Gold Prices and Political Rationalism

Yichuan Wang wrote an excellent post about what determines the price of gold.  Short answer: not inflation.  Slightly longer answer: real interest rates.  When interest rates are low, the opportunity cost of holding gold instead of financial assets are low, and gold is more in demand.  When interest rates are high, then the opportunity cost of holding onto gold increases and it becomes less worth it.  And while gold is commonly seen as a hedge against inflation, it has historically performed quite poorly as such.  It seems that the question of gold as an asset is actually quite clear…but that just raises a big question for politics.

Have you ever watched Fox News?  It’s worth it for the commercials alone, but both the commercials and the news tell the same story: Ben Bernanke’s reckless money-printing is about to turn the US into Zimbabwe, and you need to protect yourself by BUYING SOME GOLD RIGHT NOW.   Given how persistent these ads are, assume that they’re working and that the most extreme segments of the conservative movement are heavily invested in gold.

So here’s the bizarre question: why is the conservative movement so fixated on tight money?  Think of Ron Paul endlessly yammering about the gold standard, or Rick Perry threatening to lynch Ben Bernanke for his money-printin’ ways.  Even Governor Romney, who surely knows better, made some nods towards monetary tightening. The hard-money argument was a huge winner in the Republican Party in 2012, wildly popular among the same gold hoarders.  But that doesn’t square with a rational model of decision-making.   If we assume that gold is an effective hedge against inflation, a Zimbabwaic hyperinflation will be an unimaginable windfall for these people.  If we instead assume that real rates drive gold value, then inflation will be neutral to their holdings…but the tight monetary policy they demand will devastate it.  Either way, the position of hard-money conservatives towards monetary policy doesn’t square with their economic behavior.  What might be happening?

1. Scamming: Conservative media are putting one over on the base, who have a poor grasp of macroeconomics.  Fox News and talk-radio hosts are happy to fan the flames of paranoia in order to get gold-seller advertising.  They ratchet up the panic amongst conservative and Tea Party listeners, who demand hard money from their leaders and don’t think about what “victory” would mean for their portfolios.
2. Blind leading the blind: Neither conservative opinion leaders nor the rank-and-file have any understanding of macroeconomics.  Both the opinion leaders and rank-and-file are heavily invested in gold, and are beholden to various crankish ideas about the value of gold.  These beliefs suggest that gold is a special commodity that is both 1. a hedge against inflation and 2. a completely uncorrelated asset that can do well in every economic environment.  These ideas may seem contradictory because they are.
3. Cultural Shibboleth: Nobody involved understands macroeconomics at all.  Ron Paul and several other influential people (Glenn Beck, etc) become convinced of the crankish ideas about gold as in #2, staking out ultra-hard money as the rightmost pole of the debate.  Everyone who watches Fox News and listens to talk radio passively assimilates this belief as being a marker of true conservatism without really considering it on the merits.   If you really grilled the rank-and-file, they might superficially espouse the beliefs of #2 but would quickly lapse into incoherence rather than expressing the full stack of goldbug ideology.
4. Political Intuition: All actors involved are rational and grasp the valuation logic well.  They would prefer hard money to benefit the entire macoeconomy.  However, they anticipate a very low chance of Republican victory in the near future and are moving to capitalize on it.  Basically, conservatives are arguing from the heart…and voting with their wallets.

There must be other good explanations, but these are the main ones I can think of at the moment.  All are subject to pretty clear empirical tests, though differentiating between 2 and 3 is difficult unless you can convince conservative media hosts to disclose their financial holdings.

While liberals like to have a lot of fun with the crankish conservative attitudes towards gold, there’s actually an important question of political economy here.  Namely that there’s a very ideologically active faction apparently basing both political and personal-finance decisions on a model of the world that lead them to fight like hell against their own financial interests.  And not in an indirect “What’s The Matter With Kansas“-type way, but in a “Decrease the Value of My Financial Assets AND NOW” way.  I think that resolving this question can actually tell us a lot about the way that folk economics beliefs are shaped, and how political attitudes can affect seemingly-unrelated decisions about personal finance and investment.

Of Course Money Buys Happiness

There’s been some buzz recently over the finding that increased national income leads to increased national happiness.  This seems to hold true across countries, such that richer countries are generally more happy – which of course doesn’t hold much water in causal.  However, the more powerful finding to my mind is that it holds true within countries.  Countries seem to have different happiness baselines, but the baseline moves up in a predictable pattern (on a log scale, so doubling per capita GDP will only move you up 1 notch on the scale).  Everyone always loves to say that “money can’t buy happiness”, but it makes perfect sense to me on a national level.   Wealth gives individuals and nations many opportunities to maximize happiness even if you can’t walk into a happiness store and buy “1 sense of life satisfaction, please”.

 

First of all, money buys health.  It’s trivially obvious that individuals are in better health in Western Europe than in Bangladesh.  The United States is less healthy than many other rich countries and some poorer countries, but the overall trend is very clear – wealthier countries are healthier than poorer countries.  Within countries, it is even more true – wealthier Americans live longer and healthier lives than poorer Americans in basically any way you care to measure.  The most visible signifier of this is obesity, which is least common amongst the rich.  Illness can make you pretty darn unhappy.

Secondly, money buys security.  The higher your income, the further above subsistence you are and the less likely that minor setbacks will lead to total destitution or starvation.  When Americans get a raise at work or a new job, only the most desperate will think, “Hey, I’m a bit further away from starving in the gutter like an animal!”.  The fact that this is not our thought process reflects the security and peace of mind that higher national income has brought us.  When imagining the alternatives, it seems obvious that this must make us happier.

Finally and I think most importantly, money buys freedom.  As the level of national income rises, it becomes easier to be “poor” and still be comfortable.  If your dream is being a journalist and the only options available are back-breaking subsistence agriculture, then you are likely to be unhappy.  In a richer country it is simply easier to make a viable living on a “threshold income”, that is to say making just enough to get by.  If income is higher, people will have more disposable income to spend on whatever they want, meaning there is more money flowing to a wider range of things beyond the basics of agriculture, manufacturing, and construction and thus many more viable career options.  That must count for something, and I would guess it counts for a lot.

The cliche seems so well-established that this finding seems to surprise people, but I can’t imagine why.

Why Economics is Different

I just wanted to highlight two recent pieces from the always-excellent Alphaville that shows the fundamental problem with the social sciences in general, and economics in particular.  The first is hilarious – it is a collection of newspaper clippings from the 1930s that reproduce exactly the sort of economic grousings about hyperinflation that the right wing is tossing around today.  The second is awful – it concerns the fact that bipartisan Congressional opinion has coalesced around ending the temporary payroll tax cuts, against the considered advice of basically all economists of every stripe.

It goes to show the futility of advancement in economics.  While most people are willing to leave science to the scientists, everyone has a powerful sense of folk economics that guides their political beliefs and actions – this is no less true of Congressmen and businessmen than it is of ordinary citizens.  In a democratic system, therefore, that folk economics tends to be what is actually acted on rather than the state of the art in the social sciences.  Authoritarianism is no solution either – while benevolent tyrants might rely on eggheads to guide their economies, the tyrants’ own folk economics dictates which eggheads they are willing to choose.  Regardless of what economists view as optimal, the economic choices made by polities reflect the social consensus around folk economics (or the individual opinions of one or a few tyrants).

This suggests that if you want to improve the quality of economic decision-making, studying economics in academia is a terrible idea.  What you really want to do is to go into propaganda, especially those that target elite opinion leaders – Hayek’s totally ridiculous ideas about the road to totalitarianism have been much more important than his much more important ideas about price signaling.

Not News, But News to Me

I’m not a particularly big fan of either sports or of gambling, but like many Type As I do love complex systems.  I was shooting the shit with a number of my friends this weekend and we started to discuss the question of whether there are simple and reliable ways to beat the spread.  Logic dictates that no, all participants in the sports-betting market are basically rational utility-maximizers and any enduring advantages are eroded away.  However, we hit upon the idea that betting on the underdog could be a consistently winning strategy – people like to bet on winners and for that reason there is very likely an asymmetry of funds flowing into the favorites, skewing the spread.

As it turns out, this is true and well-known to bookies.  Points spreads are deliberately skewed towards the favorites for that reason.  Bookies want to maximize the take they get from people betting on the favorites, due to that asymmetry of funds flowing into the favorites, and so you can reliably win by betting on the underdogs.  The market is rational, but not necessarily in a straightforward way.

I’m also interested in the closely related question of whether there is a similar asymmetry of funds, and thus abnormal returns, on teams from media markets of vastly different sizes.  I have a hunch that the Cowboys attract disproportionately greater betting interest than the Chiefs, and that this means there is money to be made.