It seems like, after we've had a crisis, the smart thing to do would be to look at what worked and didn't work in past crises and improve. Instead, what I think we seem to do is repeat the same nonsense that makes us feel good. Two that are particularly frustrating are, "BUY GOLD!" and "SOCIAL SECURITY IS DUNZO!" I'm gonna write about why each of those is stupid.
1. GOLD!- If you watch TV, no doubt you've turned on any public channel and seen Glenn Beck sitting around talking about how the US is poised to become Zimbabwe because the Fed printed HUNDREDS OF BILLIONS of dollars, which must be inflationary because Glenn Beck figured it out in high school. And, as everyone knows, if hyperinflation is on the way, you have to buy gold because that's how you hedge against inflation. Right? Wrong. The Street Light has a good post about what drives gold prices, and why gold doesn't bear much relation to inflation expectations at all. First, the supply of gold is really small. The current stock is about 167,000 tons. In the whole world. That means that just a few hundred rich families who believe Glenn Beck (or Peter Schiff or whoever else is yelling about gold these days) buying gold can drive the price up substantially. The link I posted has a chart showing the allocation of the world's gold. Industrial and official (central bank) holdings of gold stayed more or less constant between 2007 and 2010. The amount used in jewelry rose by about 3%. But investment holdings of gold rose by over 15% in that time period. As a result, the price almost doubled. But how much of the total stock of gold does that represent? A grand total of 4,000 tons.
But dumb rich conservatives don't tell the whole story. As Keynes once wrote (paraphrasing roughly), investing in markets s like a beauty pageant where you win not by picking the contestant you find to be the most beautiful, but the one you think the other judges will find the most beautiful. And plenty of successful speculators know that, even if gold is absurdly overvalued, Glenn Beck talking it up can impact demand, and that spike in demand represents a very real moneymaking opportunity. Which is why George Soros called gold a massive bubble in a trade publication the last few years, but then built up a pretty substantial position in it (which he dumped at the end of last quarter). Soros doesn't think hyperinflation is on the way, but he does recognize that stupid people listening to Glenn Beck translates to a moneymaking opportunity for him.
The last part of this argument is the "gold as a hedge against inflation" idea. Some people still cling to the idea that, if the currency depreciates, value will be stored in gold. But that, again, is dependent on people thinking that gold is actually a good store of value. Gold is NOT like oil or copper, which are inputs in a lot of other goods/transportation, and are passed down through the stream of commerce (if the price of oil spikes, so does the price of everything that is transported using oil as fuel)-- its only practical use is as jewelry. So the price of gold really depends on... the demand for gold for other reasons. If gold becomes unfashionable as jewelry, the price of gold tanks. Inflation or not, if no one wants gold, its price isn't staying high. And the post I linked above actually has a chart showing the relationship between gold prices and inflation-- while it was pretty well-correlated from about 1980 until 1998 or so, that correlation more or less disappeared then. And that decoupling becomes even more apparent when the chart added TIPS spreads from around 2002. TIPS (Treasury Inflation-Protected Securities) are essentially government debt that's explicitly linked to expected inflation. And, unsurprisingly, while TIPS spreads tanked around 2008, the price of gold skyrocketed. So, while a few rich Glenn Beck fans and a few hedge fund managers might have been buying gold during the panic, markets as a whole didn't see anything resembling hyperinflation.
2. Social Security- You've probably heard it a million times: "Social security is a Ponzi scheme!" "You're never going to get any money out of social security!" The stupid drum marches on. But the reality is, calling social security a Ponzi scheme is a good way to show that you're 1) stupid, and 2) don't understand what social security is. A Ponzi scheme involves an investor placing money in an account with a manager. The manager, instead of investing the money, pockets a chunk and creates phony "returns" for you. If you cash out before it collapses, they pay you with money they get from new investors. The social security critics yell, "Ah-ha! Social security does that too! Today's workers pay for today's retirees!" All the while, they ignore the simple fact that social security is missing the key facet of a Ponzi scheme: phony money and promised returns. When you pay social security taxes, they don't go into your magic "social security account"-- they go into the social security fund, which cuts checks to old people. If you die in a tragic accident at age 50, after working for 25 years, your kids aren't inheriting your social security "account" the way they would have inherited your Madoff account.
So what does that make social security? The answer is: a mandatory income insurance program. You pay a certain amount in taxes, and if you reach age 65, you start getting checks. If you die at 67, you've paid way more into the system than you got. If you die at 100, you've paid way less. Same as someone who buys fire insurance whose house burns down a year later getting way more from their insurance than someone who buys fire insurance their whole life and never has a fire. If you're the second person, you don't complain that your fire insurance account was a "Ponzi scheme" because the guy whose house burned down a year after he bought the insurance is being paid out of YOUR premiums.
But, the question goes, isn't social security "insolvent"? And the reality is no. The magic of mandatory government insurance is you can change the terms any time. And, until the recent meltdown cut tax receipts, social securiy was running at a surplus. This is because the payroll tax (FICA) is designated specifically to pay for Medicare and social security. And that (not the income tax) is the tax that most burdens the typical American family (and a big reason the "Poor people don't pay income tax!" claim is so misleading). It's also a regressive tax-- FICA taxes the first $107K or so of income (half on the employer, half on the employee) at a rate adding up to just over 12%. So someone making $110K pays the same amount in FICA taxes as someone making $110 million. Going back to the earlier point, the amount of that tax earmarked for social security exceeded the amount of social security being paid out until right around 2008 or 2009 (without the meltdown, that date was projected to be somewhere between 2030 and 2040). But now that it's running a deficit, aren't we screwed?? Well, no. For all the years it ran a surplus, the Social Security Administration reinvested the surplus in Treasury bills, which mature at a given point. So the SSA dips into those reserves to pay out social security. And, in the accounting, those payments appear in the "debt servicing" portion of the budget.
Now, we will run into a problem if the surplus we accumulated runs out. So are we screwed then? Again, no. There's plenty we can do to tweak the system and make it viable indefinitely. One is raising the age at which people receive benefits. Another is raising the FICA tax rate. A third is raising the cap on the amount of income from which FICA is deducted. Or any combination of the three. Which adds up to a tweak, not a "crisis".
Now, health care spending IS running out of control, and is much harder to fix, but that's an issue for another day...
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