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Ascent of Money

by das monde Tue Sep 1st, 2009 at 05:50:28 AM EST

This is a review of Niall Ferguson's book

The Ascent of Money: A Financial History of the World.

The same story is put into televised series. The author is a contentious historian, known also for two volumes The House of Rothschild, and for the touch apologetic Empire study. Recently he got involved in a debate with Krugman and others over Obama's economic policies.


I find the historical part of the book very good (not like The Economist). At some point Ferguson laments large financial ignorance of the public -  but there is not much supply of coherent lay explanations or open educative information either. Ferguson's book gives a relatively transparent history of money and quite a lot of accessible explanations, filling quite a few "self-evident" gaps. On the other hand, a number of jumps in financial terminology or arguable "common sense" are still present. On balance, the book looks very useful for these times.

In Credit We Trust

One striking realization from the first chapters is that money (in this world) is not defined by the widely presumed functions of exchange mediation or wealth storage. This is well demonstrated by the story of Spanish conquest in South America. After the band of Francisco Pizarro routed the Inca army of Atahuallpa, the Spanish were grabbing tons of gold and silver beyond their original fancy. They even found a mountain of silver ore, Cerro Rico, and crippled generations of local Indians for extraction of that silver. But the abundance of precious metals did not make Spain supremely rich or powerful. Contrarily, Spain suffered the first big inflation, and the Spanish crown even went into deep debt. In contrast, the Dutch and British colonial empires expanded thanks to basic financial innovations (joint stock markets, exchange and clearance banking, central banking, fractional reserve system).

The defining property of money is credit assertion. Right from the Babylon times, transferable notes of credit claims were issued - and that is what money is to this day (most of the time). Collecting money means collecting credit claims. The fundamental unit of value appears to be a credit claim or expectation. The significance of precious metals (and real estate) in financial transactions is that usually these are accepted as most reliable collateral, merely.

Even if modern dollar bills are promised to be nothing more but "legal tender", all paper and electronic money originates (more or less exclusively) as credit in this world. Just recently, a lot of new money originated from the infamous subprime loans and the boom of leveraged credit. It became once more clear that waves of credit expansion do not have to be objectively related to the state of material productive relations and needs of economic exchange. We are facing an exceptionally big mismatch between financial fancy and the real world.

Even when we talk of governments "printing money", the actual mechanism is that a government borrows money from its Central Bank in exchange for treasury bills and bonds. It takes two to tango: the government prints its promissory paper that bankers and investors would value; the Central Bank delivers the banknotes. The money is covered by new ongoing credit bonds.

There is definite logic in the "money as credit" definition. It appeals to a certain will of cooperation, trust and common expectation of future between a creditor and a borrower. Such a relation is absent in nature. But there are caveats. For one thing, the powers and potential reputation of creditors and borrowers differ markedly. A debt default is a big shame, while the business of vulture funds ripping developing countries for excesses of their earlier dictators is not questioned. A lot can be sacrificed in the ongoing crisis, but not interests of big creditors. Secondly, the level of trustworthiness of a borrower or a project is determined by the will of creditors, and this is not a democratic process. Even if a majority of us were proud creditors or investors, the size of fellow fish differs markedly. Seldom are the questions asked, how powerful are the biggest bankers, what they do with "hard earned" wealth, or who owns those mountains of public debt.

Do Bankers Rule The World?

Ferguson's history also shows that the banking or lending business is a double-edged sword. At different times, you should be prepared both for high society looks and duties, and for rough power and shrewd politics to collect your credit. Failure risks are big, but a few winners could gain enormous power. The first banking practices in the medieval Europe were quick failures, mainly because only ethnic minorities were doing it. But then the Medici raised their fortunes and got significant control of Italian city states.

Prior to the 1390s, it might legitimately be suggested, the Medici were more gangsters than bankers; a small-time clan notable more for low violence than for high finance [pg 43]

By the time Pius II became pope in 1458, Giovanni's son Cosimo de' Medici effectively was the Florentine state. As the Pope himself put in: "Political questions are settled in his house. The man he chooses holds office... He it is who decides peace and war and controls of laws... He is King in everything but name." [pg 44-45]

In the post-Napolean Europe, the Rothschilds dominated bond markets of many European governments, from England to Prussia, from Russia, Austria to Belgium. They were in power to determine which ministers to appoint, or which wars were to be fought.

The liberal historian Jules Michelet noted in his journal in 1842: "M. Rothschild knows Europe prince by prince, the bourse courtier by courtier. He has all their accounts in his head, that of courtiers and that of the kings; he talks with them even without consulting his books" [pg 91]

Ferguson even mentions the story of Nathan Rothschild earning the first huge wealth from speculation on the outcome of the Waterloo battle. Ferguson dismisses it by asserting that decisiveness of Waterloo "nearly ruined" the Rothschilds, but they successfully gambled their "superflous" wealth on British government bonds that recovered by more than 40% by late 1817.

How influential and self-serving are the financial elites now? How much are public officials beholden to them? How much those exclusive bailouts were necessary? Did the financial sector become a big rentier of all economic activity?

The crisis now

Ferguson illustrates (rather speculatively perhaps) how the first financial bubbles, policy failures or creditor fancies influenced the French Revolution, the American Civil War and other important events. Ferguson also dives into emergence of the current crisis - he even claimed that the book was an attempt to provide context for this crisis. His emphasis is on the triggering collapse of subprime mortgages and on Chinamerica - the so-far cooperative relation of Chinese "savings glut" and American consumption. His insights and journalistic skills are worth attention. But however smart were our anticipations, or however skillful is the writing, the debate about this crisis is far from over. Too often very important and obvious questions are ignored. Why was it long decades of Freddie Mac and Fannie Mae activities the main culprit of the suprime bubble, not the swift rise of "Countrywide" and investors' surge for CDOs and other debt derivatives? How much of the supra-material growth of Planet Finance was ever to be sustainable? When would largest consumer or state debt problems ever be solved? Ferguson even mentions George Soros' historical superbubble theory. If this crisis did not happen because producing companies became inadequate in technological innovation or product design, it is perhaps then the modern monetary system is more a problem than a necessary "engine" of economic growth.

The credit games really got out of hand. Financial services are valued disproportionally more than human labor or nature goods. But implicit promises to every investor were bogus. Say, the latest pension policies probably constitute the largest sham or folly ever - at least in the number of effectively duped people. To solve the crisis globally or locally, some political or "textbook" economic tabus may need to be broken, as many financial mechanisms and effects (including hyperinflation, deflation, or sustainability of public policies) are still obscure enough.

Display:
A big portion of this diary was first published as two comments to an article at The Archdruid Report blog.

The Archdruid gives a few admirable expressions, like "monoculture of financial economy", or "the demand side of financial markets".

by das monde on Tue Sep 1st, 2009 at 05:58:59 AM EST
European Tribune - Ascent of Money

The defining property of money is credit assertion. Right from the Babylon times, transferable notes of credit claims were issued - and that is what money is to this day (most of the time). Collecting money means collecting credit claims. The fundamental unit of value appears to be a credit claim or expectation. The significance of precious metals (and real estate) in financial transactions is that usually these are accepted as most reliable collateral, merely.

Even if modern dollar bills are promised to be nothing more but "legal tender", all paper and electronic money originates (more or less exclusively) as credit in this world. ...

There is definite logic in the "money as credit" definition. It appeals to a certain will of cooperation, trust and common expectation of future between a creditor and a borrower. But there are caveats. ...

From Simon Critchley's post Sunday on The New York Times Happy Days Blog, Coin of Praise:

There is a theological core to money based on an act of faith, of belief. One can even speak of a sort of monetary civil religion or currency patriotism. This is particularly evident in attitudes in the U.S. to the dollar, particularly to the sheer material quality of the bill. It can also be found in the U.K.'s opposition to the Euro and to the strange cultural need for money marked with the Queen's head, underwritten by the power of the sovereign, who is also -- lest one forget -- the head of the established church.

Plato defines a "simulacrum" as something that materializes an absence, an image for something that doesn't exist in reality, for example the god Poseidon or Bob the Builder. Such is money, in my view. In the absence of any gold standard (but ask yourself, how real is the value of gold? Is it not simply yellowish metal?), money is only sustained through an act of faith, belief, promise and trust in sovereign power.

To push this a little further, we might say that in the seemingly godless world of global finance capitalism, money is the only thing in which we really must have faith. Money is the one, true God in which we all believe. ...



The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.
by marco on Tue Sep 1st, 2009 at 10:24:49 AM EST
You read it here first:
So what market prices really indicate is faith in the future. Everything else, from asset valuations, to cash flow expectations, to special prices paid for shares during takeovers, depends on this faith.

...

The remarkable corollary of all this is that to maximise economic growth, governments should act in ways that maximise faith in the future. If they destroy faith in the future, sooner or later the economy will inevitably start to contract - potentially quite violently.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Sep 1st, 2009 at 12:32:17 PM EST
[ Parent ]
Brilliantly obvious -- now that you've pointed it out to me, of course.

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.
by marco on Tue Sep 1st, 2009 at 12:44:37 PM EST
[ Parent ]
Also known as 'Love-me numbers'.

You can't be me, I'm taken
by Sven Triloqvist on Tue Sep 1st, 2009 at 12:51:42 PM EST
[ Parent ]
money is about trust in the future - but given that it started in (hard to cheat with) precious metals, there's always been an awareness that cheating is intrincically linked to money.

Then it becomes trust in institutions, in enforcement, ie in violence applied in an organised way. Money is at the heart of politics, society and human relations.

Again, I'll plug Aglietta and Orlean's La violence de la monnaie and its updated version La monnaie entre violence et confiance


La monnaie est constitutive du lien social. Elle est à la source de la société marchande, parce que, sans elle, personne n'accepterait de se séparer de ce qui lui appartient contre quelque chose dont il risque de ne pouvoir se défaire. Cet objet produit à la fois de la confiance (puisque chacun l'accepte, je l'accepte, d'où un sentiment d'appartenance sociale) et de la violence (violence mimétique: puisque chacun la désire, je la désire, d'où une lutte potentielle).

De ce double aspect dérive la contradiction essentielle: "D'un côté, la confiance collective dans la monnaie est promesse d'harmonie dans les échanges; de l'autre, le pouvoir de l'argent déclenche des crises qui sont des facteurs de désordre dans l'ensemble de l'économie." A la fois bien public et pouvoir privé d'accaparement, la monnaie a besoin d'une régulation publique, garantissant la permanence de l'unité de compte, ce que les auteurs nomment le "principe de garantie", sans bloquer pour autant le fonctionnement de l'économie (le "principe de croissance") et la possibilité pour chacun de participer à l'échange (le "principe de justice").



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Sep 1st, 2009 at 05:16:07 PM EST
[ Parent ]
but not for human society in general.

Jerome a Paris: Money is at the heart of politics, society and human relations.

If you are talking about commerce-based cultures, then you may be right.  But if you are talking about politics, society and human relations in human society at large, I really hope and believe you are wrong.  Granted, today, practically the whole planet is infested with commerce-based culture, but wasn't there a time when human society existed before and therefore without money.  And is it not possible to imagine a post-money post-capitalist human society?  If not, then that is a bleak prospect, indeed.

Jerome a Paris: Again, I'll plug Aglietta and Orlean's La violence de la monnaie and its updated version La monnaie entre violence et confiance

Aglietta and Orléan seem to make the crucial distinction:

La monnaie entre violence et confiance Michel Aglietta et André OrléanMoney between violence and faith Michel Aglietta et André Orléan
La monnaie est constitutive du lien social. Elle est à la source de la société marchande, parce que, sans elle, personne n'accepterait de se séparer de ce qui lui appartient contre quelque chose dont il risque de ne pouvoir se défaire. ...Money is fundamental to the social bond. It is at the origin of commercial/market society, because without it, nobody would agree to let go of something that belongs to them for something that they may not be able to get rid of. ...

Of course, this is a tiny extract from their book, so dangerous to jump to conclusions based on just this.  But their language of appartenir / belong, se défaire / get rid of, on top of the explicit reference to société marchande reveals assumptions indicating that they are talking about societies in which these commerce-based notions have already developed.

On the other hand, if they have based their theory on the work of René Girard, then maybe they are in fact talking about human society in general, and not just commercial society, since Girard apparently believes his theory applies to all societies and that it explains "the genesis of archaic religion".  Perhaps for Girard, Aglietta and Orléan, what I consider to be "commerce-based notions" are actually universal notions intrinsic in human society regardless of whether they are commercial or not.

Now that I am in Paris, I should find myself a copy.

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 03:41:27 AM EST
[ Parent ]
More realistically money is one particular instantiation of politics, defined as the quest for personal power and prestige.

Debt is a personal obligation, and credit is simply the socially sanctioned - or socially appropriated - right to create social obligations that are enforced by physical penalties.

It's also the socially sanctioned right to make a claim on another individual's or group's industry and creativity.

The mythology is that this kind of credit-based creates an environment which promotes industry and creativity. Sometimes it does. But just as often it destroys or wastes them.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Sep 2nd, 2009 at 04:19:53 AM EST
[ Parent ]
Can you combine the original comment you link to with your comments in this thread and the ones in the recent threads about narratives into a diary?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Sep 2nd, 2009 at 04:56:50 AM EST
[ Parent ]
das monde - Ascent of Money:

In the post-Napolean Europe, the Rothschilds dominated bond markets of many European governments, from England to Prussia, from Russia, Austria to Belgium. They were in power to determine which ministers to appoint, or which wars were to be fought.

The liberal historian Jules Michelet noted in his journal in 1842: "M. Rothschild knows Europe prince by prince, the bourse courtier by courtier. He has all their accounts in his head, that of courtiers and that of the kings; he talks with them even without consulting his books" [pg 91]

_________________

Does anyone know if the following two quotes can be reliably attributed to the Rothschilds?

Permit me to issue and control the money of a nation, and I care not who makes its laws!

Mayer Amschel Rothschild

According to Wikiquote:

No primary source for this is known and the earliest attribution to him known is 1935 (Money Creators, Gertrude M. Coogan). Before that, "Let us control the money of a nation, and we care not who makes its laws" was said to be a "maxim" of the House of Rothschilds, or, even more vaguely, of the "money lenders of the Old World". This is a play on an English proverb, Let me make the songs of a nation, and I care not who makes its laws.

Then there is:

I care not what puppet is placed on the throne of England to rule the Empire, ... The man that controls Britain's money supply controls the British Empire. And I control the money supply.

Nathan Mayer Rothschild

These smell very apocryphal to me, but they are often cited, and not just on helter-skelter conspiracy sites.

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Tue Sep 1st, 2009 at 10:45:23 AM EST
No proof, but the language of the last one doesn't feel 19C British to me.

"The man that" is an Americanism: even today, British English would prefer the relative "who". The verb "control" is modern; I'd expect "master", for example. And I don't know when "the money supply" became current. I wish the OED wasn't so expensive...

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Sep 1st, 2009 at 11:35:31 AM EST
[ Parent ]
At the back of my mind, something else felt wrong - it's "the British Empire".

Having checked, I see that Nathan Mayer Rothschild died in 1836, a year before the young Victoria came to the throne, 40 years before she took on the title of "Empress of India". The expression "the British Empire" may have conveyed something to some people in the 1820s and '30s, but phrases like "his Majesty's dominions" are more likely at the time. "The British Empire" is more of a post-hoc historiographic construct that gained currency later in the century.

The entire "quote" feels like a twentieth-century hack job to me. Anti-semitic sources not to be ruled out.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Sep 2nd, 2009 at 03:08:22 AM EST
[ Parent ]
I suspect you're right, but the language by itself is not necessarily proof, as a genuine quote might just have been modernized. I noticed this a few years ago in the German press with Bismarck's famous comment about George Bush ("Wehe dem Staatsmann, der sich in dieser Zeit nicht nach einem Grunde zum Kriege umsieht, der auch nach dem Kriege noch stichhaltig ist."): while the quote itself is genuine, many papers would reword it in modern German while still claiming it as a literal quote. I could easily see someone quietly changing "Hs Majesty's dominion" to the "British Empire" in a similar way.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Sep 2nd, 2009 at 03:15:30 AM EST
[ Parent ]
This plus the absence of a reference for the quote seems enough to disqualify it?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Sep 2nd, 2009 at 03:16:47 AM EST
[ Parent ]
I think the absence of a reference is the key part, and the language just serves as a backup.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Sep 2nd, 2009 at 03:18:45 AM EST
[ Parent ]
There are thus at least 2-3 similar quotes attributed to the patriarch Rothschilds widely on the internet (it appears, consistently). Hard to determine, is there a genuine quote proved somewhere. Were the Rothschilds sure of their power so early? Mayer Amschel did not have much empirical basis yet.

A classical reference on disproportionate but disguised power of largest bankers is

Tragedy and Hope: A History of the World in Our Time (1966), by Carrol Quigley.

A selection of its "disclosing" quotations is presented here.

by das monde on Wed Sep 2nd, 2009 at 06:01:36 AM EST
[ Parent ]
After Krugman's stinging critique of Ferguson as an faux intellectual, I was thinking I wouldn't read the book, but I might now anyway.

Based on the reviews I've seen, however, I think he might still be grasping at the proxy for the real problem rather than the problem itself. Money has always been difficult to define because it is, by its nature, an abstraction and not a thing.  

However, we can get a better idea of money by looking at what is a proxy for rather than by analyzing the attributes of money (credit is one of the three attributes that most intro Money and Banking textbooks describe), which is where most of economic and related literature gets mired.

What matters regarding money is wealth.  Does money have any conceptual basis outside of thinking about wealth?  

Wealth has both inherent and social characteristics. Inherent in wealth are the individual capabilities of life supporting functions -- nutrition, shelter, development, etc. related to an individual being.  However, also inherent in wealth are others' claims upon resources that provide such capabilities and definitions of what constitutes nutrition, shelter, development, etc,. in a social context.

Money, then, is still more general than credit, which defines only one of its social functions of establishing claims on physical resources and defining social capabilities. Money's real purpose is to be a proxy for individual wealth and therefore how money is manifest in a society must change depending upon what wealth means in a society.  We can know more about the causes and solutions to crises like the present by examining what wealth means in our society and how the relationships of power between people determine who has wealth and who doesn't instead of by getting caught up in what are really unessential details of a a constantly changing proxy for wealth.

by santiago on Tue Sep 1st, 2009 at 06:44:35 PM EST
Well my take on money at a conference in Norway over the summer is here

Money 3.0

In my view credit (aka time to pay) is inherent in the monetary relationship, but it need not - indeed, should not - actually be monetised.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Sep 1st, 2009 at 09:25:47 PM EST
[ Parent ]
Money can presumably fulfill all three attributes (as trade exchange medium, wealth storage, and credit monetization) in normal times. But the core attribute is best revealed in extreme circumstances. Money was not seen as a great wealth storage medium lately - witness the massive flow of money into stock markets and real estate, or whatever "more reliable" wealth forms.

Perhaps the strongest association of money with credit is unnecessary (for broad public purposes). But as we know, money "naturally" emerged not by explicit social consensus or government decree. Those in power to issue and control money insist on strict association of money with credit. Society's collective opinion is weak or irrelevant.

by das monde on Wed Sep 2nd, 2009 at 06:29:56 AM EST
[ Parent ]
Money has been seen as the absolute form of wealth storage in the current crisis, and that shows how human relationships of power are inseparable from money.  The falling US dollar increased in value as the crisis became publicly manifest, and that was because people sold other, less secure, forms of wealth storage -- their income producing assets -- in order to hold US dollars, which is simply a guarantee that US political authority (or EU or Japanese, etc.) will continue to reign supreme and guarantee the existing web of social relationships that currently determines who gets what in the world today.

It is not at all certain that the neo-classical narrative of money emerging "naturally" is true either. Money can emerge naturally, such as the famous cigarettes in war-torn Germany which had more value than the official inflationary currency, but the fact that more explicit, i.e. political, forms of money tend to drive out so-called natural forms, like gold or silver, from circulation show the primacy of the relational dimension over the physical. Social guarantees of wealth are superior to any presumed claims to wealth derived from merely physical characteristics of monetary specie.

I do not argue that credit is not money, but rather that credit only matters because it is another way of securing wealth, which is why money matters at all in the first place.  The more general phenomenon is wealth, not money, so that is where analysis should be focused.

by santiago on Wed Sep 2nd, 2009 at 09:30:48 AM EST
[ Parent ]
santiago:
The falling US dollar increased in value as the crisis became publicly manifest, and that was because people sold other, less secure, forms of wealth storage -- their income producing assets -- in order to hold US dollars, which is simply a guarantee that US political authority (or EU or Japanese, etc.) will continue to reign supreme and guarantee the existing web of social relationships that currently determines who gets what in the world today.

Wasn't there another more prosaic explanation for the rise of the dollar, having to do with a suddenly urgent need to pay for huge amounts of dollar denominated debt?

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 10:15:39 AM EST
[ Parent ]
Also lots of US investors repatriated their foreign asset holdings.

The EUR/USD exchange rate oscillated about 20% in one direction and then 20% in the other direction in the last 3 months of last year.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Wed Sep 2nd, 2009 at 10:21:20 AM EST
[ Parent ]
Yes, and repatriation of assets is exactly what one would expect in an environment where security for one's wealth is deemed more important than growing one's wealth. It's evidence of the superiority of the dollar (or other similarly politically credible currencies) over so-called "fundamental" values of money and assets.  The social determined rules of wealth are what matters in money, and everything else, including credit, are just proxies for those social determinants.
by santiago on Wed Sep 2nd, 2009 at 10:31:39 AM EST
[ Parent ]
No, the prosaic is the wrong one.  The only reason that you could pay for such debt while also lowering interest rates to zero is if the dollar really did command greater value in times of crisis, which it does. And that is explained by the fact that political power -- a social function -- is a more secure guarantee of wealth than anything else.
by santiago on Wed Sep 2nd, 2009 at 10:25:15 AM EST
[ Parent ]
santiago: The only reason that you could pay for such debt while also lowering interest rates to zero

Sorry, I have a very hard time understanding things financial and economic, to put it mildly -- could you explain a bit more this relationship between the lowering of interest rates and the repayment of these dollar-denominated debts?

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 10:50:07 AM EST
[ Parent ]
Well, I understand you to mean by "paying for huge amounts of debt" that people had to sell other assets at fire-sale prices in order to pay their bankers, and since their bankers lent in dollars, demand for dollars must increase, driving exchange rates up in favor of the dollar.  (Correct me if I'm not reading you right. I do that a lot I know.)

The only problem with that argument is that it doesn't explain why bankers would want dollars instead of debt assets in the first place.  What makes a currency unit a more desirable entry on a bank's balance sheet than their debt asset did?  Well, we know it's likely because the bankers realized that their debt assets are riskier and less valuable than they thought -- that there's a good chance the borrower simply can't deliver on his commitment to repay them. What was the wealth, then, that the banker reported on its balance sheet? It was really just a commitment -- that is a political or social claim on society's resources -- made by the borrower to the banker. Nothing more.

When a banker (or any other investor) decides it would rather have currency in its vaults instead of debt assets on its books, it is deciding to substitute the political power represented in currency for the social power of a borrower.  

Currency is like the city walls that people hide behind when the brigands come. When the danger is gone, people go back outside to farm and work to increase their wealth, rather than just protect it.  But if the brigand threat is particularly big, the city with biggest walls offers the best protection.
 

by santiago on Wed Sep 2nd, 2009 at 12:10:21 PM EST
[ Parent ]
Sorry, I accidentally deleted the part about interest rates.

Normally, a government, like any social enterprise such as a business, has to increase interest rates -- the amount it pays a borrower for use of its claims to society's resources -- when it tries to borrow huge sums.  Interest rates should have to increase when a government makes sudden, multi-trillion dollar commitments.  But the opposite has happened in the present crisis.  Interest rates have dropped to near zero for US government debt issuances instead.  This means that the security of holding an explicit  guarantee of wealth from American political authorities is so valuable today people are essentially willing to pay for that security by forgoing slightly higher interest rates in other types of non-US government securities. Why is this so? It's because the social rules of wealth in the world today make it possible for American political authorities to credibly promise to just take resources from someone else if need be, at home or abroad, and give to the bearer of its debt, while few other entities would have much credibility making such a promise.

What financiers like to call a risk premium is really just a government premium.  Government -- organized political power -- trumps markets, and bigger, stronger governments trump weaker, smaller ones when  ambiguities about wealth become manifest.

by santiago on Wed Sep 2nd, 2009 at 12:25:31 PM EST
[ Parent ]
Thanks for your thorough explanations.

santiago: (Correct me if I'm not reading you right. I do that a lot I know.)

No, that was pretty much my understanding of it.

santiago: The only problem with that argument is that it doesn't explain why bankers would want dollars instead of debt assets in the first place.

This is probably a totally naïve and perhaps even non-sensical question, but say somehow it were possible to repay those debts in a pre-agreed range of currencies other than dollars, say euros, yen, swiss francs, and pounds, for example.  So, for example, if a borrower owed $100 million, and the easiest currency they could get their hands on was swiss francs, then the creditor (in this hypothetical world) would have to accept those francs as payment for the debts.

In this scenario (if it makes any sense at all), there would not have been such a huge worldwide demand for dollars to repay debts, right?  There would have been demand for a range of currencies, but not exclusively dollars (because even dollar-based debts could be repaid in those other currencies).  And so, even though people would be scurrying for city walls, it wouldn't be just one city's walls, but five or six cities' walls.  And more than likely, I surmise, we would not have seen the disproportionate rise in the value of the dollar.

This hypothetical (if it follows) would not rebut your point that political pwer represented in currency trumps the social power of the borrower, as you put it, in times of crisis.  But it would rebut the claim that the city walls of the U.S. dollar are (considered) stronger than those of other currencies.

Does that make any sense?

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 01:24:51 PM EST
[ Parent ]
Yes, your question makes sense, and it is a good one.

In this scenario (if it makes any sense at all), there would not have been such a huge worldwide demand for dollars to repay debts, right?

The answer is no, not right. The demand for dollars would have been the same, and that also explains why the idea of currency baskets is problematic too. The reason is that there is nothing -- or not much anyway -- contractual, legal, or otherwise, that requires banks (or other investors or creditors) to keep the currency in their vaults in US dollars today.  They can keep US dollar currency, or they can make other loans or investments, or they can buy other currencies -- it's up to them for the most part, especially in the case of central banks which make decisions about reserve currencies.  So when someone repays a loan to them, creditors have the  option of putting the repayment in vault (or in a deposit with a central or other bank) in US dollars, or they can instantaneous buy a presumably safer foreign currency and put that in their vault instead.

What we observe, however, is that each and every day investors, creditors, and central bankers (including the Chinese who complain so much about it) all decide to hold significant US dollar reserves instead of the many other options available to them.  That is why we know that the political entitlement to wealth of holding a US Dollar is the safer castle wall during a crisis like the present than others forms of securing wealth.

by santiago on Wed Sep 2nd, 2009 at 01:47:21 PM EST
[ Parent ]
santiago: The answer is no, not right. The demand for dollars would have been the same, and that also explains why the idea of currency baskets is problematic too.

I'm probably banging up against my cognitive limits here, but here are two more ways I've been trying to understand this:

1.  Suppose we reduce the situation to an absurdly idealized simple situation, in which there are only two countries/currencies in the world, A and B, and their respective currencies happen to have a 1:1 exchange rate.  Now let's say there were a massive amount of debt denominated in A currency being held by B citizens and entities.  If those B borrowers had to repay that debt in A currency, then they probably would have to exchange large amounts of B currency for A currency, thus driving up the value of A currency with respect to B currency.  Is that correct, so far?

On the other hand, if those B borrowers were allowed to repay their debts in B currency, then the exchange rate would not be affected, or at least, not as drastically.  Is that correct?  Or am I missing some major factors?

If this scenario makes sense (a big if), then I don't see why the dollar would have gone up so suddenly against most major currencies if debt holders could pay back their debts in those currencies.

2. Another take I was wondering about:  What if Switzerland, not the U.S., were the source of all the mad financial shenanigans and most of the debt were denominated in Swiss francs and had to be paid back in Swiss francs (again, another fantasy, but...)  In this scenario, wouldn't we have seen a rush for Swiss francs and a corresponding rise in the value of the CHF?  If so, that would not be evidence for the relative pre-eminence of Swiss political authority in the world, would it?

Lastly, out of curiosity, I looked up the graphs for the last year's exchange rates of the US dollar against other major currencies, which with one exception of the yen, did show a steep rise of the US$ in the aftermath of the crisis.  Now, I believe the precipitous rise of the yen against all major currencies, including the US$, was due to a circumstance that was quite "prosaic", "technical", "artefactual", whatever you want to call it, related to the yen carry trade.  More to the point, the rise of the yen was not evidence of global investors' faith in Japanese political authority, but rather to the abnormally large extent of the yen carry trade.  If that is the case, then how can the rise of the dollar vs. other major currencies (other than the yen) be taken as evidence of faith in the political authority of the U.S.?

santiago: The reason is that there is nothing -- or not much anyway -- contractual, legal, or otherwise, that requires banks (or other investors or creditors) to keep the currency in their vaults in US dollars today.

But are they keeping their currency in US dollars today?  I doubt you can answer that by looking at exchange rates alone, but doesn't the steady decline of the dollar against all other major currencies in the graphs  below suggest that people are not in fact keeping their currency in dollars?

USD vs. Euro

USD vs. Swiss France

USD vs. UK Pound

USD vs. Chinese Renminbi

USD vs. Canadian Dollar

USD vs. Japanese Yen


The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Thu Sep 3rd, 2009 at 05:39:47 AM EST
[ Parent ]
marco:

If those B borrowers had to repay that debt in A currency, then they probably would have to exchange large amounts of B currency for A currency, thus driving up the value of A currency with respect to B currency.  Is that correct, so far?

Correct, in the givens of your scenario.

marco:

On the other hand, if those B borrowers were allowed to repay their debts in B currency, then the exchange rate would not be affected, or at least, not as drastically.  Is that correct?

Yes, correct again. And I argue that this is effectively the case in the real world today because of highly liquid markets for currency and virtually costless and instantaneous exchange of currency. People therefore are in possession of a particular currency at any moment because they want it, not because they're required to.

The dollar did not go up in order to repay debts. That was my point.  It went up because people wanted to hold dollars relative to either other currencies or other assets.  However, we know that people were actually selling other assets -- real estate and stocks -- so that means that the dollar must have increased because people, for some reason, wanted to hold cash in US dollars.

Let's go to Switzerland:

What if Switzerland, not the U.S., were the source of all the mad financial shenanigans and most of the debt were denominated in Swiss francs and had to be paid back in Swiss francs (again, another fantasy, but...)  In this scenario, wouldn't we have seen a rush for Swiss francs and a corresponding rise in the value of the CHF?

No, and the reason is because repaying debt is NOT what people do when a country goes into mad financial shenanigans such as occurred in the US (or in Sweden in the early 1990's, for a closer comparison to your Swiss example). What people do is sell assets to hold currency, paying some debt in the process only incidentally.  (No one is clamoring to repay debt right now and creditors have no way of making people accelerate repayment either, so the driving phenomenon is assets sales not debt repayment.) And if safer currencies then the precarious domestic one were available, people, including lenders, will buy and hold those currencies.  In your Swiss example, people would sell Swiss real estate and other assets at fire sale prices and use the proceeds buy Euros or Dollars.  If they could, they would even borrow MORE CHF denominated debt to buy euros or dollars.

The question then, is why didn't that happen when US financial system collapsed last year and why isn't it happening now?  Your graphs tell a story of a surge in the dollar's value followed by a return to pre-crisis prices.  That's not a declining dollar story -- that's a stable currency story. The dollar's fall since the beginning of the year indicates a willingness to invest in productive assets, possibly including foreign assets, instead of holding cash, and that's good news, not bad.

So, if the dollar were perceived to be a weak security for wealth compared to other currencies, we should never have seen any surge in its price at all. Foreigners were not ones selling foreign assets to repay US creditors last year, which is your Swiss story. Foreigners were the net creditors, in fact, as shown by the US current account deficit. Rather, both foreigners and Americans were selling US assets (causing creditors to collect some it).  And they all tended to choose to hold dollars in cash while this was going on instead of immediately converting it to foreign currency or foreign assets. That's evidence that political power trumps everything else when it comes to money.

The Yen?  Following my narrative, Japan is the world's second largest economy, Tokyo is the financial center of Asia, and Japan is therefore the only nation-state comparable in power to the US in a crisis. People believe that the Japanese have the power to make good on their claims and debts, through coercion if not through growth. If people wanted to take some wealth out of Europe and America and go to Asia for protection, Japanese political authority to protect that wealth was the best bet.

by santiago on Thu Sep 3rd, 2009 at 12:31:25 PM EST
[ Parent ]
Thank you very much for answering all these questions so patiently and thoroughly.  This has been a significant help to me.

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.
by marco on Thu Sep 3rd, 2009 at 07:06:05 PM EST
[ Parent ]
Thank you as well for such stimulating and challenging questions.
by santiago on Thu Sep 3rd, 2009 at 10:38:17 PM EST
[ Parent ]
Thanks to both of you for a valuable increase in my understanding of currencies.

Btw, the swedish krona was in the swedish crises mentioned forced from a fixed rate and then dropped substantially vs european and american currencies. In accordance with the explanation.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Sep 4th, 2009 at 07:04:30 AM EST
[ Parent ]
santiago:
The dollar did not go up in order to repay debts. That was my point.  It went up because people wanted to hold dollars relative to either other currencies or other assets.

Firstly, wherever there was an interbank market in dollar loans which froze up - and Norway was a good example - the result of the refusal by banks to roll over these loans was a requirement for dollars to settle the loans.

Hence the need for massive Fed currency swaps - mischaracterised as Fed "bailouts" eg of the poor, mismanaged, economic basket case that is Norway.

One of the key results of this, as far as I could see, was that the dollar appreciated against the relevant currencies.

Secondly, if a US owner of a leveraged foreign asset perceives that the value of the dollar is likely to fall relative to the currency of the asset location, then he is likely to get out of that exposure while the going is good.

I don't so much see that as a flight to safety, rather than as an aversion to foreign exchange risk.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Sep 5th, 2009 at 05:06:33 PM EST
[ Parent ]
The only problem with that argument is that it doesn't explain why bankers would want dollars instead of debt assets in the first place.

I don't see bankers in an active position now. They made their move when loaning, and now is up to borrowers to decide whether to return debt as quickly as possible (hence, pushing cash to bankers) or to keep "assets" for bankers.

The only thing than bankers can (or cannot) do is to lend more. But here they are reasonable enough with cynic value estimates of potentially new loan "assets".

by das monde on Wed Sep 2nd, 2009 at 11:11:28 PM EST
[ Parent ]
Absolutely right.  People are not really trying to pay back their bankers.  They are selling assets, however, and bankers are being repaid incidentally because they hold liens on any of those assets.  They're not being repaid all they were owed, but, nonetheless, they are gaining cash that they could lend if they wanted to.
by santiago on Thu Sep 3rd, 2009 at 11:16:27 AM EST
[ Parent ]
   
Part 1.

   
Part 2.

   
Part 3.

   
Part 4.


Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Sep 1st, 2009 at 07:16:57 PM EST
Here are a few other references discussing the history or role of money. It's not that I can recover everything I put my eyes on...

Honest Money, a series by Douglas V. Gnazzo; I am confused how many topics or versions are there; perhaps he put most of American currency history in a book;

Banks, Money, and Debt - a few recent articles on the "Worthwhile Canadian Initiative" blog;

When Money Was New - also a new blog article (on the Greek times)

by das monde on Wed Sep 2nd, 2009 at 06:11:31 AM EST
[ Parent ]
The phenomenon of inflation is still puzzling, isn't it? The "common sense" theory (that flush of money diminishes value of money tokens with respect to existing goods) implies a closed-market mechanism. A larger amount of money, especially if it comes from higher wages, leads to more intense consumer competition and hence to higher prices - or so they say.

Yet I do not see this mechanism working consistently. Say, take the Baltic countries: they experienced a credit boom in this decade, which increased their nominal wealth and monetary volume enormously - yet the prices did not rose at the height of the boom. Consumers were never more potent then, as realistic worries of debt return were non-existent. Why did entrepreneurs did not raise prices then?

Inflation did rose there on the last months of the boom, when indeed wages started to raise. But how did entrepreneurs reacted so fast to presumably more potent consumer demand? I do not see how consumers had a chance to clash "competitively" so fast. Rather, a much simpler explanation is that entrepreneurs "routinely" included raising costs (of higher wages) into the higher prices, trying to keep their profit share.

If you look at the Weimar Republic, the outside pressure of investors (with utmost skepticism regarding war debts and reparations) was clearly a factor. In a closed economy, the Germans could just as well use Worgl type currency. In contrast, the Nazi Germany largely bypassed control of international financial system and issued "very strange" paper money quite liberally - with remarkable (though inconvenient, controversial?) economic results at the times of Great Depression.

I even speculate that the Spanish inflation (after they got their mountains of silver and gold, as I mentioned) was wishfully fueled by the other financial powers that could not recognize such a large gap in monetary power. The strong money-as-credit association is very much Anglo-Saxan innovation.

by das monde on Wed Sep 2nd, 2009 at 07:13:31 AM EST
Web of Debt - Thinking Outside The Box: How A Bankrupt Germany Solved Its Infrastructure Problems
Schacht actually disapproved of this government fiat money, and wound up getting fired as head of the Reichsbank when he refused to issue it (something that may have saved him at the Nuremberg trials). But he acknowledged in his later memoirs that allowing the government to issue the money it needed had not produced the price inflation predicted by classical economic theory. He surmised that this was because factories were sitting idle and people were unemployed. In this he agreed with John Maynard Keynes: when the resources were available to increase productivity, adding new money to the economy did not increase prices; it increased goods and services. Supply and demand increased together, leaving prices unaffected.
Fascinating...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Sep 2nd, 2009 at 07:27:13 AM EST
[ Parent ]
according to John Kenneth Galbraith:
     By the mid thirties there was also in existence an advanced demonstration of the Keynesian system.  This was the economic policy of Adolf Hitler and the Third Reich.  It involved large-scale borrowing for public expenditures, and at first this was principally for civilian works -- railroads, canals and the Autobahnen.  The result was a far more effective attack on unemployment than in any other industrial city.16 By 1935, German unemployment was minimal.  'Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred.'17  In 1936, as prices and wages came under upward pressure, Hitler took the further step of combining an expansive employment policy with comprehensive price controls.
      The Nazi economic policy, it should be noted, was an ad hoc response to what seemed over-riding circumstance.  The unemployment position was desperate.  So money was borrowed and people put to work.  When rising wages and prices threatened price stability, a price ceiling was imposed.  Although there had been much discussion of such policy in pre-Hitler Germany, it seems doubtful if it was highly influential.  Hitler and his cohorts were not a bookish lot.  Nevertheless the elimination of unemployment in Germany during the Great Depression without inflation -- and with initial reliance on essentially civilian activities -- was a signal accomplishment.  It has rarely been praised and not much remarked.  The notion that Hitler could do no good extends to his economics as it does, more plausibly, to all else.

      Thus the effect of The General Theory was to legitimatize ideas that were in circulation.  What had been the aberrations of cranks and crackpots became now respectable scholarly discussion.  To suggest that there might be over-saving now no longer cost a man his degree or, necessarily, his promotion.  That the proper remedy for over-saving was public spending financed by borrowing was henceforth a fit topic for discussion -- although it continued to provoke bitter rebuke.  The way was now open for public action.

  1. '... the Nazies were ... more successful in curing the economic ills of the 1930s [than the United States].  They reduced unemployment and stimulated industrial production faster than than the Americans did and, considering their resources, handled their monetary and trade problems more successfully, certainly more imaginatively.  This was partly because the Nazis employed deficit financing on a larger scale ... By 1936 the depression was substantially over in Germany, far from finished in the United State.' John A. Garraty, 'The New Deal, National Socialism, and the Great Depression' American Historical Review, vol. 78, no. 4 (October 1973), p. 944.

  2. Joan Robinson. Quoted by Garvy.

_______

John Kenneth Galbraith, "The Coming of J.M. Keynes", Money: Whence It Came, Where It Went (1975), pp. 237-239

So he does qualify the Nazi achievement as "the elimination of unemployment in Germany during the Great Depression without inflation", but this was done through the use of price controls, which seems like cheating to me (though to Galbraith, who served as deputy head of the [U.S.] Office of Price Administration during World War II, price controls were a legitimate economic policy tool, if used judiciously in appropriate types of markets).

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 09:44:43 AM EST
[ Parent ]
marco:
By 1935, German unemployment was minimal.  'Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred.'[Joan Robinson]  In 1936, as prices and wages came under upward pressure, Hitler took the further step of combining an expansive employment policy with comprehensive price controls.

...

... Nevertheless the elimination of unemployment in Germany during the Great Depression without inflation -- and with initial reliance on essentially civilian activities -- was a signal accomplishment.  It has rarely been praised and not much remarked.  The notion that Hitler could do no good extends to his economics as it does, more plausibly, to all else.

Oh, God, don't let the freepers find out or they'll start claiming that Keynes was a Nazi.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Sep 2nd, 2009 at 09:54:32 AM EST
[ Parent ]
marco:
this was done through the use of price controls, which seems like cheating to me (though to Galbraith, who served as deputy head of the [U.S.] Office of Price Administration during World War II, price controls were a legitimate economic policy tool, if used judiciously in appropriate types of markets)
Reading assignment: The New Industrial State wherein the mechanisms by which corporations control prices is elucidated, as well as the reasons why they do it. Having accepted that prices are controlled in a modern economy, why shouldn't they be controlled for the good of society? And, within Galbraith's analysis, since the "private" corporations are enmeshed in the institutional structure of society and its economy, isn't what is good for the corporations good for society and conversely?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Sep 3rd, 2009 at 10:20:02 AM EST
[ Parent ]
It is.

But - by definition - Nazi economic policy cannot have got anything right....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Sep 2nd, 2009 at 10:11:40 AM EST
[ Parent ]
On the other hand, can we hear here a dog that did not bark?

What seems to be missing is pressure (or an attack) of international investors on the "funny" Nazi currency. It is not a big secret that, particularly, a portion of US political and financial establishment was rooting for Nazis.

by das monde on Wed Sep 2nd, 2009 at 10:56:35 PM EST
[ Parent ]
das monde:
A larger amount of money, especially if it comes from higher wages, leads to more intense consumer competition and hence to higher prices - or so they say.

How does that work? With the exception of essentials like housing, which seems to be a special case, can't consumers buy more stuff, and different kinds of stuff, rather than competing for the same stuff?

Rather, a much simpler explanation is that entrepreneurs "routinely" included raising costs (of higher wages) into the higher prices, trying to keep their profit share.

This seems rather more plausible.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Sep 2nd, 2009 at 09:18:51 AM EST
[ Parent ]
ThatBritGuy:
Rather, a much simpler explanation is that entrepreneurs "routinely" included raising costs (of higher wages) into the higher prices, trying to keep their profit share.

This seems rather more plausible.

But what compelled entrepreneurs to raise wages (in those 'the last months of the boom, when indeed wages started to raise')?

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 09:53:28 AM EST
[ Parent ]
If an entrepreneur raises his prices - either because he can, (since he has pricing power), or because he must (since costs have risen) - is that not by definition "inflationary"?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Sep 2nd, 2009 at 10:15:03 AM EST
[ Parent ]
das monde and ThatBritGuy seem to be agreeing that the cause of inflation is entrepreneurs raising prices and blaming it on the increasing costs of rising wages they have to pay.

But das monde wrote that prices in the Baltics did not increase until the last months of the boom, which means (if I understood correctly) that wages did not rise until the last months of the boom either (even though expanded credit 'increased their nominal wealth and monetary volume enormously' -- I guess 'their' includes both entrepreneurs and workers).

So what I do not understand is what forced entrepreneurs, after a long period of not raising wages, to do so at the end of the boom like that?

The West won the world not by the superiority of its ideas or values or religion, but rather by its superiority in applying organized violence.

by marco on Wed Sep 2nd, 2009 at 10:33:42 AM EST
[ Parent ]
what forced entrepreneurs, after a long period of not raising wages, to do so at the end of the boom like that?

Entrepreneurs really started to feel shortage in competent and reliable workforce. Economic emigration to the West was already in full force, and then the credit boom made the old wages laughably not worth working for.

There was also big disparity in wages: construction workers were paid very well (although the West were already in the West), while public workers like teachers were under-appreciated.

Wages in the Baltics were very stagnant because econoy through the 90s was still not good. In the beginning of 2000s, entrepreneurs were not raising wages unless they were "forced" to. Additional "envelope" (behind the counter) wage payments were also widespread.

by das monde on Wed Sep 2nd, 2009 at 10:10:27 PM EST
[ Parent ]
das monde:
Additional "envelope" (behind the counter) wage payments were also widespread.

A minor scandal erupted when it became clear that swedish banks had in the Baltics allowed people to borrow against their behind the counter income. Blew over quickly though.

Did any of the Baltic countries tax authorities crack down on this habit of behind the counter pay? That could also explain an increase in open wages.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Sep 4th, 2009 at 07:14:07 AM EST
[ Parent ]
That's where both monetarist and Keynesian explanations of money are important (and Krugman's criticism of Ferguson is that Ferguson never shows that he really understands what either Keynes or Friedman was talking about).  

Keynes breakthrough in knowledge about money was to show that deflation occurs when values for bonds -- which he deemed like money in their ability to store wealth -- dropped precipitously, thus causing people dump their bond investments and demand hard currency.  Inflation is the opposite -- when bond investments increase in value people dump their currency holdings in order to hold bond investments.

Friedman's breakthrough was to generalize Keynes even further -- it wasn't just bond markets that determined demand for money, rather it was markets for all other assets.  Friedman showed this by adding stocks and bonds together to show the relationship between asset values and deflation or inflation, but the same idea can be extended to all other assets, including residential homes in the current crisis.  

If prices did not rise in the Balkans with expansion of credit there, it was likely because demand for non-currency assets was also high -- people were investing in real estate, construction, foreign investments, etc., and not trying to hold Balkan currency.

by santiago on Wed Sep 2nd, 2009 at 09:45:33 AM EST
[ Parent ]
In the book, Ferguson cites James Carville, when he was Bill Clinton's campaign manager:

"I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market: You can intimidate everybody."

Such is the power of financial democracy (or oligarchy?!).

I see a lot of subjective demand and supply in the modern economy and financial world - perceptions or anticipations, what the supplies and demands should be, or blind herd following of investment fashions or "best available" strategies. The two big theories do not apply well to bubble periods; they basically ignore relevance of bubbles. Regarding post-bubble depressions, I don't see how Friedman helps.

by das monde on Thu Sep 3rd, 2009 at 12:43:55 AM EST
[ Parent ]


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