Paper Promises: How Money Works And What Happens When It Doesn't Hardcover – Mar 20 2012
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Bold and confident ... Coggan covers the terrain with characteristic calmness and objectivity, avoids over-simplification, and laces his arguments with his trademark erudition ... The alphabet soup of acronyms, from SIVs to CDO Squareds, is blissfully lacking ... Finally, the book is free from the shrieking ideology that afflicts virtually all contemporary debates over money. Indeed, it offers a clear explanation of the fresh ideological divisions that have arisen over how to deal with the crisis ... the book should be taken very seriously Financial Times This book stands way above anything written on the present economic crisis -- Nassim Nicholas Taleb, author of 'The Black Swan' The most illuminating account of the financial crisis to appear to date ... [written] with a lucidity that enables him to convey deep insights without a trace of jargon ... [a] thought-stirring book -- John Gray New Statesman A remarkable book from one of the most respected economics journalists on the planet. Every page brings a fresh insight or a new surprise. A delight -- Tim Harford, author of 'The Undercover Economist' Fascinating and authoritative, with the rigour and depth to satisfy an economist and the accessibility and pace to engage the layperson ... If everyone read Coggan's book we might just be a little more circumspect if and when the next burst of irrational exuberance overtakes the economy Management Today A masterful history of financial crises Independent By far the best analysis of the "new normal" -- David Stevenson Financial Times An excellent book ... a smart and witty analysis of the current economic storm, set in the context of the history of money -- David Wighton The Times Coggan is ... an exceptional banking and economic historian Irish Examiner Coggan traces 'history's tug of war between monetary shortage and excess' in this engaging and timely book about the current financial crisis... Thoughtful and thorough Publishers Weekly Intriguing Irish Independent Coggan ... deserves his Best Communicator award: he moves the story along at a fast and flowing pace, combined with the ability to find the short phrase that summarizes in simple language the kernel of many complex economic ideas ... demonstrates a comprehensive awareness of the major academic debates in economics and economic history ... deserves to be one of the three books you read from the vast literature spawned by the recent crisis -- John Gent LSE blog A very good and sensible introduction to the history of the recent economic crisis, with an emphasis on debt and also historical perspective Tyler Cowen Blog Paper Promises is not only a great book, it is a great accomplishment - a brilliant work of financial history, a clear examination of the present moment, and a journalistic masterpiece all wrapped into one 800-CEO-READ A crisply written look at how the debt crisis may overturn the global economic order ... Like a battlefield guide, Coggan takes us on a tour of paper promises, wending from John Law's monetary experiments in France following the death of Louis XIV to Ben Bernanke's quantitative easing ... A valuable primer to anyone who still asks, as his father-in-law did, where all the money went during the meltdown of 2007 and '08 Bloomberg
About the Author
Philip Coggan was a Financial Times journalist for over twenty years, including spells as a Lex columnist, personal finance editor and economics correspondent, and is now the Capital Markets Editor of the Economist. In 2009 he was awarded the title of Senior Financial Journalist in the Harold Wincott awards and was voted Best Communicator at the Business Journalist of the Year Awards. Paper Promises is his fourth book.
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Starting in the United Kingdom in the late eighteenth century, the Industrial Revolution resulted into accelerated economic growth, significant population increase, and more trade across the developed world and its colonies. This burst of activity required more official money that remained based on precious metals until WWI. The United Kingdom led the way once again with the adoption of the gold standard among developed economies in the first half of the nineteenth century. The absence of universal suffrage allowed the upper or creditor classes to whom central bankers usually belonged, to favor a policy of sound currency backed by gold, regardless of the pain inflicted to the lower social classes. WWI resulted into the suspension of the gold standard and the massive increase in paper money.
Power shifted to debtors during the inter-war period due to the widespread adoption of democracy and the impossibility to restore the gold standard because of the burden of international debts, especially war reparations. During this period, the global money supply expanded, resulting in more paper money relative to gold. The crisis of 1931 resulted into a deflationary trap and the shift toward the modern welfare state to try to mitigate the effects of persistent mass unemployment in the 1930s. Widespread trade protectionism compounded the difficulty for governments of advanced economies to manage the economic cycle during this period.
Under the leadership of the U.S., the Bretton Woods system of fixed exchange rates was introduced in 1944 and remained in place until 1971. This system was built on the control of capital flows and the confidence of international investors in the U.S. economic policy. Currencies were linked to the U.S. dollar, which was itself linked to gold. Only central banks were able to convert paper money into the gold that the U.S. owned. During this period, economic activity far outstripped the supply of precious metals.
Confidence in the U.S. economic policy broke down in 1971. The final link with gold was removed by the U.S. The combination of paper money and the adoption of floating exchange rates, in the developed world at least, resulted into a massive increase in the volume of debt. Governments, mainly in the developed world, further fueled this debt bonfire by making more and more unfunded promises to their (ageing) electorates. The past decades witnessed first runaway inflation, then a series of bursting asset bubbles from the 1980s onwards. During the same period, the increase in consumer prices was constrained thanks to globalization, technological advances, and the greater role of women in the workforce.
The current global debt crisis, which started in 2007-2008, has witnessed the return of the problems associated with the 1930s, i.e., debt/deflation spiral and the paradox of thrift. Central banks have not hesitated to sacrifice the value of their currencies to protect the financial system.
To his credit, Mr. Coggan clearly articulates the likely long-term consequences of this debt crisis, i.e., inflation, stagnation, and default.
1. High inflation is very tempting to the central banks of heavily indebted countries. However, creditors will push back by asking for the same real rate of interest, regardless of the level of inflation. Furthermore, quantitative easing (QE), which also sacrifices creditors' interests to the benefit of those of debtors, is an unproven tactic that is unlikely to work. As Mr. Coggan learns from Lee Quaintance and Paul Brodsky, two hedge fund managers, printing money and extending credit do not create wealth. QE at best redistributes wealth; at worst may temper its creation.
2. Low interest rates, which reward debtors at the expense of creditors, and low growth, go hand in hand. The cost of capital and the return of capital tend to be at the same level. Therefore, if this is the case, the Western world is following a deeply flawed strategy. Electorates will push sooner or later their representatives to erode the debt, in real or nominal terms, to try to escape from stagnation. Nonetheless, creditors will push back as it was noted previously.
3. The temptation to default is also high. The political unpopularity involved in paying "greedy" (foreign) creditors will overwhelm any other issue associated with a default. The best that creditors can do is to cut off (temporarily) the defaulting debtors from access to further borrowing.
It does not matter which of these three scenarios ultimately gets the upper hand, writes Mr. Coggan. Debt is unlikely to be repaid in the form of money with the same purchasing power as when it was lent. Breaking these paper promises will damage the interests of both debtors and creditors.
Many developed Western economies are unlikely to escape from this crisis by achieving high growth due to population and productivity constraints as well as higher energy prices. Some developed countries will be able to muddle through; others will be ensnared into a debt trap. The developing countries will have to review their options under these circumstances.
Mr. Coggan concludes his examination of the history of money and debt by looking at the outlines of a new international currency system resulting from a world economy in crisis. The U.S. and China are at odds with each other about the outlines of this new system. China prefers a system of fixed exchange rates, the U.S. a system of floating exchange rates.
In summary, Mr. Coggan does a great job in making a complex subject accessible to a wider audience.
Paper Promises is a very well written and unbiased economic history covering different monetary systems from the classic gold standard through Bretton Woods to our current fiat system. In some sense, this book doesn't offer any new information to people who follow closely the present economic crisis and are interested in economic history. And I suppose some people, including myself, will find plenty of places to disagree with the author, and some minor mistakes such as stating that the Fed has bought 600 trillion US dollars of government bonds as part of QE2 (P. 244, British Edition). Yet, this book still has value in it. It seems that Coggan isn't captivated by a particular ideology regarding gold and was able to write a balanced analysis of the advantages and disadvantages of the various gold standards.
However, this book has more to offer than just economic history. Perhaps the better part of the book is the part concerning the ongoing crisis that Coggan reviews, in the context of the theme of his book, debt. Coggan explains the economic crisis and the coming challenges we face with great clarity, which helps to tie all the pieces together.
Ultimately, the most unsatisfying aspect of the book is that it doesn't offer any conclusive solutions of how to get ourselves out of the mess were in.
However, the author's analysis of how debt everywhere - national governments, state governments, local governments, and personal- has grown like cancer for forty years, and now will control our financial future and that of our children and grandchildren, is an absolute must-read for every responsible adult. The list of chapter headings gives a flavor of what is to come: "Paper Promises"; "Riding the Gravy Train"; "Blowing Bubbles"; "The Ponzi Scheme Needed a New Set of Suckers", etc.
Philip Coggan is former investment editor of the "Financial Times", and long-time columnist for the "Economist". He therefore has a nose and instinct for digging at the facts to get to the story, and the writing skill and experience to report the story in ways that the lay reader can follow. This is just as well. The topic of debt and finance is, for most of us, rather dry and removed from what we think about on a daily basis. However, decisions made by those before us to accumulate debt, and decisions we are making now, bind us and our children to a constrained future. Mr. Coggan's economics is, however, not as strong as his reporter skills.
Mr. Coggan writes, "If there is a fundamental theme to this book, is is that there are no easy answers in economics". We certainly agree with this.
We have a huge, self-inflicted problem: In the last forty years, the entire world has been more successful at creating claims on wealth than wealth itself. In other words, we have lived beyond our means. We have amassed huge debts, which cannot ever be repaid in real terms. We have, in essence, "bequeathed our debts to our children". None of us would go to a nice dinner, and tell the headwaiter to send the check for our dinner to our unborn grandchildren to pay. Yet, that is exactly what the entire developed world has done, in a very serious way, for decades. There will be a price to pay. The long term effects of this ocean of debt must be either inflation, stagnation, or default (or, likely, a combination of all three).
Austrian economists will cringe, however, at Mr. Coggan's continued reverence for Keynes. Many blame Keynesianism and perversions of it for getting us here in the first place. However, Mr. Coggan falls into the Keynesian trap of believing we need to fear savings, not spending on things we do not need: "As Keynes pointed out, money saved, rather than spent, reduces demand for goods and thus employment". Many would argue that this is exactly wrong: money spent on things we do not need, especially money borrowed, is the root of our current debt problem.
It is here we part most dramatically from the author. He does not see a good solution to the problem of too much debt, except, apparently the Keynesian tactic of taking on more debt to keep the spending going. There are those, however, who would argue the solution is to get rid of debt, sooner rather than later, so our economies can breathe and grow again. How this is done, and who pays, is part of all our futures.
Somewhat tough sledding here, some flawed analysis in this writer's opinion, but a good lay discussion of an absolutely critical issue affecting all of us.
As someone who has followed the financial crisis in the news and read a few books about it, I found the book engaging and even hard to put down. Coggan is best at tracing many episodes in the history of money and debt over the last 200 years or so. His book does not dwell as much on the colorful characters portrayed in, say, a Michael Lewis book, but because Paper Promises is really about ideas it is extremely thought-provoking.
Ultimately, however, the ideas presented in the book are somewhat muddled and fail to convince. Coggan sometimes seems to want to go back to the gold standard, even though he describes the main argument for why a gold standard is inadequate: the supply of money should reflect the size of the economy (based on population and productivity), but the supply of gold depends not on the economy's size but on the success of extracting gold from the Earth. He makes a more explicit case that the "fiat money" used since 1971 is responsible for the stock bubble of the 1990s and the housing bubble of the 2000s. This argument has several weaknesses which he doesn't address. He states that these bubbles were examples of inflation that are comparable to the generalized inflation that occurs when governments print too much money. He never explains why he thinks this is true. Since speculative bubbles can occur whenever a mass of investors convince themselves that some new class of investment (railroads, dot-coms, subprime loans) will make a lot of money, soft money doesn't seem necessary for the explanation. Coggan admits that there were speculative bubbles under the gold standard, including the stock bubble that led to the Great Depression.
Coggan tries to explain difficult economic concepts within the confines of a popular book, with only partial success. I still don't quite understand how governments have controlled the supply of money under different economic regimes. In some cases he makes some points which are blatantly untrue, such as calling government pensions Ponzi schemes. A Ponzi scheme is one that inevitably fails because the scheme needs an ever-widening circle of investors. Pensions only rely on there being another generation to support the retirees, and are no more Ponzi schemes than the concept of retirement itself (which relies on the labor and interest income from a younger generation of workers and borrowers to support the retired people).
The book ends with a sobering discussion of where we go from here. I think Coggan is too pessimistic about the future but he certainly points to demographic and financial problems that we will need to grapple with.
Excellent summary of the history of fiat currency (currency not tied to an underling asset such as gold) and what the consequences are likely to be for us all. The issue of course being not whether the whole charade will collapse but rather when and in what fashion (through devaluation, inflation or default). In addition, the world today faces the unique issue that the core global currency, the dollar, is itself suffering from all of the issues of being a fiat currency and as such, when it collapses in one of these fashions, it will have devastating consequences for the global economy.
Depressing but enlightening reading. The slow motion implosion of the euro (and associated social unrest) is likely only a precursor of what is yet to come.
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