Survival__ Structuring Prosperity for Yourself and the Nation - Charles George Smith [172]
Since the price of wheat can continue declining after we buy, then we might choose to "dollar-average" our purchases--that is, add to our hedge as prices decline rather than buy our hedge at one time.
If gasoline and natural gas are currently inexpensive compared to recent tops, then we might purchase a futures contract on gasoline or natural gas which serves to protect us against future spikes in the cost of gasoline.
The value of the futures contract (which can be purchased at various broker/dealers much like stocks or options, with some restrictions and requirements) varies depending on the current price of the contract month of the commodity being hedged. But just for purposes of illustration let's suppose a futures contract on gasoline costs $1,000 and the household consumes $3,000 of gasoline a year.
The total cost of the gasoline and the hedge is thus $4,000. If gasoline drops in price, then the hedge--essentially a bet that gasoline would rise in price--loses value. So if gasoline drops such that the family only consumes $2,000 a year, then the household budget remains $3,000--the lower cost of $2,000 and the cost of the hedge $1,000.
But if gasoline rises dramatically, then the futures contract may well be worth $4,000. Since fuel prices jumped, the cost of the family's gasoline consumption might rise to $5,000 a year. But since their hedge rose in value as gasoline rose in price, the household can sell the futures contract for a profit of $4,000 (if the trade works the $1,000, which is a performance bond, is returned at liquidation), the net cost of the family's gasoline and hedge is $1,000 ($5,000 gasoline + $0 hedge = $5,000 minus profit from hedge $4,000 = $1,000).
Thus the purchase of the hedge lowered the family's total gasoline expenses to $1,000 for the year (the $1,000 performance bond was returned when the futures contract was sold)--a savings of $4,000.
As Harun explained, large agricultural and transport enterprises must hedge against fluctuations in essential costs and revenues. Global enterprises also hedge against fluctuations in currencies.
While this example might seem complex, the underlying strategy is simple: by investing in a hedge, risks can be offset or reduced.
If a household depends entirely on one income source (one wage earner), then the risk of that wage earner losing their job could be partially offset or reduced by developing an alternate source of income or by buying a "loss of income" insurance policy.
Developing multiple sources of revenue is a form of hedging against the risk of the household losing its sole source of income. This might mean another household member seeks a part-time job, a spare room is rented to a student, a garden is planted in Spring and the produce sold at farmer's markets, a new skill is acquired by someone in the household and marketed through friends, family and other networks, some small-scale Internet-based enterprise is developed, etc.
There is no one answer to how to offset or mitigate risk, but having multiple sources of essentials, rigorous cost controls and carefully planned hedges against potentially catastrophes is a strategy with a much higher probability of success than remaining passively exposed to foreseeable risks.
All of these concepts are simply forms of risk management. We cannot make risk vanish, but we can plan for contingencies.
6. Radical Self-Reliance
While self-reliance certainly implies self-sufficiency, what the term means to me is expressed by this phrase: To look out for Number One, take care of Numbers Two through Nine.
In other words, by self-reliance I mean a security and prosperity that is independent of the crumbling Savior State and its rentier-financial Power Elite partners. Since it is extremely difficult to provide all that life demands as an individual, then