Gold Rush

I am a sucker for Alaska Channel's (actually, The Discovery Channel's) reality shows.  Specifically it's Deadliest Catch and Gold Rush that fill up my DVR and keep me up past bed-time.   I find the combination of danger, drama, industrial equipment, and pathos of difficult, blue-collar work irresistible.  I even manage to see through the horrifying habitat destruction in Gold Rush.  Say of me what you will.

Luckily for you, Gold Rush also provides a useful allegory for a discussion about monetary policy.  I really do have – assuming these things aren't completely scripted at this point – tremendous respect for the guys on the show.  They take big personal risks and they work their asses off.  The more I grow to like them, however, the more I'm reminded of a quote I've heard attributed to Warren Buffet:  “It seems odd that we spend all this time and money digging up a rare element, only to bury it back underground elsewhere.”

I can't help but wonder what our society would look like if all the time, money and human capital pouring into gold mining, in stead poured into education, infrastructure…take your pick.  It's really the same question we should have asked during the real estate bubble earlier this century.

No, I'm not suggesting we should centrally plan our capital allocation.  I'm saying, we already do… sort of.  The FOMC is the monopoly provider of US dollars.  The price of gold is almost entirely a function of USD liquidity.  [It's a common misconception, by the way, that gold is a measure of “fear” in the general sense.  Look at any gold chart over the last 10 years and you'll see; gold goes down when general fear is most acute.  Gold only goes up when the specific fear of a drop in USD value rises.]  So, rather than working on American infrastructure the guys from Gold Rush wander the Klondike in search of the last remaining bits of virgin ground…to rip up.

Just like developers chasing yields into the increasingly scarce “virgin” ground for single family homes, these gold miners take bigger and bigger risks to find fewer and fewer flakes of gold.  And, when the inevitable market collapse takes place, what will our society have gained from their effort?  Real wages and asset prices that have no place to go but down, an excess of McMansions, and a slightly larger pile of gold.

Maybe this Ron Paul fellow and his economic north star Friedrich Hayek have a point.  Maybe counter cyclical monetary/fiscal policy only delays the inevitable while transferring wealth from savers to borrowers.  Yes, there is the possibility of increased volatility, as there was before the Fed was established.  Perhaps, however, firms and individuals would begin to bake increased volatility into their thinking.  You might get slower growth in the near term, but more sustainable growth in the long term.

It just seems a shame to have these brave, hard working guys risking life, limb and family nest eggs chasing a rare yellow mettle that will only end up in a bank vault.