Paper Promises: Money, Debt and the New World Order
Philip Coggan
Allen Lane, 304pp
Review by Christopher Silvester
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As the global financial crisis has continued for longer than we dared expect back in 2008 and deepened further into something abysmal in the true sense of the word, so the books that have sought to offer an explanation of it all have widened their scope and lengthened their perspective.
First out of the blocks was Gillian Tett, who showed how one investment bank, J P Morgan, spearheaded the perversion of the derivatives market in the Nineties; then we had Andrew Ross Sorkin, who showed how the near implosion of Wall Street following the collapse of Lehman Brothers reverberated around the globe; and then we had Bethany McLean and Joe Nocera, who showed how the invention of mortgage-backed securities in the Seventies and the subsequent hubristic expansion of the government-sponsored entities Freddie Mac and Fanny Mae fuelled the predatory lending of the sub-prime boom.
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Now, in a book that will appeal to the general reader as much as the financial professional, Economist reporter Philip Coggan has encompassed the international exchange-rate system and stretched the perspective back to William Jennings Bryan. Sub-prime caused the credit crunch, which led to banking collapses, which led to government bailouts, which led to sovereign debt crises, but long before sub-prime the world took the decision to gorge itself on debt.
In the 40 years since Nixon abandoned the obligation for the US Federal Reserve to exchange dollars for gold at a set rate, the world has been operating a ‘fiat money’ system, which means that ‘modern money is debt and debt is money’. Hence, we live in a world of paper promises.
The eurozone crisis, about which the world’s media has obsessed, is part of a much larger picture of chronic policy failure, says Coggan. ‘The European bailout packages represent the end of a long process in which bad debts have been passed up the chain — from private-sector borrowers to banks, from banks to governments and from weak governments to strong ones.’ In the cases of Spain and Greece, we have reached the point where the will of the strong governments is being tested.
The reason that the whole system has been sustained for so long is that it suited the world’s most powerful economic players, the United States and China, for it do so. In order to depreciate its own currency and thereby maintain a high rate of economic growth, China was forced to buy dollars in the form of US Treasury bills. The paradox was that ‘the system had thus created a very wealthy group of investors who were effectively uninterested in the price of, and return from, their investments’.
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Inasmuch as Coggan displays any emotion in this impeccably restrained assessment, he reserves considerable quiet contempt for quantitative easing as a policy weapon. In an intriguing observation, he traces ‘monetary easing’ back to the 18th-century Scottish economist John Law, who advised the French monarchy to create paper money, which was then used to buy government debt through the vehicle of the Mississippi Company. This and the British South Sea Bubble ‘did not last long, because of the Ponzi-like nature, and because the newly created money tended to leak into other speculative propositions, including a plan to drain the bogs of Ireland and turn lead into silver’. For South Sea Bubble, read sub-prime. Modern QE, he concludes, ‘could be seen as the ultimate triumph of debtors’ over creditors’ interests’.
His prognosis is bleak indeed. Of the three possible remedies for our plight, what he calls ‘the unholy trinity’ of inflation, stagnation and default, the second is likely to prove intolerable to electorates, the first is unlikely to work as creditors will demand repayment in real terms, while the third would inevitably lead back to stagnation, ‘a zombie-like existence for many debtors’. Coggan pins his hopes (and ours) on a new version of the Bretton Woods exchange-rate system, though one in which it will be China that calls the shots.
Many of his assertions are pithy and memorable. ‘In the last 40 years the world has been more successful at creating claims on wealth than it has at creating wealth itself,’ he says. His vivid metaphors and similes are all the more telling for being sparingly deployed. ‘The banks are locked in embrace with their governments like two drowning men, each dragging down the other,’ he writes, and elsewhere he states that for investors in gilts QE is ‘as if a benign computer hacker had, instead of stealing money from your online bank account, decided to add money to it’.
A model of lucidity and dispassionate analysis, this is a book to which I shall find myself returning over and over again.
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