First, on the political situation. This poll claims that
Back in 1974 – shortly after Richard Nixon’s resignation in the Watergate scandal – 55 percent of Americans were optimistic about “our system of government and how well it works.” Today, 33 percent say that, the lowest number in nearly a dozen measurements taken across the decades.
I would argue that the fundamental problem is the knowledge-power discrepancy. Leaders have more power and less knowledge, and the result if more dramatic policy failure. In my view, the solution is to restructure government to make it more competitive and to disperse power. See Unchecked and Unbalanced.
Also, Richard Florida writes,
Despite all the attention that has been paid to the effect of current economic conditions on the upcoming midterm elections, structural factors remain the central axis upon which American politics turns. Yes, richer states are more likely to be Democratic and poorer ones Republican. But it’s more than money. States that have transitioned to more knowledge-driven creative class economies are more likely to be blue, while working class states are more likely to be red
Again, I doubt that the long-term trend favors Republicans. Note, however, that Florida’s analysis fails to uncover (as far as I can tell) the reason for the swing from 2008 to 2010. Thanks to Mark Thoma for the pointer.
Mark also points to a piece by John Y. Campbell that explains bond prices using the capital asset pricing model.
if the inflation risk premium is negative, breakeven inflation understates market inflation expectations. The negative correlation between stocks and bonds today suggests that the inflation risk premium on Treasuries is negative, and it could be as low as -75 or -85 basis points. This implies that investor expectations of 10-year inflation reflected in the bond market are around 2.7%, in line with the view of professional forecasters and the inflation swap market.
Read the whole thing. The argument is that investors want to hold more bonds now because they perceive a risk of deflation, although average expected inflation is higher than would be inferred from TIPS spreads. I wonder, though, what would happen if you applied CAPM to gold. I would think that gold might have become more positively correlated with stocks, which ought to lower the premium that people are willing to pay to hold gold.