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Back in May when Mark Carney was leaving his post of Governor of the Bank of Canada, I warned him that the British press would probably make up all sorts of rumors about him. The most believable one pertained to his status as a warlock. As evidence of Carney’s warlockishness, I quoted a prominent political scientist, who had this to say about Carney: “No one gets to where that man is just by working hard and being good at their job. That’s just not how our world works.”

Now that Carney has settled into his post as Governor of England’s central bank, I am inclined to agree. The proof is in the Yorkshire pudding. What did England’s pre-Carney economy look like? Pretty crappy I’d say, even for Europe. Its highly integrated finance industry meant it was hit pretty hard by the 2008 sub-prime mortgage crisis–British banks lost around 12 billion pounds in 2007 alone, and was also victim of a weak European export market in the wake of the sovereign debt crisis.

About a year before Carney started at the Bank of England, the UK slipped back into recession and people were beginning to wonder if the unemployment rate would ever decline after hovering around 8% since 2009.

Now, a mere five months after Carney’s arrival, the BoE’s Monetary Policy Committee (MPC) is proclaiming that “in the United Kingdom, recovery has finally taken hold.” Growth projections are being revised up and stat-watchers have been surprised at the job creation numbers of the past few months. Which leads me to ask: What is this guy’s secret?!

image: Chris Wattie/Reuters

He didn’t technically do much. After his first meeting in August with the MPC, he issued an unclear, waffly statement saying that he would not raise interest rates until the unemployment rate dropped below 7%, unless inflation became a problem or financial stability were threatened. No one quite knew what to do with that, but soon everything started getting better. In fact, things started improving the second Carney took over at the BoE, leading the Financial Post to assert that he had quite possibly made the best-timed job switch ever. And now, says Carney, the UK economy is sailing along at escape velocity. (Though most economists would beg to differ, according to a survey by Bloomberg Businessweek.)

Sorry, Carney, I’m onto you. I’m not fooled by your adorable ploy to win Britons over by taking the Tube to work on your first day and getting lost. An entire economy serendipitously healed itself the moment it became your responsibility. It’s more than luck.

Wikipedia defines warlocks as beings who invoke “magic through their darkened soul,” while warning that “warlocks are often evil or chaotic in alignment.” More incriminating is the fact that “almost all of the warlock’s attack powers depend on charisma or constitution for accuracy and damage, with some powers gaining bonuses from intelligence.” Now we know why Carney is so powerful: his excessive charisma and intelligence have made him unstoppable.

Also suspect is the way the Carneys have miraculously avoided the usually intense scrutiny of the British press. The Canadian media made much of the attention the popular couple would garner from the famously obnoxious British papers, but, apart from a brief uproar over Diana Carney’s dislike of tea bags, this has not come to pass. An innocuous occurrence, or another instance of magic invoked through a darkened soul? Who am I to say?

As long as Warlock Underlord Carney continues to use his powers for good, there is really no harm in his being a warlock. Is he evil or chaotic in alignment? I don’t really know what that means, but I don’t think so. His terse and dynamic public statements sure are missed here though. Our new Governor seems content to do what most bankers do best: his job, discreetly. And I actually prefer it that way after Poloz issued a weird statement thanking Canadians for taking on crippling amounts of debt during the recession. I don’t blame him though–the shoes of a warlock are hard to fill.

Spain has officially left the EU bailout fund this week, and we are getting reports that it is officially “out of recession.” So what does a country “out of recession” look like?

image: Associated Press

Hm. Maybe by “out of recession,” people mean that Spain has doled out so much recession in the past few years that it has no more to give. It’s fresh out of recession and has now replaced it with garbage. I don’t care what the official parameters defining a recession are–strikes by students and garbage collectors, an unemployment rate of over 26%, and a GDP growth rate of -1.4% last year don’t seem like evidence of Spain’s emergence from recession.

In fact, Spain’s youth unemployment rate reached an abysmal landmark in late August when it hit 56.1%. So if anyone is curious why Spaniards aren’t busting out the rioja to celebrate the end of their recession, this could have something to do with it. There have been mentions of disincentives to work, but Spain has been busy for the past two years dismantling its welfare state, and the recent protests are a reaction to this. People also have to realize that Spain is the proud inventor of “machismo,” a charming little spin on patriarchy. I cannot imagine that Spanish men are happy about not being able to fulfill their traditional role as providers for their families. It’s hard to fathom that a country that holds the matador up as an example for men would be very accepting of the dude who sits on the couch watching Betty la fea and drinking…whatever it is that Spaniards drink. Rioja?

Foto: EL PERIÓDICO.

The high expectations placed on men as fearless providers is partly responsible for the awful way unemployment is affecting Spanish society. The current generation of young people is now called the “lost generation,” and there has been a rise in cases of “youth machismo,” young Spanish men’s reaction to feeling professionally impotent.

The New York Times had a great piece on Spain yesterday that draws attention to the way youth unemployment is pulling at the fabric of Spanish society. The quote that really got to me was one from a young, educated girl who had to leave Spain to work in a stockroom in the Netherlands:

“Leaving your country should be a decision, not an obligation.”

Does this sound like someone who is taking advantage of disincentives? The next person to say that word to me is getting smacked. That article is full of highly educated youth searching frantically for a job, even if it’s as a clerk in a grocery store. This clearly illustrates that the issue is not that no one is trying to find a job–the issue is that there are no jobs.

I am extremely confused. Who decided that Spain was out of recession? A recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” Spain’s GDP has been falling for eleventy-million consecutive quarters (also known as since the beginning of 2012).

As this chart illustrates, Spain’s GDP had taken such a beating since 2008 that a recovery will take many years. But since its GDP is projected to increase by 0.1% in Q4, it is apparently out of recession now? Tell that to the PhD-holding Spaniard wading through trash to get to her job interview for a temporary position at the grocery store.

Cuba’s recent announcement that it will be merging its two currencies was the most exciting development in my life in months. But let’s blow right past the part where my life is apparently excruciatingly boring and get to the fun currency stuff!

What would Che say?

Cuba’s currency situation has been cray for a while now. For the past two decades, the peso convertible (CUC) has been used by rich folk and tourists, while the peso cubano (CUP) was used by the unwashed masses. And I mean unwashed–many Cubans barely make enough CUPs to cover the cost of soap. The CUC is quasi-pegged to the US dollar, and it is now worth about 1.03 USD. Twenty-five CUPs are worth one CUC. The tale of these two star-crossed currencies is a story of persistent inequality in spite of, and at times because of, Cuba’s communist regime. Human nature and global necessity have given rise to a two-tiered society in Cuba, and Raul Castro’s regime is attempting to level the playing field with reform. But can a unified currency unify Cuba?

An article in the Havana Times describes the feeling of having to pay for goods in CUPs instead of CUCs in a humorously depressing way: “The numbers are shocking…they remind you how screwed you are.” This is because many consumer products are priced in CUCs, so Cubans must change the CUPs they are paid in to purchase them. But most Cubans who get paid in CUPs only dream of being able to afford the flatscreen televisions and other luxury items that CUCs could get them. Many would settle for the money to buy a beer on a hot day.

Cuba’s GINI coefficient, a measure of income inequality, has been on the rise since the fall of the Soviet Union in 1989 and the introduction of the peso convertible in 1994. In the late ’80s it was estimated at 0.24, but by the mid-2000s it had risen to 0.5, moving The Economist to comment that “Cuba is starting to resemble the rest of Latin America, but without the civil liberties.” Also, most of Latin America can afford to pay its doctors and doesn’t come close to having the highly developed underground economy that Cuba does. Take a step in any direction at a Cuban resort and you will find something being done under the table in the name of helping an enterprising Cuban renovate his home or buy a car. Even my parents, two of the most straight-laced people who have ever existed, accidentally purchased contraband rum on their Cuban vacation.

In a country where it is more lucrative to be a tour guide than a doctor, the restoration of a single currency will hopefully bridge the gap between Cuba’s elites and those who must choose to either circumvent the system or suffer it. Access to the peso convertible has been synonymous with affluence, and it will be interesting to watch how Cuban society changes with its gradual exit. There are  worries of sharp inflation since the CUP, while theoretically equal in value to the CUC, is actually worth so much less. Adding to these concerns are questions around whether the Cuban government’s odd system of giving state-run enterprises a 1:1 exchange rate on CUCs and CUPs will necessitate painful spending cuts. However, the likely currency devaluation is attractive from a trade standpoint, especially for the tourism industry. Let’s just hope the spoils trickle down to the poor doctors who need them.

This currency drama is almost as exciting as watching all those Cuban telenovelas that don’t exist because no one has any money to make them; much like a telenovela, it will end in marriage, but instead of two ridiculously attractive people, two currencies will merge. It remains to be seen if the union will be a happy one.

Puerto Rico’s strongest export? Charisma.

Watching Puerto Rico’s steady slide toward default is like watching a slow-motion car crash. “What slide toward default?” most people will ask. Ah. The one that is being covered by not one single respected American publication because no one in America has thought about Puerto Rico for around 115 years, or since America took possession of the newly liberated Spanish colony. I had to learn about PR’s bond crisis through a series of articles in The Economist, and even the New York Times relegated the news to some pseudo-section called Dealbook. Whatever that is.

Puerto Rico’s situation brings two comparisons to mind. The Economist draws a comparison to Greece as “a chronically uncompetitive place locked in a currency union with a richer, more productive neighbour.” Moreover, Puerto Rico’s public sector is bloated (surprise, surprise), and it’s debt-to-GDP ratio is 70%–higher than any other American state. And while PR is not a state, it is also not a country and it’s treated by the US as a state. Technically, it’s a territory, and though its residents are citizens of the United States and pay with the greenback, they cannot vote in federal elections. Exhausted yet?! I am.

The second comparable situation is the string of bankruptcies declared by a handful of California cities and, more recently, Detroit. However, as that weird Dealbook crap points out, Puerto Rico cannot declare bankruptcy due to its territory status–it’s in a “legal twilight zone.” This article is from weeks ago but it reports that Puerto Rico has essentially LOST ACCESS TO THE BOND MARKET. Of course, this could not have come at a worse time, with the shutdown of the US government and a near-default of federal US bonds. But now that’s all over (for now) and, still, all anyone can talk about is Ted Cruz and Miley Cyrus. Enough!

See what I mean about the charisma?

All of this could be solved by granting Puerto Rico US statehood, an option that its citizens, who were historically loth to fully join America, approved in a referendum in 2012. However, like all issues that must go through Washington, this one will almost certainly result in partisan squabbling and eventual gridlock. Puerto Rico votes Democrat, and Republicans will not tolerate an influx of democratic senators, reps, and electoral college votes. And so again, US politicians will act in the interest of ensuring their party’s continued success rather than in the interests of their constituents.

Because, though politicians are not accountable to Puerto Ricans, this decision will still hurt the people that do have the right to a federal vote. In the event of a Puerto Rican default (proposed by Matt Yglesias), investors will lose out. This includes a not insignificant number of US citizens’ pensions and mutual funds. And if PR chooses instead to cut its citizens off from social spending, the US will probably have to use tax dollars to prop it up anyway. Puerto Ricans don’t pay federal taxes, so that’s all on you, America. (:

In general, this crisis really underlines the shitty shittiness involved in PR’s status as a US territory. Puerto Rico has no control over its monetary policy or exchange rate, which would be very helpful right now in restoring some competitiveness. It is subject to US labour laws, which are not really applicable to an economy as uncompetitive as PR’s. (The minimum wage in Puerto Rico is pretty much equal to the average wage.) Reforms are supposedly being passed, but there is only so much a governor can do. The tax incentives for American manufacturers to set up shop in Puerto Rico expired in 2006, and politicians appear to have just kind of forgotten to renew them, or to do anything else helpful for that matter. If Washington doesn’t start paying attention, something really stupid is going to happen–something that will require making it rain on PR from Washington’s rubber-band wallet. And that’s not good enough for a territory that produces the most pop stars per capita in the world.

Come on Ricky–buy some Puerto Rican bonds!

I know I had some harsh things to say about Canada recently; I went so far as to call it a d-bag and compare it to a belligerent child. I have had something of a change of heart, and I owe it to The Economist‘s offbeat use of the word “sexy” to describe Canada.

The Canadian Press/Adrian Wyld

The event that inspired the elevation of Canada to sex symbol status was the announcement of a free trade agreement between Canada and the European Union. Hot damn! I was beginning to think that the agreement to which Harper has been alluding for some time was nothing more than a mythical yet wondrous figment of Harper’s imagination. The unicorn of trade agreements.

sadhillnews.com

But it turns out that I was wrong, and Harper was just playing it close to the chest for a change. Heh. Of course, not everyone will be happy about this deal: there are those who believe that protectionism, not liberalisation, is the path to a thriving local economy that actually benefits locals. There is a lot of worry in particular about Ontario’s troubled manufacturing sector, especially its automotive industry. An influx of cheap European cars is probably bad news, but opinion is still surprisingly divided over the harm vs good that will come of it because, on the other hand, Canada can now sell more of its cars to Europeans.

In any case, this is exactly the sort of cyclical argument on free trade in which I do not wish to engage. Economic and political integration between nations is usually a good thing, and free trade foments both. People hold up the subprime mortgage crisis and subsequent eurozone crisis as examples of inevitable consequences of financial globalization, but I would argue that these events were more a result of lax regulation in the US and debt-to-GDP panic in the eurozone. That is, their actual cause was not financial integration between nations, but isolated cases of stupidity, the effects of which were exacerbated by linkage. So, to me at least, the argument against financial linkage should more rightly be one against stupidity.

One could argue that if linkage exacerbates shocks, then that is reason enough for nations to withdraw, but it is not that simple. There are enormous political and economic benefits to integration, and isolation is looking nearly impossible these days. As technology changes the global landscape ever more radically, it is becoming increasingly difficult for nations to shield themselves from the reverberations of economic shocks in far-off lands, even when their laws in theory should. And when we look upon one of the world’s most isolated nations, North Korea, it becomes apparent that isolationism is not a good look for a modern economy. (Though there are obviously other factors at work in North Korea’s case.)

KCNA

Unfortunately, the complete opening of trade borders that some predicted would result from globalization has taken a stumble following the financial crisis of 2007. Far-reaching, multilateral trade agreements are increasingly being replaced by bilateral or regional pacts, and many countries’ knee-jerk response to the recession has been to tighten capital flow rules and impose prohibitive tariffs. Which is so unsexy.

The sexy thing for governments to do now would be to collaborate more fully in the task of building an international governing body that we can all agree on. Since the Harper government insists on undermining the UN at every turn, perhaps it could be a forerunner in establishing a viable alternative–in that case Canada would instantly be promoted to “dead sexy” status. An international governing body would empower governments to tell the US to regulate its shit, and the eurozone to learn basic economics instead of listening to Rand Paul. One would hope.

Canada is still a douchebag for spying on Brazil–that needs to happen less if we are hoping for increased integration–but I suppose Baird’s comments on the fraudulent Maldives elections were warranted. The election was really really fraudulent, and it appears that no other country really minded–or were they just too busy worrying about their US bonds? I begrudgingly award kudos to Baird for speaking out. Though I still think some tact in other instances would do wonders.

Yesterday someone sent me an online petition to “remove Stephen Harper as PM of Canada.” That’s when I realized I should take it down a notch. I’m not his biggest fan, but he’s not at Putin or Maduro level. Sometimes he even does things that don’t completely enrage me. And he may turn out to be our sexiest PM yet–especially if he gets a real unicorn for Canada just like he got us those pandas.

Over the past year I have had countless conversations about politics with many people, and the only time I ever get into trouble is when I begin talking about Venezuela’s late former President, Hugo Chavez. When I express a dislike for his policies, I am inevitably asked if I am “conservative.” NO! I just believe in sound macro policies! The (usually left-leaning) person I am talking to looks at me mistrustfully and the conversation either awkwardly ends or is steered into US-bashing territory by said individual. Yes, I know that the US is responsible for 99.9% of everything bad that has ever happened (except for Nickelback), but Venezuela’s current woes cannot be cast as such. (Though President Nicolas Maduro is doing just that–he recently expelled three US diplomats for plotting to sabotage the economy.) I want to make the case that leftist policies can certainly work well as long as they are implemented prudently and intelligently, as in the case of Brazil’s president from 2003-2011, Luiz Inacio Lula da Silva (Lula).

Venezuela has had a turbulent past three decades, as have most Latin American countries, which makes it difficult to gauge the impact that Chavismo has had on Venezuela. Also complicating matters is the country’s reluctance to divulge economic data. However, it is generally agreed that Venezuela’s GDP growth looked something like this under Chavez:

 

And this is how Brazil’s looked under Lula:


For my purposes, the most salient features of these two growth trajectories are:

a) Venezuela’s steady downward arc after bouncing back from the oil strikes of 2002-2003.

b) The fact that Venezuela, a nation with the largest oil deposits in the world, was unable to maintain steady growth or stability for any meaningful period of time (estimates place average growth between 2004 and 2011 at just 3%).

c) Venezuela’s isolation from the West relative to Brazil is demonstrated by a small downturn in 2007-08 GDP, while Brazil took a nosedive during this period.

d) But still, Venezuela’s persistently diminishing growth since 2007 is mostly a product of reduced demand for oil throughout the developed world.

e) Under Lula, Brazil’s economy took off and rarely dipped below 3% growth, exempting the recession.

Agence France-Presse — Getty Images

Of course, a leader’s legacy is not judged solely on GDP growth, but I think the above charts show some fundamental truths about the two leaders’ governing styles. Though Lula spooked markets during his campaign with comments about reevaluation and possible default on Brazil’s sovereign debt, once in office, he was pleasantly pro-business. His trademark combination of public and private sector enterprises worked well, and foreign direct investment tripled on his watch to $30 billion a year by 2011. He also collaborated with the IMF and was able to pay back loans two years ahead of schedule. Imagine that–a leftist who can balance the books!

He also lifted 20 million Brazilians out of poverty and made it his personal goal to bring them better education and health care. Lula began the long process of tax reform, which is now stalled under his successor Dilma Rousseff, and appointed competent economists to run the central bank and treasury. Inflation was 15% when he took power, but hovered around 5% for most of his presidency. Best of all, he implemented various innovative initiatives. Fome Zero’s goal was to reduce hunger, and while it had a government budget, it also accepted funds from private donors and international organizations. His Growth Acceleration Program was a pledge to invest in Brazil’s infrastructure over the course of four years. Keynes would have been proud.

Lula played nice with the US and Latin American countries, and, despite some mighty odd pronouncements, he attracted business to Brazil because he didn’t terrify people. Sure, he blamed blue-eyed, blonde haired people for the recession, but I, for one, admit my part in it. Oh why did I underwrite all those CDOs while I was working for Goldman Sachs? The point is that Lula understood the role of international engagement and the private sector in the fate of his country’s economy, and was able to move to the center politically when he realized that the state acting as a belligerent island cannot sustain an economy in today’s world. He understood that cooperation with these actors was the only way to accomplish his central goal of giving Brazilians the means to live a comfortable life. Did Chavez understand this? Not a chance.

Juan Barreto/AFP/Getty Images

Chavez might be remembered best for his loud denigrations of everyone from George W. Bush (whom he called “the devil” and “Hitler-Bush”) to Spanish monarch Juan Carlos I, who famously told Chavez to shut up at a leaders’ summit. While this foreign policy technique certainly garnered attention, it severely crippled Venezuela’s relationship with pretty much every country except Bolivia, Cuba, Russia, and Iran. And so while Brazil’s FDI and current accounts balance flourished, Venezuela found itself increasingly limited to a small number of trading partners–though it should be noted that, despite Chavez’s fiery invectives, the US was the most important of these!!

I have no doubt that Chavez had the best of intentions, and I don’t deny that he helped a lot of people. The poverty rate in Venezuela was 70.8% in 1996, and by 2010 it had fallen to 21%. He conceived of projects such as Ciudad Caribia, a city created for the country’s Carib population in which homes have been given to 1600 families so far. I do not take issue with what he was trying to do, but rather his methods.

Chavez implemented a number of economic policies that did more harm than good, especially for the poverty-stricken people he most wanted to help. The fact is that revenues from state-owned oil behemoth Petroleos de Venezuela S.A. (PDVSA) go directly to the government, which then uses the cash for whatever suits its fancy. This often includes public works projects, social spending, and aid to poor countries like Haiti and Cuba. My intention is not to debate private vs public (I have no problem with state-owned enterprises, as long as productivity can be maintained), but PDVSA is not state-owned so much as it is Chavista-controlled in a distinctly undemocratic fashion. This is important because the degree to which Venezuela is dependent on oil exports is shocking. In a 2009 report on the Venezuelan economy by the Council of Foreign Relations (CFR), it is reported that “oil generates about 80 percent of the country’s total export revenue, contributes about half of the central government’s income, and is responsible for about one-third of the country’s GDP.” This number has been estimated at 95% in recent years. In other words, yowza!

So the government’s ownership of PDVSA puts it in control of most of the capital flowing into Venezuela. The government in turn dispenses the wealth to the people. Chavismo is essentially the process of the government’s increasingly restrictive economic policies that make citizens even more dependent on the Chavista government. And, as the CFR points out, “analysts draw links between PDVSA’s profitability and the political stability of the country.” Eek. The CFR also reports that policy analyst Peter Hakim has observed that “Chavez’s gradual takeover of PDVSA has given him an enormous bankroll to pursue his political and economic ambitions.” Many have suggested that PDVSA is poorly managed and that more revenue should be reinvested in infrastructure to assure its long-term productivity. While social spending is admirable, money spent on infrastructure would assure the availability of revenue for social spending well into the future.

Apart from Venezuela’s worrisome dependence on oil and the Chavista hold on PDVSA, the two most irksome policies implemented by Chavez are price caps and exchange rate controls. Price caps were introduced as a way to tame the country’s rampant inflation, which is partly a result of reliance on oil. Inflation has long been a problem of Latin America, but in recent years other countries have managed to tame the beast, whereas Venezuela has resoundingly failed, even compared to economic basket-case Argentina:

(There is also speculation that Venezuela’s inflation rate may be creeping back up to 100% amid ongoing instability caused by the April elections.)

But instead of treating the cause of the problem, Chavismo elected to treat the symptom, which resulted in perpetual shortages of bread, milk, and other essential items as carrying these products was no longer profitable for grocers. Admittedly, inflation and shortages were a problem long before Chavez took power, but he presided over an increase of the price of oil that reaped surprisingly few improvements in the country’s financial situation. Compared to United Arab Emirates or Norway, also big oil exporters, Venezuela has little tangible evidence of an oil boom–except inflation, that is.

Masdar City, Abu Dhabi
image: BBC

Currency controls are also a massive problem. Put into place to lessen capital flight in the face of inflation, they have further distorted the value of the bolivar. The official exchange rate is 6.3 bolivars for one dollar, but on the black market the rate is six times that. To bolster the export sector, the bolivar was devalued by 33% in February, which incurred even more inflation and resulted in even more expensive imports. So the export sector, from which the government gets virtually all of the profits, is prioritized over the interests of citizens that need a stable currency and consumer products, which in turn makes them even more dependent on state handouts. This is fine if the state continues to hand stuff out, but, by most accounts, social spending is unsustainable.

I could list more dismal economic statistics, such as the 9% deficit Venezuela clocked in 2012, but I think I’ve made my point. It has been said that Chavez improvised his way through much of his presidency, and I think that’s fairly obvious. Despite his good intentions, he was not a prudent caretaker of the economy.

It is always hard to gauge how much of a country’s trajectory is a result of leaders’ policies, and it’s a little unfair to judge Brazil, with its diverse export sector, against Venezuela’s petroleum-heavy exports. However, It could be said that Lula did more with less and that Chavez did both less and more with plenty. Though the legacies of these two leaders will continue to be hotly debated for years to come, from my perspective one gave the people the means to sustain themselves while the other made them more dependent on an ever-increasingly precarious state.

Both Lula and Chavez’s successors are in extremely difficult situations that can to varying degrees be attributed to their predecessors. Venezuelan President Nicolas Maduro must find a way to scrap some of the more insidious policies of Chavismo while keeping the Chavistas appeased, while Brazilian President Dilma Rousseff must find a way to push through tax reforms, work on infrastructure, and improve Brazil’s business climate.

I hope I have made my case for responsible leftist policies rather than reckless ones, and I hope it is now clear to all that I am not a yanqui-loving, satanic, conservative!

“Just forget about it guys, go do something else.”

This was the advice an investment banker in the mining sector said he’d like to impart when he gives a speech next week on his industry to MBA students going into mining. And he didn’t have any sunnier words for potential investors: “Mining is like a lottery. You can win big, but chances are you won’t.” He took the lottery comparison further, suggesting that mining’s low profit margin means it constantly sucks up large amounts of capital to function while returning little of it to the average investor.

Though mining as an industry is currently in a down-turn, the banker insists that his comments apply in more prosperous periods too. All of this struck me as extremely odd. While the price of gold has taken two big falls and a series of little stumbles over the past six months, it is seen by the general public as one of the “safer” investments. Investors tend to turn to it in times of instability, to safeguard against rogue currencies and capricious markets. In India the national gold fetish has caused a massive current account deficit and distorted the value of the rupee. And if Rand Paul and others of the libertarian persuasion want to reinstate it as the standard by which to define the value of the worlds’ currencies, they must have good reason for wanting to do so.

All of this raises a few questions for me. First of all, what does it mean to buy gold? When one invests in gold, is one investing in the actual material tucked away in a safe, or rather must one invest in the mines that extract it or in an ETF tracking a multitude of mines? “Investing in gold” is such an abstract phrase, for me at least, that it bears examination.

The short answer to this question is, anything goes. One can invest in bullion coins, bars, or even jewelry, from dealers (Forbes’ Nathan Lewis outlines the entire process here), which will usually Fed Ex the gold to a chosen destination. This can be a bank, a safe storage company of the owner’s choosing, or even a home safe. (Insert snarky quip about libertarians storing gold at home here.) There are also virtual gold ownership options in which the company holds gold for the owner, and ETFs that track gold’s cost. However, Lewis warns against these options, because in the event of the bankruptcy of a broker, it would be nearly impossible to recoup the investment. As he rightly points out, when one possesses physical gold, it is possible to see “just how abstract and tenuous most investments are.” ETFs are seen more as a speculative bet on future gold prices, as are gold futures contracts; both investments more closely resemble Keynes’ famous casino (in which agents act based on their predictions of other agents’ actions) rather than our investment banker’s mining lottery, which applies more to the next gold investment option.

2 Chainz: Sustaining the gold industry since 1977

The “lottery” route to gold ownership is through investment in mining companies. A quick scan of most major mining companies’ balance sheets will show why: many of them are loaded up on debt due to the capital-intensive nature of the industry. One of the larger firms, Barrick, has a whopping $14 billion in long-term debt. Forbes observes that gold mining companies have underperformed both the broader market and gold itself consistently for eight years, despite gold’s soaring price during that same time period. It would stand to reason that gold miners would take off at some point, but rare are the instances in which common sense holds up in markets. In the case of gold miners, it seems the complex logistics of the industry have managed to erode its profitability, and the situation is critical now that gold prices have fallen so drastically. On the upside, however, most analysts say gold miners have nowhere to go but up, making them a wise choice for anyone who enjoys lotteries with particularly long odds. Gold miner ETFs are available too.

So the differentiation between investing in gold and investing in gold mining is important in understanding our banker’s bearish comments. My initial confusion came from conflating the two, though now I have another question: If gold is reckoned by most to be a secure store of value in times of instability, and (by some) the standard by which currency should be measured, then how to explain its spectacular fall?

Ben Bernanke, the current Chairman of the Fed, had this to say: “Nobody really understands gold prices and I don’t pretend to understand them either.” Many analysts affirm that gold’s price is largely based on emotion. That’s a pretty risky thing to chain a currency too, though it could be argued that a floating currency’s value also has a lot to do with investor perceptions. The price of gold seems to be loosely connected to the level of perceived instability of markets and political conditions–this would partly explain why gold has been in a bull market since 2000, and from then it quadrupled in value over the next nine years. Gold now trades for around $1300 an ounce, down from over $1900 in 2011. The Fed’s announcement in May that it might soon begin tapering QE may have exacerbated gold’s precipitous fall by attracting investors partial to “safe” investments back to the US bond market with the promise of higher returns. Additionally, the Fed’s comments could be seen as a harbinger of the end of the uncertainty that the recession perpetuated, thus making gold’s function as a safeguard against instability redundant.

Proponents of the gold standard amazingly still abound. Most of these are libertarian-leaning Republicans who regard inflation as theft. This too is an emotional issue for some. Even after the price of gold tumbled twice within two months, which should clearly signal the fact that no commodity is sacred, Republican politician Rand Paul insisted that his father’s pet gold standard platform be reconsidered to combat the dreaded inflation beast, commenting that “we need to think about our currency that once upon a time had a link to a commodity and I think we should study it.

Despite recent events, it is unlikely that gold will lose its relevance anytime soon. If the US does in fact default on its debts, gold may enjoy a swift recovery, as might the mining sector. Whichever way gold goes, Mr Paul is unlikely to give up his crusade to reinstate the gold standard. And as for the banker in mining, he’s just grateful for the extra free time to work on his speech.