Sunday, July 12, 2009

The Ascent of Money, Niall Ferguson

The subtitle of this work is "A Financial History of the World". GREAT book, one of those gems that one feels lucky to have tripped over and will likely be reading a couple more times in the next few years.

Niall is Scottish, Oxford, Harvard, Stanford, PHD, and an EXCELLENT writer. A real find. Here are his "main summary points" from the introduction:

  1. Poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the LACK of financial institutions, with the abscence of banks, not their presence.
  2. If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.
  3. Few things are harder to predict accurately than the timing and magnitude of financial crises.
He does a great job of supporting these, but I'd argue that they are close to self-evident. When one lacks credit, a safe place to put assets and the ability to exchange value with others (1), it is pretty likely that poverty will be rampant. Finance is just one more "technology". All ANY technology does is "magnify what we are" -- it is completely unsurprising that finance would do the same. Lastly, in the words of Yogi Berra, "predictions are hard to make, especially about the future".

The interaction of "money" and "value" back through history -- gold of course, bonds, "fiat money", etc are all covered with nice stories to help make them memorable. The Medici family, the Rothschild family, and the nexus between Jews, banking, and why. Mainly, interest was called "usury", and the church prevented Christians from charging it -- therefore, the Jews got the role. The use of commodity backed bonds is well covered using the Confederacy and cotton as examples.

Probably the biggest surprise to me was the level of involvement of Milton Friedman and the University of Chicago in the Pinochet administration in Chile and the results. Here is a paragraph from one of the Chilean government officials of the era that might be of slight interest to someone in the US today that is not in the complete thrall of BO:

What had begun as a system of large-scale insurance had simply become a system of taxation, with today's contributions being used to pay today's benefits, rather than to accumulate a fund for future use. This "pay-as-you-go" approach had replaced the principle of thrift with the practice of entitlement ... but this approach is rooted in a false conception of how human beings behave. It destroys at the individual level, the link between contributions and benefits. In other words, between effort and reward. Whenever that happens on a massive scale and for a long period of time, the final result is disaster.

Imagine that!! A welfare system that breaks the connection between effort and reward doesn't work for humans!!! What a concept! He covers it for Japan, Europe (especially Britian) and some for the US, but I'd argue that effectively, we all really understand this. "There is no free lunch" -- everyone would LOVE it for "someone else to pay", but the bottom line is that they aren't going to. You can demand that they do and force them into concentration camps and even kill them in the final analysis, but just like China, the USSR, N Korea, N Vietnam, etc, you find that unless you allow the "profit motive" to have a solid effect, you end up with a disaster where everyone is poorer with the exception of a few folks in the central government.

He covered hedge funds and especially George Soros quite a bit. I'm always amazed at how someone that one would assume that the left would see as "the worst of the worst" -- making money on international currency flows with no concern as to what country, what jobs, or whatever is injured. In 2007, Soros made $2.9 B himself, yet because he gives entirely to left wing causes (ACORN,, and the Daily Kos) his making of $2.9 billion is just fine, while some other exec that makes a "mere" $50 million or so for running a real company and making real things is considered to be a "robber baron".

The reason is simple -- the majority see the government as "providing" for them rather than the people that produce the wealth. The producers are bad -- they don't pay enough, they need to work harder. Long live the re-distributors!

The book is an excellent read -- derivatives, credit default swaps, sub-prime loans and a host of other things are covered in a relatively easy to understand and narritive manner. The bottom line is what one might expect. "Value" is based on what people are willing to pay, and "risk" is changeable and not computeable. Not only is there " no free lunch", there is also no "safe haven". There ARE principles that would seem to work well in even the medium term, and nearly certainly in the long term, but in the short term, "markets fluctuate" -- sometimes violently.

In the big picture, that is GOOD, but ONLY if the governments let the process of "creative destruction" take place -- if unions are no longer competitive, then they lose. If cars need to change, then the companies that build the new kinds of cars fast enough survive and those that don't die.

Esentially we have turned to the socialist direction that has failed miserably across the globe over and over because it is human nature to want to remove risk and to get a lot more for a lot less effort. Both are very good impulses if being pursued by creativity, hard work and lots of mental effort in a competitive environment. Both are huge disasters if being pursued by government officials trying to force the markets to be calm and business to be stable by fiat.

This knowledge isn't new ... Shakesphere had it down pretty well:

I can call spirits from the vasty deep.

Why, so can I, or so can any man;
But will they come when you do call for them?

Why, I can teach you, cousin, to command
The devil

And I can teach thee, coz, to shame the devil—
By telling the truth. Tell truth and shame the devil.

BO seems to be doing a lot of calling.