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Fighting Forced Frugality in 2024

Invest in things you can control...
I WOULD summarize the economic flow of recent events like this, says Charles Hugh Smith on his OfTwoMinds blog in this article re-posted on Addison Wiggin's Daily Reckoning.
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?
I've written a book on self-reliance. 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 responsibility 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:
  • Lower expenses, needs, expectations, obligations: it's easier to get enough of whatever you need if you need very little.
  • 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.
  • Have plans in place to respond to much more severe challenges / crises than the mainstream reckons are possible.
  • 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 (for 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.
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. 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.
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 nest egg of wealth into conventional "boxes": some in precious metals, some in income-producing real estate, some in dividend-paying stocks, some in bonds, etc.
The problem with this approach is two-fold:
  • Not every household has a large nest egg of financial wealth that can be divvied up in passive investments.
  • All of these passive asset classes could be disrupted by authorities responding to financial/economic crises. Precious metals, stocks and bonds could be restricted, frozen, heavily taxed or expropriated by one means or another, and rental real estate could be restricted by rent control.
Authorities have few limits on their responses, and their desperation to keep the status quo glued together by whatever means are at hand will be near-infinite.
Many such options are time-tested and legal. A "windfall tax" on profits and capital gains is legal, for example, and there are no upper limits on such "special levies". Local authorities can forcibly acquire property via eminent domain, and should real estate valuations plummet, the "fair value" paid for the property might be minimal.
The wealthy will have targets on their back, as the bottom 90% will support "wealth taxes" because they won't have to pay them. The authorities will leave assets the majority own (the family house) alone to avoid the risk of political blowback/disorder.
The top 10% are the natural target as they 1) own 90% of the income-producing wealth 2) are a minority and 3) politically vulnerable to charges of rigging the system to their own benefit.
Not all assets are of equal utility. A house will continue to have utility as shelter regardless of its market value. It doesn't matter if the house is worth $1,000 or $1 million if it's owned debt-free and provides shelter.
Not all assets generate income we can actually control. Renting out a studio or room in our house is unlikely to face much regulatory risk, and we control who we rent to and under what conditions. In previous eras, taking boarders was a common path to generating income for widows who had lost their husbands and their income.
The core concept here is that if you have few resources or assets, invest them in an enterprise you own and control that has the potential to generate more income than passive investments.
For example, the capital gains/income potential of $5,000 invested passively in precious metals, bonds or stocks is negligible. But this modest sum could go a long way in setting up an enterprise based on skills, networking, etc – ie, an enterprise whose value is generated not by the sum invested but by the skills and social capital leveraged by the modest financial investment.
One of the points of my book on self-reliance is to highlight the lack of basic life skills in today's populace when compared to the populace in Emerson's time (1840s). I admit to being stunned by how many people do not know how to change the oil in their car, make minimal mechanical repairs, nurture plants/trees, do basic home repairs, or prepare simple, real-food meals from scratch.
In an economy optimized for efficiency and profitability, tasks are segmented and specialized. Jobs where we're paid for having a spectrum of broad-based skills are rare. We're paid to be specialists, and encouraged to pay other specialists to do everything for us.
Many people are finding it difficult to find a handyperson who can do a variety of small repairs. Those who are available are often overbooked and pricey. I've heard some online sources claiming a handyperson can make $1,000 a day. Even if that overstates reality, the trajectory is clear: the number of people with a broad range of skills is narrow, and further narrowed to those willing to put up with all the hassles of running an enterprise and dealing with customers.
In an era where risks are multiplying and hard to assess, optimizing our lives for broad-based life skills, zero-debt, direct control of our assets, and becoming valued contributing members of networks of productive, trustworthy people will lower our exposure to risk and increase our security.
If the status quo manages to continue on its present course, none of these strategies reduce our enjoyment. Reducing risk by adding skills and enterprise works just as well in good times. 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.
As the Chinese saying puts it: when you're thirsty, it's too late to dig a well.

Publisher of Agora Financial, Addison Wiggin is also editorial director of The Daily Reckoning. He is the author, with Bill Bonner, of the international bestsellers Financial Reckoning Day and Empire of Debt, and best-selling author of The Demise of the Dollar.

Addison Wiggin articles

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