Sunday, February 05, 2012

Paper Promises: Money, Debt and the new World Order

This is a great lecture, informed by Coggan's background as a historian. If you already know something about the subject I suggest starting at 36 minutes in. The talk is also available as a podcast via iTunes (look for LSE public lectures).

LSE public lecture: ... as Philip Coggan shows in this new book, Paper Promises: Money, Debt and the new World Order which he will talk about in this lecture, the crisis is part of an age-old battle between creditors and borrowers. And that battle has been fought over the nature of money. Creditors always want sound money to ensure that they are paid back in full; borrowers want easy money to reduce the burden of repaying their debts. Money was once linked to gold, a commodity in limited supply; now central banks can create it with the click of a computer mouse.

Time and again, this cycle has resulted in financial and economic crises. In the 1930s, countries abandoned the gold standard in the face of the Great Depression. In the 1970s, they abandoned the system of fixed exchange rates and ushered in a period of paper money. The results have been a long series of asset bubbles, from dotcom stocks to housing, and the elevation of the financial sector to economic dominance.

The current crisis not only pits creditors against debtors, but taxpayers against public sector workers, young against old and the western world against Asia. As in the 1930s and 1970s, a new monetary system will emerge; the rules for which will likely be set by the world's rising economic power, China.

Philip Coggan was a Financial Times journalist for over twenty years, including spells as a Lex columnist, personal finance editor and investment editor, and is now the Buttonwood columnist of The Economist.
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9 comments:

nvnl said...

As a high school student in the US, I empathize with Dr. Hsu's call for more transparency in college admissions,
but even though I want to know what the acceptance thresholds really are, it's
dangerous to open up the process too much. The reason is, under too much
scrutiny
and litigation, the admission process may become formulaic and
admission simply the expected result of meeting some set of public
criteria. Given the intense competition to get into US
colleges, this would certainly lead to perverse incentives for students
to perfect a limited subset of prerequisites. If I knew with
good certainty that I could get into Harvard with nearly 2400 SAT, a 4.0

average, an internship with mention in a publication, and a
school sport; then I would quit my piano, pickup basketball, tutoring,
and blog to focus on those goals. Certainly, these are impressive
accomplishments, but much less so if I spent the entirety of my high
school career (or longer) focusing on them alone.


This brings up another point: college admissions offices need the
latitude to admit students that may have achieved less thus far, but
had fewer
resources to do so. After all, in real life and in real research,
perfecting the prerequisites does
not equate to being able to produce new value or insights. Who is more
deserving of admission and has a higher potential to succeed: a student
who studied 8 hours a week for a year, whose parents hired a private
tutor, and who scored in the 95-th percentile; or one who had to work at
his/her parent's shop 8 hours a week, could not afford tutoring, but
still managed a respectable 90-th percentile? It's hard to say,
especially because the first student would never admit to having had
such an advantage in his/her application. Yet the numbers would show
only their final results: a 95-th percentile candidate versus a 90-th
percentile candidate. If admissions offices face pressure or find it
politically easier simply to admit the higher achiever, then they very
well may pick the lesser of the two candidates.


Moreover, in my experience, test scores like the SAT have been
frequently emphasized by visiting admissions officers as a way to
provide a cutoff for under-achievement, not as a measure of
over-achievement. A student who comfortably achieves the 98-th
percentile and focuses on other aspects of his/her high school career
should not be penalized because another student studied harder and
longer simply to ace the test. In fact, the first student seems wiser
and better suited for the rigors of life and research. Considering all
this, it seems like only with a grand sense of entitlement and quite a
bit of naivety that someone would complain about not getting into
his/her preferred college with perfect test scores.

So it is my opinion that a call for transparency in admissions may
be needed, but it should not put undue pressure on college admissions
offices to justify all their selections. There are right questions to
ask and inquiries to make, but they don't include "why didn't so-and-so
get into Harvard?".

12:19 PM
RKU1 said...

Well, decades ago The London Economist was a small but outstanding news magazine, under the long-time influence of its late Deputy Editor Norman MacRae.  Unfortunately, that very quality caused its undoing.

Circulation boomed in the U.S. among elite readers disgusted by the endless silly twaddle found in Time and Newsweek.  This exponential growth in readership raised its profile dramatically, and also concentrated its revenue-base among its high-income East Coast American readership.  Gradually, it trimmed off any ideological "rough edges" lest views too far outside the respectable NYT/WSJ spectrum led to subscriber (or advertiser!) disorientation and unhappiness.  As the end result of this gradual process, I haven't paid attention to the publication for years now, and based on the obvious slant of its cover-stories, I'd be surprised if it ever said much these days which was different from its NYC-based newspaper equivalents, though perhaps it still says those same things a bit more zestfully.

I may take a look at the video, but I'd be astonished if I see anything that alumnae such like Megan McArdle don't already say every day of the week.

2:10 PM
B said...

I've got questions.

1. Coggan's scenario presents a simple "and then the West crashes" development. However, the economies of the US and EU are coupled only loosely; for instance, every time the EU eats shit, the dollar goes up (which is reflected in the dollar value of my gold and silver holdings.)

2. Likewise, China is not JUST a creditor. It is a creditor most of whose liquid assets (I believe) consist of Western debt. If it calls in a big enough chunk of that debt at a time (as in Coggan's scenario,) or even tries to offload it onto a bigger sucker, it risks major systemic issues.

3. Also, China has an unbalanced economy primarily tied in on Western consumption and disproportionately focused on the coast, downstream of major dams. Big chunks of it are populated by minorities with grievances.

8:41 PM
B said...

Blogspot ate my comment.

Question. Given the following:
1. The economies of the debtors (the US and EU) are linked, but not firmly, which is why every time the latter's economy slides an inch towards the precipice, the former's currency gets a boost, as witnessed by a fall in precious metal prices.

2. China is not JUST the creditor. It is a creditor whose liquid holdings are, in very large part, composed of Western debt. Any attempt to cash that debt in or at least unload it can cause its market value to plummet, hosing China.

3. Further, China's economy is largely tied to Western consumption of mass labor-produced goods. A spread of gray-market digital fabrication in the West can destroy it rapidly. Large amounts of poor Chinese with no income stream=historical recipe for large problems. With the improvement in the standard of living in the last 30 years, large chunks of the population aren't as patient and disciplined as they once were.

4. Also, China's economy is largely localized on the seaboard, downstream of large dams. 

5. And huge, resource-rich areas of the country are populated largely by minorities with grievances.

6. The 500 pound gorilla in the room, the US, though it can't distinguish its ass from its elbow when it comes to fiscal responsibility, has lately shown itself pretty good at technosocial manipulation of an enemy's population in order to foment revolution. China is not Libya; then again, Muammar did not do anything nearly as scary as threatening to impose financial discipline and take away the US political class' ability to print money in order to buy votes. People do desperate things when they're staring down the barrel of a gun.

7. What can we expect to see USG do in order to maintain its privileges and economic power at the expense of its creditors and fellow debtors?

9:11 PM
RKU1 said...

Well, I'm no expert here, but the Chinese government recently announced they were constructing 35M modern new apartments for workers, partly to lessen the unemployment sting from any global downturn.  Presumably, the could always increase the total to 70M if too many idle hands appear.

All China really gets from the US is dollars, and they already have something like $3T of those, enough to buy an immensely vast future pipeline of needed raw materials, assuming no direct military embargo.  If they dumped even a fraction of those dollars on the open market, America's economy would immediately collapse.  China's great asset is its highly skilled and disciplined workforce, including the technological elites.  Against that asset, $3T in cash is certainly expendable, especially since no one really believes the U.S. will ever pay it off at anything like current values.

By contrast, what the U.S. gets from China is "cargo," lots and lots of "cargo." If the "cargo" someday stops coming or becomes vastly more expensive due to alternate suppliers, I'd expect massive unrest and probably the quick collapse of the American regime into who knows what else.  Don't forget that America's government has virtually no domestic legitimacy these days, with non-approval of Congress running at something like 95% in public opinion polls.  I very much doubt disapproval of China's own government is anywhere close to 95%.

Finally, I think America's subversive apparatus is vastly over-rated.  For example, they've been trying to get rid of Chavez for a decade or more, and he's still around.  The various "color revolutions" were almost all in states permeated by American media and honeycombed with American "democracy advisors," which made them quite vulnerable.  Ghaddafi was quite unpopular internally, and even so the rebellion would been immediately crushed without massive Western military involvement, allegedly including special forces to break the long ground stalemate at the end.  If the Chinese had been stupid enough to give foreigners control of their electronic media, they'd be in a fix, but they weren't so they're not.

Like I said, I'm certainly no expert, but I can still my two cents.

10:04 PM
5371 said...

1. There isn't really a precipice. Greece couldn't actually do serious or lasting damage to Germany if they wanted to.
3. Any number of SF scenarios would be bad for China's economy.
4. ?
5. Applies to every country of large area.
6. The US, and their citizens, are very, very good at taking credit for things they had nothing to do with. May be relevant.
7. Destroy their rivals at the price of their own inevitable doom? Why?

2:43 AM
Ken Condon said...

Still--investors are buying US debt in huge numbers. Perhaps the global view is that the US is not going away or (at least) has nowhere to go. So things will continue because they will.
http://www.bloomberg.com/news/2012-02-06/huggies-price-cut-shows-why-bond-market-backing-bernanke-considering-qe3.html

1:57 PM
Ken Condon said...

Also-as far as fiat currency goes (in case some missed this) one cannot get more valuable that this:
http://www.youtube.com/watch?v=auZgAcQbTLwJust trying to have some fun here.

6:57 PM
Joshua A Keim said...

Hello my name is Joshua and I am working on an ever normal granary receipt project to free the people of earth from fiat money and overturn the money changers tables. I would love to chat with you Steve.  1worldcurrency.net is my blog and I can be reached at 1worldcurrency@gmail.com may peace be with you.

3:24 PM

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