Thursday, June 18, 2015

Diversify Your Portfolio with Informal Credit

Informal credit is an asset that government cannot tax.

Today we present a guest post by frequent contributor Jeff W. on informal credit, a non-financial but very real asset that is the foundation of the community economy.In our financialized world view, few even recognize the value of informal credit, much less promote it.

Diversify Your Portfolio with Informal Credit by Jeff W.

Most of the investment advisors who are running around today have a standard idea of what a diversified investment portfolio should look like: it consists of stocks, bonds, and real estate. It might also have some commodity futures and gold. Maybe it would also include some life insurance or annuities.

As opposed to such mainstream investment advice, there is also advice freely available from the vendors who sell to Preppers. These vendors advise a different set of holdings in one's portfolio, consisting of freeze-dried turkey tetrazzini, canned tuna, bottled water, first aid supplies, bullets, etc.

Both kinds of portfolios, however, would benefit from the addition of some informal credit. Regardless of whether the Preppers are right or wrong in saying that we soon will be living in the Mad Max scenario, informal credit is something good to have. It can be defined as an unrecorded stockpile of goods and services owed to a person in exchange for work and resources that he has previously provided. It is neighbors helping neighbors without any formal accounting of the transactions.

When a person joins a community where informal credit is honored, he generally is extended some informal credit when he joins. Neighbors will help him in expectation that he will someday help them in return. As time goes on, favors and resources are traded and transferred in an informal, recordless way and each participant in the informal credit network at any given time has a holding (though it cannot be measured or quantified) of informal credit.

Advantages of Informal Credit. If you live under the power of a rapacious government, as Americans do today, then informal credit is valuable because government cannot get at it. Government cannot even learn of its existence. Government cannot effectively demand records because there are no records. Government can declare non-cash transactions taxable, and demand tax payments from them, but it has no way to enforce that demand when records are not kept. Informal credit is an asset that government cannot tax.

It also has an advantage over hoarding, because the well-known danger of hoarding is that robbers might enter a hoarder's house, put a gun to his head, and demand that he reveal the location of his hoard. That puts him in a dilemma, because if he reveals the location of the hoard, the robbers will take it, but if he doesn't, they will likely kill him. He will probably be dead in either case.

But informal credit, to the extent that he has it, is something that robbers cannot steal. Another advantage is that no one in the financial services industry can get their hooks into it and take a percentage rake-off, or inflate it as a Ponzi asset bubble. Informal credit cuts bankers, stockbrokers, and Wall Street entirely out of the picture.

Preppers often talk about fortifying a house or a farmstead, and how you can do that, and what kinds of weapons you might need. But in colonial America, settlers did not put much effort into fortifying their houses. Instead they built forts, and when external threats were on the warpath, they moved the women and children into the forts while the men went out to do battle. If future years are times of lawlessness, people likewise will be better advised to fortify a larger structure and move non-fighters to the fort in times of danger. Where will people get the money to build such a fort? They won't need much money if they use informal credit. In colonial times, settlers' forts were built with volunteer labor and informal credit.

How to Build up Informal Credit. Working in the cash economy does nothing to build up informal credit--and that is to government's liking. They want to tax every cash transaction, and they have the means to do so. In order to build up a stash of informal credit, you have to do work without requesting cash in return. So first you need a useful skill. Skills such as auto repair, HVAC installation and repair, carpentry and home repair, farming, gardening, landscaping, first aid and basic medical skills, computer-related skills are useful. This is not an exhaustive list.
In order to build up informal credit, you have to perform useful work for your neighbors. That means working on a neighbor's house or his car, his garden or his farm, or performing medical services on someone's body. If you don't have skills that enable you to serve your neighbor in a valuable way, you will have a hard time building up informal credit.

The function of providing security should also be added to the list. Maintaining a neighborhood watch is a job very much suited to informal credit. The watchers need to be rewarded eventually for the job they do. But a formal accounting of hours served, time clocks, etc., may not be needed if you live in a community where people take their neighborly responsibilities seriously.

Essential to building up informal credit is living in a community where informal credit will be honored. If, when you perform a favor for someone, that person says, "I owe you one" or "much obliged," then it is likely that the credit you have just built up can be redeemed later on. If you live among degraded freeloaders, however, whose motive is just to take from you without ever paying anything back, then you will never build up informal credit. You are living in a place where informal credit cannot exist.

Disadvantages of Informal Credit. The biggest disadvantage, as has just been mentioned, is that you will do work for people and they will never pay you back. Because you have no contract or record of what you have done, and because there is no contractual enforcement mechanism, there is always a danger that freeloaders can take advantage. The solution to this is to avoid living among freeloaders. Move to a place where the decent people live. As an enforcement mechanism, the nonviolent practice of shunning can be used. In a community where informal credit is honored, freeloaders can be shunned to the extent that their requests and demands are ignored due to their history of abuses.

Informal credit does not lend itself to capital investment. Hard cash is necessary for large capital projects. It is also not honored outside the boundaries of a community. In order to spend it outside a community, it first must be converted into cash. In a highly competitive business environment under a high-tax government regime, most business owners cannot afford to do work in exchange for informal credit because they have to constantly scramble desperately to get cash. Despite these drawbacks, however, informal credit still deserves a place in your portfolio.

Informal Credit Builds up the Community. Where informal credit is earned and honored, a community can be built up. Such a community can have specialization of labor, which greatly increases productivity. A community, even a community with little or no money, can provide for the common defense. You no longer have an isolated Prepper guarding his hoard of gold and freeze-dried food with a rifle pointed out the window. Instead you have a community, a commonwealth, working together for the common good. Those who refuse to work, of course, should be thrown out.

The Outlook is Bullish for Informal Credit. Do we have a rapacious and lawless government? Are taxes high? Is law enforcement collapsing and is crime becoming more widespread? Are people being ripped off by the the legal system, the sickcare system, and the education system to the point where they can no longer afford them and are searching for alternatives? If the answer to any of these questions is yes, it's bullish for informal credit.

You can't expect to get rich off informal credit. But by earning it and honoring it, you may become a member of a genuine community. You may experience a new sense of self-respect and purpose when your skills are in demand. You will gain a feeling of security if you know that your neighbors will, in various ways, repay you for the work that you have done, and that they will come to your aid if you are ever faced with an emergency.

Before the invention of money, people survived for thousands of years using informal credit. If future events push us back into primitive conditions, informal credit will make a comeback--and it will also likely be the key to your survival.

Thank you, Jeff, for discussing a key element of truly sustainable, locally based economies. 

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go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

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You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

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Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)
The Old Models of Work Are Broken 

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