Ep 46 – Glen Whitman and James Dow: Economics of the Undead
What should you pack for the zombie apocalypse? Are vampires the best immortal investors? What would be money in a zombie pandemic?In the last installment of our Zombie Month series, we welcome James Dow and Glen Whitman onto the Gold Exchange Podcast. James and Glen are professors of finance and economics at CSUN, and edited the Economics of the Undead. Listen to Ben, Keith, James, and Glen get into everything from zombie insurance to undead investing.
Connect with Glen on Twitter @glenwhitman and James on his website.
Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals
Additional Resources
Earn Interest on Gold and Silver
Austrian Theory of the Boom Bust Cycle
Reasons Why Gold is the Best Money
Thomas Sowell Conquests and Cultures
Podcast Chapters
04:23–5:36 Yield Purchasing Power
05:36–09:54 Vampiric Investing
09:54–12:41 Undead Present Discounting
12:41–17:15 Packing for Zombies
28:16–36:08 Dracula and the Boom Bust Cycle
36:08–38:21 The New Whiskey Rebellion
38:21–42:56 The Immortal Drawdown
42:56–47:49 Zombie Comparative Advantage
51:30–56:09 Bryan Caplan’s Bet
Transcript:
Benjamin Nadelstein:
Welcome back to the Gold Exchange Podcast. My name is Benjamin Nadelstein. I’m joined, as always, by founder and CEO of Monetary Metals, Keith Weiner. We are joined by two special guests today for our zombie themed month. We’ve got James Dow and Glen Whitman. Welcome to the Gold Exchange Podcast.
Glen Whitman:
Thanks for inviting us.
James Dow:
Thank you again.
Benjamin Nadelstein:
So why don’t you quickly give us a quick background. Glen will start with you. How did you kind of learn about economics, get interested, and specifically about zombies?
Glen Whitman:
All right, well, how I got into economics needs going way back to when I was an undergraduate and I was studying political science, but felt like all the debates that were happening in my classes were actually about economics. So I thought maybe I should learn about this econ thing and added an econ major and got sucked in and ended up going to graduate school, and the rest is history. So that’s the short version of how I got into economics, the undead thing. It’s been a while, but I believe the origin was from watching Buffy the Vampire Slayer, which I know that Jim was also a fan of. And I remember there was an episode where the character Spike, a vampire, is discovered to have been visiting what I can only describe as a blood brothel, where apparently there were humans who liked to be sucked by vampires, and so they were paying vampires to suck their blood, which, first of all, just struck me as odd. As an economist, I thought maybe the payments would go the other direction. But also there was the fact that later in the episode when Buffy discovers this, she goes ballistic and she ends up burning the place down.
And my reaction to that, which was similar to the reaction of the character Giles, was to say, well, wait a minute, isn’t this a way of solving the vampire problem in a voluntary manner involving markets? After all, they’re not hurting anybody who doesn’t want to be hurt. Everybody’s there voluntarily. It’s mutually beneficial exchange. What’s the problem? And so that got me thinking about the economics of the undead. And at some point, I started talking to Jim about it, and I guess he caught the bug, too, and that’s how we came up with the idea. It also, I guess, was affected by the fact that we had seen all these series of things like Lord of the Rings and Philosophy, the Undead and Philosophy and so on. There are a number of books that are about the intersection of philosophy and pop culture, and we thought we could do the same for econ.
Benjamin Nadelstein:
James, why don’t you give us a quick introduction to your background? Obviously, Glen beat you with this vampire teeth and got you interested. But how did you get into economics?
James Dow:
Right, yeah, I’ve had a long interest in horror movies, more classic horror movies from the so when Glen brought up this topic, I thought, oh, yeah, that’s a natural thing to do, and give you a chance to kind of think about rethink about those movies in a new light. What is their implications for economics? And, yeah, I kind of have a similar background with Glen. I started out as a political science major as an undergraduate, and for me, I think it’s sort of an interest in math and history. There’s always been my interest, and so economics is kind of a nice combination of the two. A little bit more technical than political science, but still involved in social science and history. So I switched over, became an economics major and enjoyed it so much. How can they make a career out of this? Went to graduate school and became a professor.
Benjamin Nadelstein:
All right, so now that we have a little bit of both of your background and how you kind of came to this economics of the undead topic, let’s talk about the book now. So I loved reading this book. It kind of melds economics and the undead and a little fan movie fiction. It has a little bit of everything. So I can’t recommend the book enough. But I wanted to dive in with something that Keith wrote, which is about yield purchasing power. So there’s this idea, okay, I have $100,000. How many groceries can I buy with this? $100,000. But that might not be the right question. So, Keith, why don’t we jump to you? What is yield purchasing power?
Keith Weiner:
So you just described purchasing power $100,000 worth of capital if I liquidate it, how many groceries can I buy? Yield purchasing power is if I operate the capital as a business or at least as savings and getting an interest rate on it. How many groceries can I buy with yield $100,000 worth of capital? It turns out that there’s been a hyperinflation in yield purchasing power since the early to mid 1980s where it takes more and more capital to get the same median lifestyle worth of groceries.
Benjamin Nadelstein:
Well, the reason I wanted to ask this was in the book, there is a chapter on investing and how vampires might invest differently or similarly to humans. And I’ll let you guys jump in here in a second. But what I thought was interesting was this idea of compound interest, right? So at our company, we obviously offer people interest on their metal in metal, which is great for those people, and they can earn compound interest on that interest, which is always great. I think Einstein kind of said that compound interest is one of the most powerful forces in the universe. But when I was reading the book, there was something that I didn’t think to account for, and that’s survivorship bias. So you hear about all these Count Dracula and all these people with lots of gold, and obviously we want them as monetary metals alliance, but one thing we don’t hear about is the counts of Communism, because all of their gold, all their property and all their wealth might have been confiscated in the revolution. So, Jim, is there actually a benefit to being an undead or immortal investor, or is it kind of no big difference?
James Dow:
Well, first, go back to this idea of survivorship bias. And the reason that came up is, let’s say you are a very long lived investor, like a vampire, and so you’re talking about a period of 100 years. So what return could you expect to earn if you’re investing for that long? And the problem is, if you just go back and say, let’s look at all the stock markets that have lasted 100 years, you have a bias because you ruled out all the stock markets that have failed. So you’re one country that’s lasted 100 years, you earn 8% a year, that’s great. But another country could have only gone for 50 years. And then there’s a communist revolution and the stock market is crashed and all the capital appropriated, and then you earn nothing. You lose all your money, and those things don’t show up in the data when they actually calculate this, and people have done the research and actually gone back and said, what have you earned for 100 years in the stock market? So in that sense, it overestimates your returns because you don’t know ahead of time, maybe, which society you’ll end up in.
Benjamin Nadelstein:
So I had a possible, maybe, solution to this, but again, I never studied finance, so this might not work. But how about setting up an immortal undead trust? So vampires, they can fall asleep as long as they need to, right? And they might be earning interest on, let’s say they’re gold capital and they have a henchman or whatever, they put someone under their spell and maybe they can have them kind of keep an eye on the market. So if things aren’t looking so hot in one area, they can move that capital somewhere else. What do you think about that, Jim?
James Dow:
Absolutely. You could start up a company, Renfield Money Management. Right? Renfield was Dracula’s assistant who did all that sort of stuff. And to be honest, how well do you know your clients now? Are there some you just never see in the daytime? What are you handling money for? So that’s a perfectly reasonable thing. So one is you might want to delegate people to do that for you. Another thing, of course, is diversification. I’m pretty confident in kind of broadly what the world will look like over the next five years in terms of technology and governments and things like that. But if you’re asking me what is the world going to look like 30 or 40 years from now, it could look radically different. And so, again, I think that’s a big argument for again, for extreme diversification, concerns about tail risk, concerns of people talk about black swan events, things like that.
Glen Whitman:
I would jump in here and say the strategy is to go to sleep. In the meantime, you hibernate as a vampire while your money accumulates. That seems like a good idea, but then you have to have somebody else to deal with those problems, and then that has to be somebody that you’re paying. And so that person ends up being kind of a drain on your fund presuming. You have to give them some kind of an income to live on. Now, on the other hand, you could choose to remain alive during this whole period while your money is accumulating. But in that case, of course, you have to have money for your own maintenance, which is something that’s going to be drawing down your capital and reducing the amount of return that you’re able to get.
Benjamin Nadelstein:
Well, Glen, I want to ask you a little bit about that. So there’s this idea of valuing present gold and then there’s this idea of value future goods, right? Can you break that down for me? And does that change at all if you have a longer kind of view or longer time span?
Glen Whitman:
Interesting question. So what you’re talking about is sometimes referred to as present discounting or sometimes referred to as time discounting. And it’s just the idea that in general, people value the present more than they value the future. And we will put something called a discount rate on that as a measure of how much a dollar in the present is worth relative to a dollar in the future. Now, the question is, would vampires have a different discount rate from human beings? And I think the assumption is that they would because of the fact that they’re so longlived. And so there’s a paper in the book by I think it was by Fabian Medbecki, which is saying, well, if that were true, then in that case, how would that change the decision making calculus of, say, vampire policymakers who are thinking about things like climate change? I think it’s a plausible argument in as much as when people discount the future. One of the reasons they discount the future is because of the possibility that the future won’t occur, that you won’t be alive when a given future happens. And so if a vampire is more likely to be alive when a given future happens, then presumably they’ll put a bit more weight on it.
Glen Whitman:
That said, a couple of caveats, which is a vampire might also have to worry about the likelihood of being staked in the meantime. It’s not a given that the vampire is going to live forever.
Keith Weiner:
I was going to ask, are the children immortal or can anybody with silver cross or a stake in their life in which case they’re not immortal? And then time preference still is the thing.
Glen Whitman:
Yeah, exactly. And I would also say that it’s not the case that the possibility of death is the only thing that causes us to prefer the present over the future. Think about the fact that, say, young people who have a lot more years left in their life than more elderly people nevertheless will sometimes behave in a way that seems like they place a lot more value on the present than the future. So I think it has to do with a lot of subjective factors that are not necessarily related to how long you expect to live. I’m not saying that that’s not one of the factors that goes into it, but there are other things to consider as well. So for that reason, I don’t consider it a slam dunk case that vampires would have a lower rate of time discounting than humans would.
Benjamin Nadelstein:
Well, okay. Now I want to get to something that I thought might be fun. So Keith is obviously a gold and silver guy like myself and we talk a lot about how gold and silver money. But one of the chapters is discussing what someone might want to pack if the zombie apocalypse does happen. Now, I’m not going to spoil some of the other chapters, but there is this idea of a zombie bond which I thought was really interesting. There’s kind of the zombie insurance, right? You’re playing with chemicals, you might be working on some sort of zombification process and so you are kind of inclined or forced to give out zombie insurance. So you put out this bond. If anything ever happens, people will be paid in full for their risk of dealing with your kind of zombie work. But let’s say the worst does happen. The zombies are out and it’s time to pack your goods and go. What are some things that you might want to pack on the zombie apocalypse? Jim, let’s start with you.
James Dow:
So that was a chapter and I was talking about what you should bring. And part of the point of the chapter was really to introduce some economic notions like physical capital and.
Glen Whitman:
Human capital.
James Dow:
Human capital, sorry about that. The idea was that if you just pack goods, like pack a bunch of food, pack a bunch of water, that’s going to run out quickly. So you really want things that can produce for you for a long time. And since you’re limited to the amount you can carry, human capital has the advantage of being carried in your head. And so being very lightweight in that sense. And so there’s value in sort of learning skills that might be useful in the zombie apocalypse. And what I argued is if it really did happen, technology is going to be knocked way back to say what it was like in the so what you really need are the skills that in the 1007 hundreds would have been useful. That was the idea behind that.
Glen Whitman:
Specifically, I have to say the genius idea that people are in all areas and all circumstances, but especially during an apocalypse, going to have a demand for alcohol. And so I love the progression that Jim goes through with this. Well, you might think bring a bunch of alcohol, but you can’t be carrying around kegs of alcohol with you everywhere you go while you’re being chased by zombies. So the next thing you might think is, well, maybe I should just bring a wagon. And on the wagon I’ll be carrying the components of a still. And that’s better than trying to carry around a bunch of alcohol. So that’s bringing the physical capital instead of the consumer gold. But maybe even better than that, as Jim suggests, is human capital. Bring the knowledge of how to build a still and that way you’re not trying to carry your still along with you while you’re fleeing from the zombies.
Benjamin Nadelstein:
Well, I like that idea. When I was reading the book, something that jumped out to me was this kind of idea that there is a trade off between value and weight, especially when you’re maybe on the run, right? So the zombies have this benefit that they actually don’t have any fixed location they can kind of wander around. But the humans, they kind of want to sit in one place and so they kind of start to accumulate things. But that’s an issue when you might need to escape or move to a different location. And it reminded me of a Thomas Solo book. I believe it’s conquests and cultures. But you should just read every Thomas Solo book just to be sure. And one of the points that he makes is that different continents have different geographical features. And because of those features, different items were more likely to be sold as goods because of their weight to value ratio. So in Africa, there’s the Ivory Coast and the Gold Coast. And one of the reasons that those coasts are named as such is because the value of those items was easily able to get to the coast.
Benjamin Nadelstein:
In Africa, there’s not a lot of rivers that get deep into the country. And the ones that do are either subject to intermittent rainfall and they also have these issues of big waterfalls. So there’s big kind of drawdowns if you want to think about it that way. And there’s a CC fly which kills pack animals. So pretty much anything of value that would have to be traded to the coast would have to be walked there physically. So you’d want to pick items that have really, really low weight but a high value. So ivory was one of those items. Gold was one of those items, and the third items was slaves because although they had a high weight, they could walk to the coast themselves. So I was thinking a lot about that when I was thinking, well, what should I pack? And the next question I had was what would be money in this kind of new zombie economy? Glen and I started talking about this. Now obviously I like gold and silver. I think it has a lot of properties that would be helpful. But maybe in the zombie apocalypse, gold and silver aren’t really an option.
So maybe Glen, we can start. What are some money items that you think could be possibly that kind of next medium of exchange when we get to the zombie apocalypse?
Glen Whitman:
Well, first I’d like to rewind just a little bit because you were making a very good point earlier about how humans want to settle down and accumulate. And that’s a big part of the reason why a zombie apocalypse would in fact cause such a drastic drop in our living standards is because of the fact that part of the way that we are able to become so rich is by settling down, accumulating capital, and engaging in a higher degree of specialization and trade enabled by that level of capital. But as soon as you can’t settle down because of the fact that your settlements will be found and invaded, so you have to constantly live on the run, that means that you’re going to be in a much more low quality of life situation because you cannot create as much stuff. So that’s a great starting point. Now another reason why you’re going to be so poor in such a circumstance is because of the likelihood, although not the certainty, that at least at first you don’t have a good medium of exchange, because a good medium of exchange makes it possible so that we can trade effectively with each other.
Glen Whitman:
So even if there’s not as much production, at least we can make sure that each of us has the right combination of goods that’s going to allow us to survive. But without money, you find yourself in this situation where you have what Adam Smith called an extremely clogged and embarrassed situation, I think is what he described it as. Because if you want to say, get some chicken from somebody and all you have are batteries, but they don’t want batteries, what they want is a medical kit, then in that case you have to go find somebody who has a medical kit and is willing to take your batteries. And then once you’ve got that medical kit, then you have to go back to the guy who has the chicken and see if he still wants that medical kit. So it becomes very difficult to carry on exchanges when you’re doing it through a barter system. So money helps to solve that problem. But in a zombie apocalypse, there is a good chance at least that the dollars that we have left over, which have no inherent value to them, are not going to be a good medium of exchange anymore.
They’re going to lose value. So if that’s true, what are people going to rely on is money instead, because it seems natural that they will. So Jim and I were actually discussing this yesterday and trying to figure out what it would be. And the problem is you want something that has some inherent value to it because otherwise it’s just worthless paper and there’s no particular reason for people to want to accept it except from a pure, what we call a bootstrapping equilibrium, where just because everybody else does, everybody else does. And it kind of is a selfsustaining situation. But it really helps to have that backstop of it being useful in some way, such as to either pay your taxes or to make jewelry with, as in the case of gold. But you don’t want it to be too useful or else there’s too high an opportunity cost. You don’t want to be taking something that you really need to be using on an everyday basis, like your weapons or your batteries or your food or whatever. You want to turn that into a medium of exchange because in that case you’re not using it for what it should be used for.
And so you want something that kind of strikes that balance. You want it to be useful, but in a way not too useful on an everyday basis. And so gold is good for that. But I just had this feeling, just a gut feeling, that maybe there’s perhaps not even enough gold floating around in private hands in a way that’s easily accessible that it would take on that role. So I think it would probably have to be something else, but I’m not sure what. And at that point I’m going to hand it off to Jim, maybe as a better answer.
James Dow:
I mean, I think you would really see multiple kinds of money circulating at the same time. I mean, I think there’s some inertia even of paper money which will depreciate away pretty quickly anyway as it runs out, but still might be useful. You need also things, Keith. Small denominations change, right? And so that would probably persist for a while. At the same time, it is a multiple equilibrium situation. Everybody’s got to agree on the same thing and that can be hard to do. And so we talked about things like bullets, which have a nice feature, that they’re relatively small, you can use them for small transactions, but as Glen said, there’s a high opportunity cost to them because you wanted bullets to shoot zombies, not to be held as a store of value. Gold is probably a natural one. I think the question is what would be the prices of gold and could you have small enough denominations to use it in sort of general everyday commerce? I could honestly see gold sort of as becoming more valuable over time, but maybe not at the start. It’s an awkward means to do small transactions. But as civilization kind of rebuilt itself you would need more of a store of value for the long term and goal of service back in history.
Keith Weiner:
If I can just jump in here. Looking back historically the kind of the dawn of civilization and immediately before that when people were nomadic and had to move not because they were running from zombies. So assuming in this scenario that the zombies are a feature that stays and they can’t kill off all the zombies and get back to rebuilding civilization, which assuming zombies are going to be a permanent feature of the landscape, as it were, then people have to return to a nomadic lifestyle, not just moving with the changing of the rains and following the hurt animals they were doing. And historically we know that at least for larger transaction sizes, people were using livestock as money for similar reason as you described in the Ivory Coast and the Gold Coast, which is the livestock moves on their own feet. So the issue that it’s heavy isn’t really that much of an issue. As long as there is grass or something breathable then they can move anywhere you need to move. And then for smaller transactions also. So livestock are great at carrying value over distance because they move wheat. And then salt, particularly salt was used as for carrying value over time because it’s durable.
And so historically, we know at a time when people were nomadic, salt and cattle were forms of money. So there’s some reason, I mean, obviously the obvious are kind of fantastical but there’s some reason to think that those types of solutions would occur because the conditions gold be carrying what existed 4000 years ago. So far as we know before gold, this is what life was like.
Glen Whitman:
Yeah, salt is a really interesting suggestion. Of course, salt used to be hugely valuable and other spices as well and they’re nicely portable. I think what happened historically is we came up with technology that allowed for mass production of salt which drove it to the point of having a very low value just because it was so common. And so if we lost that technology along with many other technologies as we likely would in an apocalyptic scenario, then suddenly sugar and other spices could be very highly valuable again. And so that is an interesting suggestion for something that could serve as a medium exchange.
Keith Weiner:
Also, salt wasn’t just a spice. We think of it today seasoning for food. It was necessary preserving food, especially meat, which otherwise couldn’t keep. So you killed that animal. What do you do with the part that you can’t eat immediately, it’s going to spoil very quickly. Salt allows you to preserve it. And so salt was very obviously you have the problem dual use it’s both money and consumable commodity for daily life was garrisoned until they developed the technology to produce it in mass scale. And so salt was valuable. And historically we know it was a form of money for quite a long time until technology and other things moved on. And then it becomes gold and silver almost exclusively after that.
Glen Whitman:
I don’t think it’s a given that people would necessarily always live in a nomadic lifestyle. I think in the early days of a pandemic, that’s extremely likely. But something that I think the TV show The Walking Dead got right is that people, I think, will gradually start to form essentially citadels, walled cities. At one point in the show, they actually use a prison, which used to keep people in, but turns out it’s helpful for keeping zombies out. And so I think that’s probably what you would see starting to happen is almost a city state kind of situation where people form these communities which are Walt or have some other means of keeping the zombies out. And so then the next stage that would allow some level of specialization and growth and civilization to occur. But to really start to approach anything approaching modern levels of prosperity, they would have to start trading with each other. And that’s going to be the really difficult part. Can you clear out a road and protect the road from the marauding zombies? Is there any such thing as a walled road? Are they going to have to start using hot air balloons to get from one city to another to engage in trade?
So that’s going to be, I think, the sticking point for how you get beyond just having little citadels.
James Dow:
I think if you had multiple of these small towns or citadels, you might also see sort of competition for the private provision of money. So let’s say you happen to be a citadel that’s sitting on a copper mine. And so if you figure out how to do basic copper mining and basic coinage, then you stamp your citadel’s thing and that’s a source of revenue for you. Then you stand by the currency and it gets more commonly used then, yeah.
Benjamin Nadelstein:
I like this idea a lot. What’s interesting. Which I hope I think Keith and I are kind of chuckling. We’re discussing the idea of capital being devoured by zombie hordes and the death of paper money and having to come to this kind of new alternative. Which is funny because in our Zombie Month theme that we’re doing on the Gold Exchange podcast. We’ve been talking about zombie firms and how obviously the Fed has been dealing with these zombie firms. So I think it kind of has a nice correlation there. It’s kind of a larger theme, zombies devouring capital and the soundness of money. So Jim. I actually want to get to you. Now. Let’s talk about the federal Reserve and one of our favorite scoopy kind of characters who is Dracula, and he has this ability to kind of mess with people’s understanding of time. So in the last chapter, I really like there’s this discussion of time and how Dracula is kind of a force or a thematic force against this kind of modernization. Can you tell us about that?
James Dow:
Yeah, so the notion of sort of a contrast between very modern industrial society, which is very explicit and precise notions of time. So, for example, you have a train. It comes at this point, it leaves at that point. We organize our lives around this time schedule. And in an older world, which Dracula represents, time is not as precise and that people lose track of things, and it makes it hard to plan. And so, in a sense, this precise notion of time was important for the west to develop an industrial society. And the more Dracula would intervene and disrupt that, it would make it harder for commerce to take place, to be able to make organized decisions and coordinate across individuals.
Benjamin Nadelstein:
Well, I want to talk about that for a second and use this kind of messing with time and the analogy of the federal reserve. So one of the things that’s interesting, we talked earlier about kind of time preference and future goods, present goods and calculating, hey, what do I need to use? What type of capital should I use? If the structure of time, the structure of money is a certain way, and you might embark on certain projects if you were kind of given this signal, hey, the economy wants you to take on longterm, capital intensive projects, or you might be getting a signal, hey, now is not the time to invest in those types of projects. And what’s interesting is that a vampire could maybe change your inner mental state to kind of not understand what type of project should be taken. But in a way, the federal reserve also has this ability to move that signal. Keith, why don’t you give us a quick you had a great tweet today saying that the bus phase is just revealing what was happening in the boom phase. And let’s talk about that boom phase for a second.
Keith Weiner:
The misunderstanding of that signal the first time I have to make is that the lower the interest rates, the greater the signal for really long term capital projects. The higher the interest rates, the higher the time preference, the more that everything is giving a consumer good now and screw the investment. The tweet today was kind of related to that. Everybody loves the boom. We were just talking about this before we started recording. Everybody loves the boom. And it’s generally believed that the boom is a time of prosperity, but actually, that’s when the damage is occurring. You have a falling interest rates, a falling interest rate causes the conversion of capital to income, one person’s capital to another person’s income to be spent. That’s what an endless bull market does. And so everyone feels richer, everyone’s spending. That’s when the damage is being done. I was on a different podcast earlier talking about the destruction of the pension funds which now surfaced not in the US, but in the UK and their desperate need for they think it’s liquidity. I think it’s a much deeper issue than that. Anyway, the bus isn’t causing the damage. It’s not that JPAL hiking interest rates is causing all this problem.
Rather it’s the discovery or it’s the accounting is catching up to the reality of what the damage has already been done. And nobody knows exactly how much pain we have ahead of us. Assuming he persists, and my personal belief is that he will not, there’ll be a point at which he they’re calling it pivot, but whatever you want to call it, return to easy money and falling interest rates, I’d like to jump.
Glen Whitman:
In and make sure we dropped the name of the author of the chapter that Ben was talking about. Her name is Hollis Robbins and she’s not an economist, but I believe she’s blanking on what her academic discipline is. But she really had this interesting idea that Dracula stands for this kind of difference between modernity and the old customary way of doing things. And particularly that old customary way of things can upset expectations and make it difficult for people to coordinate. And so one of the things that allows us to coordinate with each other is these time conventions. But I think the point that you two are making, which is interesting, which is that money is also a convention. It’s a convention that we use and we all coordinate upon and it helps us to make arrangements with each other. For instance, long term investment, so long term loans. And I have an expectation that I’m going to get paid back a certain amount of money with interest and I can use that as a way of calculating whether it makes sense for me to make that loan or not. But what happens with inflation is that it throws off the signals, right?
So now it’s more difficult for me to know exactly what it is that I’m going to be getting back, what kind of a return I’m actually going to be getting on my investment, because of the fact that the interest rates entangles the effect of inflation with the real interest rates, the real rate of return. And so in a way, you could argue that the Fed or Central Bank, when it’s not behaving well, when it’s not doing its job properly, is in a way behaving a little bit like Dracula was with the upsetting of time conventions, except they’re setting upsetting monetary conventions in a way that very similarly makes it more difficult for people to coordinate with each other. And plan for the future.
Keith Weiner:
Right. It causes this incredible boom and then bust, which is ultimately the discordination of messing with time preference or attempting to mess with time preference and distorting distorting the market signal time preference, which is interest rates.
James Dow:
Yeah, I have to put in here too, that alcohol shows up again here as a reference. It used to be described as the role of the Federal Reserve was to take away the punchbowl just as the party was getting started. And so you’re looking in 20 12, 20 13 maybe it should have really started to taper then and kind of ignore the taper tantrum and unwind a lot of its transactions, but it didn’t, and it’s paying the cost now.
Keith Weiner:
One thing talking about alcohol and capital, you guys familiar with the Whiskey Rebellion in the early nascent United States?
Glen Whitman:
Actually, I have a T shirt I got from Lucky Jeans that says Whiskey Rebellion on it with the years in which it took place.
Keith Weiner:
So obviously carrying around wheat was bulky and practical. Carrying around beer bulky and impractical. But if you distill that beer down to whiskey, you reduce now, obviously not. I mean, the zombie apocalypse doesn’t really work assuming you have basically a peaceful countryside and you’re not like on the run, but you just have the normal challenges of bringing a horse drawn cart from one town to another. Whiskey was kind of emerging as a form of money, and I don’t think that Washington understood that and they were just taxing it, maybe as a syntax. I’m not exactly sure what the context was. And a bunch of cooters up and down the hills decided, no, we’ll have a rebellion and we’ll shoot the tax collectors, and obviously we know what happened after that. But it’s interesting that whistle emerged because it’s the most portable form of grain, right? Just the alcohol component, which of course always has a high demand in society for whatever reasons.
Glen Whitman:
Yeah. So that brings us back to the packing for the apocalypse argument. It just happens that in the case of the apocalypse, even whiskey, despite being the most distilled and compact form of the value, still isn’t quite compact enough.
Keith Weiner:
Yeah, that’s right. You can carry a gallon of it, maybe, but if you’re running even a gallon of that weighing £67 plus the container, then you don’t necessarily want to be burdened by that. If you’re running and there’s 100 zombies screaming or groaning or whatever it is they do behind you, you probably want to be as lightweight as possible.
Benjamin Nadelstein:
Well, I find this really interesting that there’s this idea of, like, portable. Obviously it has to be splittle because I think at one point my first thought, okay, we need a new money and it’s a zombie apocalypse. My first guess was bullets. Right? But you can’t really split a bullet in half and retain its value. And so I like this idea of alcohol. I mean, we might be really drunk for what’s left of the apocalypse. But I like this idea of portable assets, light and weight. But I think the most portable asset is the idea, right? The understanding of how does one create gin or whiskey. But I think we have to go back to this survivor shit bias, right? If the one guy knows how to make a whiskey, but he doesn’t pass that knowledge on to someone else and he gets hit by a zombie, there goes our money and there goes our whiskey. And I want to talk about that for a second, which is this idea of the draw down, right? You’re always worried about that existential draw down and we’re talking about stocks or other items like that. Jim, why don’t you tell us about this idea of correlation, negative correlation between stocks and in a portfolio.
Someone who might live forever, like Dracula, he might be less worried about these drawdowns than maybe your average person, right?
James Dow:
So I think you’re talking about serial correlation or correlation in stock returns over time, right? And the idea is that if you have enough time and if stock returns are negatively serially correlated, you can kind of wait out something that’s bad. Because if it’s bad now, it’ll be better in the future. And if you can wait long enough, that’s fine. But for humans, as you say, we can’t necessarily do that. And as your lifespan gets shorter and get close to retirement, you have to worry more about those large drops. I think this sort of fits in a bit too, with what happens society, society wide during these large meltdowns in financial markets. And there’s an old saying by attributed to Rothschild, anyway, that the best time to invest is when there is blood in the streets. And so if you can survive these drop downs. Then you have a big opportunity to again. A vampire can last a long time and just wait for the times when things really go bad and invest in in a way. It kind of goes back to Nassim Taleb’s idea of a black swan is that. Again. There’s a lot of tail risk out there. But it only comes occasionally and you need to catch it when it does.
Benjamin Nadelstein:
Right. I like this idea because from what my understanding was, well, you want to pick these stocks that do really well. And listen, obviously no one wants to pick a stock that does bad. I think the advice is always buy them when they’re low and sell them when they’re high, which is easier said than done. But we wrote a white paper called the Case for Gold Yield in a Portfolio. And one of the benefits of gold in that portfolio was that it kind of mitigated these big, big drawdowns. And I think when I read part of that chapter, that’s what I was thinking about is that if you can kind of mitigate these existential drawdowns. You can be in the streets while everyone’s bleeding out and kind of looking for those values. And one of the parts that I found really interesting was talking about investing in Southern property after the Civil War. So if you can kind of live through the carnage and the battle and live long enough, there’s probably a big arbitrage between the price of a property in the south in whatever, the end of the Civil War to 100 years later.
James Dow:
Yeah, very much so. And to go back to the goal point, I mean, correlations are important. That’s the idea of diversification. So correlation across assets, and particularly it might be most important in times of extreme changes and so maybe in moderate ups and downs in the stock market. I don’t know how much. I mean, gold would certainly be a diversifying asset, but maybe it’s a very good asset at very, very bad times. I mean, I don’t know that we’ve seen enough very bad times to say for sure, but it certainly seems plausible to me.
Benjamin Nadelstein:
Yeah, the idea that gold zigs one other asset, zag, I think is something that people talk about. But what you’re saying, hey, gold is actually really useful, possibly in these existential moments, maybe not so much in these small moves of volatility. But I know. We talk about Cyprus. They had a banking crisis there and one of the ways that people could kind of get some of their money and get some of their capital out was through gold because the bank said, hey, listen, if you have your money with us, well, maybe you don’t.
James Dow:
Right?
Benjamin Nadelstein:
All right, I want to jump to a little economics lesson because I always had trouble with this idea of comparative advantage, right. So I understood, okay, if someone, I’m really good at the piano and my friend is really good at bodybuilding. Well, you’ll specialize in bodybuilding and I’ll kind of specialize in piano. That always made sense to me. But what if I’m a better bodybuilder and a better piano player than my friend? I never really understood why would we want to trade with each other? And when I read the zombie chapter, it really kind of helped click all those little boxes because when you think of a zombie, right, you’re like, there’s no reason to trade with the zombies. They’re worse than everything. I mean they’re literally brain dead. So you guys are professors. Maybe you can explain it to me. Finally, comparative advantage.
Glen Whitman:
Sure. So I mean there’s a mathematical explanation, but that’s hard to do on a podcast. So I’m not going to try to give you any actual ratios. Instead, I’ll just give you the example that I think is most intuitive for my students. And I talk about parents having their kids do chores, such as doing the dishes. Well, here’s the fact I can do the dishes better and faster than my children can, all right? So why would I ever have them do that, aside from trying to train them so that they’re hard working individuals later in their life. The reason I would have them do the dishes is because of the fact that, yes, they can’t do it as fast as I can, but by doing the dishes, they free up my time to do something more valuable that they can’t. Their disadvantage is even greater, right? So my kids have no chance of writing a great economics paper, only I can do that, right? So by having them do the dishes, it frees up more time for me to invest in other things that I’m even better at and that have greater value. So that demonstrates the idea that even when you have parties to trade, where one party is better at everything than the other party, better at everything in an absolute sense, is not what’s relevant.
What really matters is the opportunity cost of doing one activity. So what are you giving up by doing an activity? So by doing the dishes, the kid is giving up almost nothing, right? The opportunity cost of what they’re giving up by doing the dishes, it’s not much, but by me doing the dishes, I’m giving up time that could be spent on something more valuable. So what that means is I actually have a higher opportunity cost of doing the dishes than my child, which is weird to sound. How is it higher cost for me to do the dishes in my child? What’s higher cost because of what I’m giving up? So, the way that comes that applies in the case of zombies and vampires, first of all, we should mention zombies are usually portrayed as mindless. And so if we’re dealing with that kind of a zombie, sometimes they’re portrayed as having a degree of intelligence, but if really they’re just mindless, then they become the functional equivalent of draft animals. And we don’t usually think of ourselves as engaged in trade with our horses, even though we do give them something to eat, right? But we do engage in trade with the people who are the owners and wranglers of horses.
So that’s how you would think about trade in that context. Most likely. But the idea is, look, even if zombies are not good at much of anything, right, at least compared to how good humans are with brains, nevertheless they can provide a source of strength, they can provide a source of power, much like horses can, right? And so if you have enough of those zombies and they’re all strapped into some kind of a harness and you can use them to generate some kind of power, why wouldn’t you? Because that will free up other resources that can then be used on more valuable things. So that would be trade with zombies, which is really trade with whoever owns the zombies. Vampires are usually portrayed as having intelligence, so they are capable of managing their own affairs. So you would again find it valuable to trade with them, except at least as vampires are usually portrayed, they might be better at everything than humans. They are portrayed as smarter, faster, more charismatic, they’re better at everything. Right? But just by the same token, as it makes sense for me to trade with my children, it makes sense for the vampires to trade with the humans.
We can all make each other better off by the humans focusing on those activities which have a higher opportunity cost for the vampires. Now, what might those things be? It’s hard to say, but if we’re using Anne Rice as our starting point, they’re probably going to be better rock stars than we are.
Benjamin Nadelstein:
I obviously love the book and I can’t recommend it enough. And I want to thank obviously, Professor Whitman for explaining comparative advantage to me. It took me so long, but now I think I finally got it. I want each of you, maybe we’ll start with Jim to say one of your favorite chapters from the book and why you liked it so much. Maybe give everyone like a little teaser and then what you’re planning on working on in the future so we can read more of your work. Jim, let’s start with you.
James Dow:
Probably a glance starting chapter on dating. And so we didn’t really cover it here because it’s not about financial markets and gold and things like that, but I think it’s a very different perspective on that. I think the chapters had kind of a wide range of topics, so I’ll put that out there. And for the future, well, if the dead do start to rise, I think our research becomes very relevant and I would follow up on that.
Benjamin Nadelstein:
But what was funny is while we were recording this podcast, I thought we’re talking about how lightweight ideas are and obviously you want to kind of diversify the ideas, right? So if I don’t survive because the zombies get me, at least Glen will have the ideas in his head. And hopefully if a lot of people watch this episode and the zombie apocalypse does happen, they will have some idea of what my money might be, who to date, and hopefully they’ll have read the book. So Glen, let’s go to you.
Glen Whitman:
I think probably the most surprisingly fun paper to me when we put out the call for papers and we got people’s proposals was the paper by Hollis Robbins that we mentioned earlier, but we’ve already talked about that, so I’ll move on beyond that. I’d say that the first paper that I wrote for this book, I think chapter 15, is the one that convinced me that this was a doable concept, that we actually had an idea for a book here and it was treating the problem of zombies over feeding on the human population as an example of the tragedy of the commons, which in the modern world. In a more realistic example, we know from things like the overfishing of the oceans. And the point I was trying to make in that chapter is that you might think, oh, it’s just a problem of too much demand. But that’s not true, because we also like to eat chickens and beef. And when we eat chickens and beef, people grow more of those things. They raise more of those things. So why, in the case of fish, when we eat more fish, does it lead to fewer fish?
Yet eating more chickens leads to more chickens. And the answer has to do with the institutional situation, the fact that chickens and cows are privately owned. And that means that the incentives are aligned for people to not over slaughter them and to make sure that they’re continuing to breed and create more. That applies in the context of vampires with humans, because of the problem that the vampires don’t own the humans. Instead, humans are like a freeroaming resource, a lot fish. And so vampires could face a problem of over feeding on the human population unless they find some sly way to privatize us. So that was a fun chapter to write. As far as what I’m doing in the future, we don’t have a sequel plan to this book just yet. Sometimes we toy with the idea of maybe there should be economics of the superhero world of the Marvel Cinematic Universe or something like that. So maybe one day we’ll get around to doing that. So, yeah, that’s where I’ll leave it.
Benjamin Nadelstein:
Well, that would be really fun. My brain is kind of tingling with all the ideas how Superman invests and all these great ideas, but actually, I want to believe you guys with something from another professor I really enjoy, and that’s Brian Kaplan. So, like a lot of Brian Kaplan’s work, and we have had him on the podcast, and he got to subscribe so you can catch his episode. But one thing Brian said on the show, which I really loved, was he enjoys betting with people because it’s a great way to kind of keep skin in the game, from Nassim to LEB, and make sure that people aren’t over exaggerating when they make a claim. There’s no chance this will ever happen. Well, there’s no chance you should be able to bet me at these really great odds, right? And so Brian is discussing with someone who is interested in AI and AI safety, and from Brian’s perspective, he thinks it’s a little bit overblown. And the AI researcher thinks that there’s not going to be any human beings on the surface of the planet by 2050, which is pretty soon. And something I thought was, well, listen, there’s no way to bet on the end of the world, right?
Because if it happens, there’s no one to pay you and there’s nothing to spend the money, right? So it’s kind of a dumb bet to bet on the end of the world. There’s kind of no way to do it, but Brian corrected us. There is kind of a way to do it. So what you do is the person who doesn’t believe that the world is going to end pays all of the money right now to the person who does believe the world is going to end. And at 2050, if the world does not end, that person gives all the money back with interest. So what I think is interesting, this kind of reminded me of that zombie bond idea. Maybe we can figure out a way with Brian or someone else to kind of do a zombie bet on the world. So if the end of the world does happen, we can still make some money in the meantime.
Glen Whitman:
Right. So I think that’s a very clever way to make a bet on the end of the world. And you could just change the circumstance that leads to the end of the world on Brian’s bet. And it would apply equally well in terms of the zombie apocalypse. So instead of it being AI takes over by 2050, zombies have decimated the human population by 2050. And you could do it the same way that said that bet is not really the same as insurance. It is not really helping you in the event that the apocalypse happens. And so it is not in that sense, like when your car gets wrecked and you get paid back and you are able to buy a new car. So it’s a bet, but it is not insurance. And Jim might have more to add on.
James Dow:
Oh, and I’m just going to follow up and say it’s also a way for the benefit to the person who believes the apocalypse is sort of allowing them to borrow more against future income. Because if you think the zombies are going to eat up the world, I want to spend my money now. And so in that Brian’s bet, if I’m leaving, the zombie apocalypse is going to happen. I just want as much money now, I’ll enjoy my life and then if it turns out it doesn’t happen, then fine, I’ll go to work and pay back the loan, but there has to be some reward to me upfront. And that’s really what this is doing. It’s kind of allowing that person to borrow against their beliefs.
Benjamin Nadelstein:
Right. It’s that present, present goods and future goods, I think ideas is coming back, right?
James Dow:
Yeah, pretty much.
Glen Whitman:
With respect to the idea of insurance, the basic problem here is when you have highly correlated negative events, that it becomes very difficult, if not impossible, to insure against that. So that’s why it’s basically impossible in California to get any kind of real earthquake insurance, because of the fact that if there’s an earthquake, it’s going to be all the claims coming in at once. So any insurance company that was trying to insure against that would be guaranteed of bankruptcy in the event of an earthquake. And probably would not be able to pay off even a fraction of their clients. That said. There is a chapter in the book by. I believe. Brown and Prague. And the argument there is if zombies are not so much an apocalypse that leads to the collapse of our civilization. But instead kind of an endemic problem at some point where we’re living fairly normally. But we know that there’s always a risk of zombification at some point which will cause certain costs to you. Then in that case. It does become an insurable event. And in that chapter they talk about some of the ways that such insurance could work.
Benjamin Nadelstein:
Well, I really like that idea. I think I might personally take out some zombie insurance just to be a case the apocalypse does happen. I want to thank both of you so much for coming on the Gold Exchange podcast. And I highly, highly recommend that everyone go get the book.
James Dow:
Thank you. It’s been my pleasure.
Glen Whitman:
Thanks for having us.
Benjamin Nadelstein:
Thanks, guys!
Additional Resources for Earning Interest on Gold
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The Case for Gold Yield in Investment Portfolios
Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.
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