treated this hoarded gold as the result of unpatriotic wickedness or madness, instead of seeing that it was but the sure result of a law working in every land and time, when certain causes are present. Marat followed out this theory by asserting that death was the proper penalty for persons who thus hid their money.

Of course, the best answer is to prepare for the third stage of inflation during the second stage—prepare by hoarding things someplace out of reach of the local authorities, who will make it illegal to protect oneself from the government’s printing presses or simply seize assets for themselves because they didn’t have the foresight to hoard themselves. In other words, keep a stash of hard assets (not paper money or claims to paper money) in a distant land. For U.S. citizens, this is especially difficult because many lands that won’t turn your seized assets over to the IRS aren’t friendly toward U.S. citizens either. On the other hand, many governments are “unfriendly” toward “foreigners”—all foreigners. They may just seize your assets and keep them for themselves. Eventually, governments also turn against their own citizens (for survival)—consider the way gold was seized from U.S. citizens during President Roosevelt’s administration in 1933. There are very few countries that have a long-standing record of respect for property rights.

Traditionally, there have been three different approaches to hoarding assets: 1. Buying valuables and hiding them nearby, possibly under ground, or in a safe place in one’s home. This has been the favorite approach in most communistic countries where freedom to leave is restricted. 2. Establishing a stash of assets in a distant (and hopefully more secure) “safe haven” country where one has ties and to which one might possibly escape in desperate times. Switzerland has been a favorite safe haven for many followers of this approach. Until recently, this approach has been hard for the authorities to detect and has only been available to relatively wealthy people. 3. Disguising the assets so that they would not be recognized as something of value. Of course, the problem with this approach is that one’s heirs might not recognize the assets’ value and may sell them for a pittance or throw them away.

In the past, one’s approach has depended, in part, on how comfortable one is with moving to a distant land (where language skills may be an impediment) versus staying at home and trying to cope with the difficult times in a familiar place where one has friends and relatives.

With the advent of wire transfers and the internet, international business is becoming easier. Today it is possible to establish a bank account in a distant land and pay your local bills on-line from half way around the world. On the other hand, it is easier for government authorities to find your hidden assets. Even banks outside the U.S. are becoming agents (qualified intermediaries) of the IRS.

More recently, hiding assets has taken on a whole new meaning in the United States . It’s sometimes called asset or “wealth protection strategies.” Wealth protection strategies are used to protect visible assets from attorneys seeking a deep pocket, and possibly a government with ever-rising tax levies. See the chapter on Wealth Protection Devices and Financial Privacy.

As inflationary times enter the second stage, prices start to rise more quickly and it becomes more difficult to simply save and invest with positive long-term results. Consequently, two things occur: speculation (attempting to profit from changing prices) increases, and gambling (seeking out man-made risks such as lotteries) rises. As prices rise, it becomes necessary to learn more about prices of various goods just to find a good deal on necessities. Everyone becomes price conscious and a comparative shopper. More and more time is consumed taking care of life maintenance tasks rather than producing for tomorrow. Some people who have given up any hope of saving and investing enough money to become rich (or just to make ends meet) turn to gambling as a way of hitting it big. Others become speculators (in stocks, real estate, commodities, currencies, etc.) or try to “get ahead” by suing a deep pocket.

Of course, some speculators, victims, and gamblers win big. Others lose big. Many of them make the headlines and some become folk heroes, while conservative investors quietly lose their life savings. To the extent that one group gains, another group loses. In short, inflating the currency transfers wealth from the savers to the risk takers, plaintiffs, and debtors. The rules of prudent investment are turned up-side-down during inflationary times, killing savers’ incentive to save. During inflation’s third stage, only the savers who have converted their savings into hard assets (thus becoming hoarders) and are not persecuted and/or prosecuted/executed for hoarding survive with any wealth intact.

The U.S. saving rate has been declining since 1982. Click here for the Federal Reserve Bank of St. Louis ’ revealing chart. As saving declines, there is less money available for emergencies and/or capital investments. As capital investment declines, standards of living decline. Also, as U.S. citizens save less, they must borrow more to maintain their levels of consumption and the U.S. government must turn to foreign sources for capital needs (China/Japan) and/or print more money. Eventually, many businesses that suffer large losses because of bad debts must also turn to foreign funds (sovereign wealth funds) to boost their capital accounts.

Some companies try to shore up their capital accounts by merging with other companies or acquiring (or being acquired by) other companies to take advantage of a larger economy of scale. In other words, by merging with another company, many duplicate expenses can be eliminated, thus saving money and simultaneously increasing market area.

It is arguable that the same thing (attempts to benefit from a larger economy of scale) is happening among nations where there is a common market (ASEAN, the European Union, MERCOSUR, and NAFTA).

Conspicuous consumption describes the practice of buying expensive consumables to impress people. People can use current income, savings and inheritances, or debt to satisfy this ego need.

If need be, seek a qualified psychologist’s help to overcome this problem. This is one habit no one will be able to afford during the third stage of inflation. Furthermore, many people will become secretive, misleading, and dishonest just to survive the third stage of inflation.

Consumptive debt is a close cousin of conspicuous consumption. Using debt to purchase consumer goods precludes saving and hoarding because the debt service will take priority. Spare earnings will go toward paying off debts. During the second stage of inflation, all consumptive debt must be eliminated as soon as possible. You must realize that there will come an end to borrowing during the third stage of inflation and that only savers and hoarders will have anything if/when that time comes. There are hundreds of debt consolidators and counselors who can help you get out of consumptive debt. If you go to a search engine such as Google , Yahoo, and/or MSN and search for “debt reduction,” “debt counseling,” “debt consolidation,” or “debt management,” you will find many choices of firms that may be able to help you reduce/eliminate your consumptive debt.

Inflation destroys savings when the savings (and hoards of paper money) are kept in money forms; i.e., savings accounts, claims to paper money payments such as income-limiting employment contracts, bonds, notes, bills, social security, insurance, annuities, long-term lease payments, and lottery winnings that are deferred, to name a few. To see the effects of inflation on savings, click here. If possible, people will hoard and hide hard assets to survive the third phase of inflation (it is better to spend/invest one’s fiat money as soon as possible rather than to save it).

Taxes reduce the amount of money left for savings. Remember, governments consume capital. The less you pay in taxes, the more you can save (as a percentage of your total income) or hoard. To learn more about how to reduce the amount of money you pay to tax authorities, see the chapter on Taxes.

In my experience, the parties who benefit the most from lawsuits are the attorneys. When I have asked attorneys how much such and such will cost to pursue, they don’t give me a total, or even an estimate. All they tell me is their hourly rate. I am expected to open up my checkbook, give them a blank check, and pay them for as long as the dispute lasts. In short, I end up working for them.

Of course, many attorneys will tell you that the costs associated with defending one’s rights in a law suit are simply the costs of doing business and should be considered as such when pricing one’s goods or services. At some point, however, it becomes impossible to remain competitive when one’s costs are too high. In short, high costs of any kind are deadly to profits and savings. To learn more about the detrimental effects of lawsuits, see the chapter on Lawsuits and Lotteries.

Natural disasters, illness, death of family members, injuries, theft, fires, and, for some people, the ideal gizmo they just can’t do without qualify as unexpected expenditures. Being unexpected, by definition, means that you didn’t foresee it. All you can do is save money in advance (and possibly buy the right insurance), and hope that your savings will be adequate to cover such expenses.

Obviously, if you lend money to someone, and he/she fails to repay you, you have a loss. This could lead to a lawsuit, or it could lead to the borrower’s bankruptcy. Either way, capital will be consumed/lost. Saving ability will be impaired. Avoid questionable borrowers. While this may not always be possible, a thorough credit check should reveal enough for you to decide whether to lend money to someone or not. This is especially important during inflation times.

Low interest rates give savers little reason to save. Other more lucrative investments (other than sub-prime loans) must be researched and pursued. This requires more effort and time, which isn’t always available.

When people believe that the government will look after them in their old age, or will take care of them if they become disabled, or that it is easy to get “free” money from the government, they have less of an incentive to take care of themselves and save for the future. They develop a dependency or victim mentality. Such an attitude generally precludes saving.

When people have given up hope of getting what they want through work and saving, they may develop a gambling or lottery mentality. They spend their savings on the chance to hit it big—to win the lottery. Odds are they’ll lose (their savings). The more lotteries are available, the easier it is to become a loser.

There are hundreds if not thousands of investment advisors around the world. In the United States , the government has a designation for “investment advisers”—they are licensed to give advice about securities. For the U.S. government’s ideas on how to choose an investment adviser and/or a financial planner, click here. Some advisors specialize in a particular type of investment, a specific region, or type of customer. There are even on-line services that try to help you find a suitable investment advisor. For several choices, click here, here, here, and/or here. Please realize that the advisors you find may or may not understand inflation.

There are also many newsletter writers who recommend stocks, and other investments. The newsletters of a few who are aware of the coming inflation include: Money and Markets, Forecasts and Strategies, and Casey Research.

Some people try to transfer the bulk of their inflating currency into other non- or slower-inflating currencies as a hedge against inflation. That may work up to a point, but as world-wide inflation picks up (because the world uses the U.S. dollar as its reserve currency), all fiat currencies lose value. To learn more about how the foreign currency market works, click here and/or here. To learn more about purchasing foreign currencies, click here.

Other people hoard hard assets, especially precious metals. Click here for a list of coin and precious metals dealers in the United States . On the other hand, you may not want to store your precious metals in your house or safety deposit box. Instead, you may consider purchasing a warehouse receipt or certificate of ownership from an entity that stores the metals for you such as the Perth Mint in Australia .

Of course, there are different ways (vehicles or instruments) to purchase precious metals, as well as other commodities. You have the securities markets, where you can purchase stock in a mutual fund that holds the physical gold and silver (see Central Fund of Canada). Other mutual funds may invest in anything from mining companies or other natural resource companies to blue chip stocks, commodities, or foreign businesses (see Yahoo for a listing of top performing mutual funds including many that invest in hard assets).

Exchange traded funds are relatively new investment vehicles. The are funds that try to parallel a particular index by buying the stocks that comprise the index, the MSCI for example, or that invest in a particular commodity, silver for example. To learn more about ETFs, click here or here.

Of course, you can buy individual stocks in the company of your choice through your local broker, an on-line broker, or, if you want to go to the trouble of opening an account in a foreign country, with a broker half-way around the world. Some people, like Warren Buffet prefer stocks to commodities. In fact, Mr. Buffet is reputed to have said "I would rather own assets that produce value. The Dow went from 66 to 12000 and paid dividends. If you owned gold, you paid 20 and it went to 400 a hundred years later." (Exception: if you had purchased gold in August of 2007, when gold was at $660.00 per ounce, you’d be better off today (March, 2008) than if you had invested in most stocks at the same time.) For the most part, Buffet is correct.

On the other hand, when we consider the Dow in light of inflation (by comparing the Dow with the price of gold), we can see that the Dow is actually in a bear market. To see the chart, click here.

As inflation picks up, the costs of production will rise. Cost overruns may interfere with production creating shortages and, in turn, higher commodity prices. As commodity prices rise, the costs of production rise faster. Long-term projects that looked economical a year earlier may no longer be feasible. As long-term projects are delayed or cancelled, production is delayed or never hits the markets. All businesses (even those producing commodities) will be affected by rising costs. As costs go up, it becomes more difficult for businesses to earn a profit. If/when profits decline, stock prices also decline.

For a world that uses U.S. dollars as a reserve currency and to price most commodities, a declining dollar means that the costs of production will rise world wide. Businesses around the world will be affected by a U.S. dollar inflation. At some point, in an effort to avoid the inflation that the Fed is exporting, some countries may try to separate/distance themselves from the U.S. dollar (Russia is moving in that direction now) and price their goods/commodities in a different currency. If they are successful, the U.S. dollar will become weaker even faster. If they are unsuccessful, they will suffer the same consequences as U.S. businesses; i.e., coping with inflation.

For a list of individual natural resource stocks, click here for mining stocks. Click here for energy-related stocks.

During non-inflationary times, commodities would not be a competitive investment without leverage. During inflationary times, commodities have the potential to become a bubble bull market because they “crash up,” and because they are relatively small markets (compared to the securities markets where there is no limit to how many shares can be issued).

If we add billions of new consumers ( China and India ) to the equation, the potential for a bubble bull market in commodities grows much larger. To learn more about futures/commodities, click here, or read Hot Commodities by Jim Rogers.

There are options on stocks, cash commodities, indexes, currencies, real property, and futures contracts, to name a few. To understand how options work, click here or here.

Because options’ prices depend on an underlying asset and on the time remaining to expiration, the question is always, what will happen to the price of the underlying asset and when? If you have good timing, you can multiply your money with options. If you have poor timing, stay away from purchasing options because the option’s time value decreases at an accelerating rate as expiration approaches.

A note to readers who are living from hand to mouth

 First, you must become a more aggressive comparative shopper. Shop at a Salvation Army Store instead of Wal-Mart. Shop at Aldi (or some other discount food store) instead of a Safeway, Kroger, or A&P first. Shop yard sales. Also, don’t forget to consider the cost of transportation when calculating the total cost of your purchases. Look for cheaper ways to get around—carpooling or bicycling, for example.

Secondly, start hoarding hard assets. OK, so maybe you can’t afford to buy gold and silver, but you can probably afford to stockpile sugar, salt, flour, water, bottles, jars, firewood, etc. Some of these items can be acquired for free, or just for the asking. You can trade your commodity for gold, silver, or whatever if things become really desperate.

Thirdly, become an expert at something. That means learn the prices (the market) of something that interests you. I have known people who have learned the market for one specific thing, for example, jewelry or gems, antiques, coins, truck engines, books, art, porcelain figurines, comic books, baseball cards, cars, houses, clothing and used computers. By learning the market for these items, they were able buy and sell these things and earn a nice supplemental income (at first) and eventually live off their trades.

To give you an idea of what I’m talking about… I have an old friend who drives around with his eyes open, looking for old trucks. When he sees one, he will inquire whether it is for sale. Sometimes the person will say, “maybe,” sometimes “no,” and sometimes “yes.” Regardless of the answer, he’ll make the person a low offer and be very politely told to leave. Six months later, when he drives by and the truck is still sitting there, he stops in and asks whether that same truck is for sale for his price. This time the fellow starts to negotiate on the price. But because my friend knows his market prices, he doesn’t budge on his offer. Sometimes he’ll get the truck, but sometimes he has to leave without a deal. And six months later, he’s back again. This time the fellow finally relents and sells him the truck at his price because he hasn’t had any better offers in the meantime and he’s tired of having my friend stop by every six months. (It just wasn’t a high enough priority for him to try to sell it at a higher price.) Eventually he gets his truck and turns around and sells it for parts to his established market of used truck parts vendors. At times, when he’s feeling ambitious, he’s even been known to buy up a whole fleet of trucks, busses, or vans that a big company just wants to get rid of. As an interesting aside, when he buys these vehicles “as is,” many of them still have fuel in them. He pumps the fuel out and stores it in a large tank. He may even haul some of it with him on longer trips. He hasn’t bought any fuel in years—it’s a by-product of his vehicle purchases.

With the advent of the internet, this type of business has been made easier. For example, I know of a lady who has a teenage daughter. She goes to the local Salvation Army store, buys “fashionable” jeans, blouses, etc. that her daughter tells her are in vogue. Then she turns around and sells these things on EBay at multiples of her purchase price. The extra money she earns finances skiing trips to Europe every year.

Thinking of the internet, for those of you without much storage space, it may still be worthwhile to become an expert in one of your interests. You may be able to capitalize on that interest and expertise online by promoting other people's products (affiliate arrangements), developing online products, providing material that attracts enough viewers to sell advertising, or self-publishing a book. New opportunities are arising all the time. Use your imagination! There are books, e-zines, e-newsletters, etc. to help you get started.

The bottom line is that you have to find the time to learn something that can give you an additional stream of income so you’re not living from hand to mouth. If that means watching less TV, playing fewer computer games, partying less, or even sleeping less, so be it. Everyone has the same 24 hours in a day. Spend more of your time being productive, less time being consumptive and look for ways to cut your costs.

Last thought: if you can’t cut your costs and/or raise your income because of all the distractions where you are, move!

Saving and investing become more difficult during inflationary times for several reasons:

1. Calculation becomes more difficult. Investors not only need to compensate for the higher prices, but they must also accurately anticipate future price increases in their prospective calculations.
2. At some point, costs go up faster than incomes.
3. Progressive taxes take a bigger bite out of higher incomes.
4. Markets become more volatile.
5. Commodities and money become scarcer. Hoarding creates shortages.

During inflationary times, freedoms and individual rights are lost and governments seize what they want (as a means of government survival). Government wants take priority over individual rights. Politically powerful people are privileged. Politically incorrect people are persecuted, prosecuted for economic “crimes,” and stripped of their assets. In short, politics takes on more importance in daily life. Everyone needs a politician in his/her pocket to “protect” his/her rights to life, liberty, and the pursuit of a livelihood.

During the second and third stages of inflation, hoarding, comparative shopping, force, and speculation become a way of life.