Monday, February 07, 2011

Hedging for the End of Civilization, Part I

Tell me, would you trade 22 pounds of gold for this shoddily-built suburban confinement unit?

(creative Commons-licenced photo by David Shankbone, via his Flickr page).
Ever since the global financial crisis of 2008, when our mirage of real estate wealth dissolved faster than a mold-infested McMansion, and thousands of major employers looked into their bank accounts and realized that they wouldn't meet the weekend payroll without a bailout, it's become apparent to most people that "money" is only as valuable as everyone else thinks it is.

The paper bills we carry in our wallets are ultimately just paper. But they're valuable to us as a convenience of modern society: a means of exchange whose value we all agree on by consensus.

A few weeks ago, This American Life broadcast another great show from the economist-reporters at Planet Money all about the fiction of money. It made the point that money's value is a collective act of faith: we all trust that every store, bank, and employer will be more or less in agreement about the value of our dollar bills.

But societies have lost faith in the value of their currencies before - many, many times. When it happens, people are forced to rely on theft and barter in order to feed themselves. Faith in money is closely bound with the cohesion of civilization itself. If people can't trust their neighbors to value their currency, then they are less likely to trust their neighbors in general.

So far, because money is convenient and civilization is important to people, societies have invariably come back to trust money once again - no matter how badly it burned them before. It helps that, for the last century, the United States Dollar has lorded over everything as the world's papal currency. It's been the one kind of money that everyone could have faith in and rely on. Even when pesos and rubles collapsed, Argentines and Russians could still use tattered U. S. dollar bills as a trusted means of exchange.

But recently, the world has been questioning even its faith in the dollar. Which is not to say that anyone is losing faith in money: they're just looking for a new idol. And guess what it's made of?

In the past five years, the price of gold has more than doubled. Right-wing radio propagandists are making "money" hand over fist by sowing doubt in their followers' faith in dollars, and selling them overpriced gold as a "safe" alternative.

Gold has always been used as currency. It's compact, relatively rare, and impossible to counterfeit. It's still widely used as a reserve for the world's national treasuries - here's a great field report on Manhattan's Federal Reserve Bank gold vault, where 7,000 tons of gold are stored under the streets of the financial district in order to shore up our faith in the financial stability of national governments.

But if we're questioning our faith in the value of dollars, shouldn't we also question our faith in the value of gold? At the end of the day, it's just a shiny metal. Gold can't feed anyone, or generate energy. Just like paper bills, it's only valuable if lots of other people think that it's valuable. And if we really come to a circumstance where the dollar collapses and the world's economy comes crashing down, I can't see how a gold brick is going to do anyone a damned bit of good, unless you're using it to smash windows in a looting spree.

I don't consider that a realistic possiblity by any means, but it's an interesting thought experiment to consider what kinds of currencies would actually be valuable in that kind of situation. How about solar panels? If the dollar collapses, then utilities would lose the means to buy up supplies of natural gas and other fuels from overseas. Blackouts could become widespread. Homegrown electricity would be more valuable than gold in such a situation.

So if there's a real risk of that happening, then solar panels should be very, very valuable for anyone who's hedging their investments against the end of civilization, right?

Well, that's not happening: solar panels are actually getting less expensive, largely thanks to improved technology.

This tells us two things:
  1. The market doesn't seriously expect civilization and the dollar to collapse. And, as a corollary: the price of gold, which has more than doubled in four years, is an asset bubble just like McMansions and stock in Instead of a real estate craze or an internet craze, we're going through an Apocalypse craze.
  2. Glenn Beck's listeners would be much better off if they started buying bought renewable energy while it's still cheap, instead of overpriced gold coins.


Jeremy Corbally-Hammond said...

I love it how an advert for GoldLine showed up in my feed reader at the bottom of this post!

C Neal said...

Ha! I hope that you clicked it - I get about 10 cents every time you do.