Thursday, June 11, 2009

Ascent of Money by Niall Ferguson: Interesting quotes

Recently finished reading Ascent of Money: A Financial History of the World by Niall Ferguson and thoroughly enjoyed it. It’s very well written and covers a gamut of topics pertaining to financial history. While I’ll be posting a book review sometime later, just felt like sharing a few interesting quotes from the book. These are randomly taken, and in no way reflect the main contents of the book. You can read the reviews from this Amazon link to pique your interest.

On inflation in 2008: The coincidence of a dollar slide and continuing Asian industrial growth has caused a spike in commodity prices comparable not merely with the 1970s but with the 1940s. In mid-2008 we witnessed the inflationary symptoms of a world war without the war itself. Anyone who reads this without feeling anxious does not know enough financial history.

On the medieval crusades: The roman system of coinage outlived the Roman Empire itself. Prices were still quoted in terms of silver denarii in the time of Charlemagne. Difficulty was that by that time where was a chronic shortage of silver in western Europe. Precious metal tended to drain away from backward Europe. The crusades, like the conquests that followed, were as much about overcoming Europe’s monetary shortage as about converting heathens to Christianity.

On gold standard: Advantages: Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by causing governments to pursue prudent fiscal and monetary policies. Disadvantage: Policymakers are forced to choose between free capital movements and an independent national monetary policy. Not both. A peg means higher volatility in short term rates, as central bank seeks to keep the price of its money steady in terms of the peg. It can mean deflation(1870s 1880s), it can transmit financial crisis(like after 1929). System of money based primarily on bank deposits and floating exchange rates is freed from these constraints.

Why so much debt? The root cause must lie in the evolution of money and the banks whose liabilities are its key component. The inescapable reality seems to be that breaking the link between money creation and a metallic anchor has led to an unprecedented monetary expansion – and with it a credit boom the like of which the world has never seen. Measuring liquidity as ratio of broad money to output, this ratio has risen. At the same time capital adequacy of banks in the developed world has been slowly declining. Today banking assets are around 150% of countries combined GDP.

On Globalization: Globalization is not a new thing. In the 30 years before 1914, trade in goods reached almost as large a proportion of global output as in the past 30 years. In net terms the amounts invested abroad – particularly by rich countries in poor countries – were much larger in the earlier period. Over a century ago, enterprising businessmen could see that there were enticing opportunities throughout Asia. Capital was abundantly available, and British investors were more than ready to risk their money in remote countries. Yet, despite the investment of over a billion pounds, the promise of Victorian globalization went largely unfulfilled in most of Asia, leaving a legacy of bitterness towards what is still remembered as colonial exploitation.

Hyperinflation in Germany: A big reason Germany went into hyperinflation after First World War was the key role of the bond market in war and post-war finance. . Germany did not have access to the international bond market during the war. While the entente powers could sell bonds in the US or capital-rich British Empire, the Central powers were thrown back on their own resources. Much sooner, the German and Austrian authorities had to turn to their central banks for short-term funding. By the end of the war, a third of the Reich debt was floating or unfunded, and a substantial monetary overhang had been created

Hyperinflation is always and everywhere a political phenomena, in the sense it cannot occur without a fundamental malfunction of a country’s political economy.

One important history lesson is that major wars can arise when economic globalization is very far advanced and the hegemonic position of the English-speaking world fairly secure. A second lesson is that the longer the world goes without a conflict, the harder one becomes to imagine (and, perhaps, the easier one becomes to start). A third and final lesson is that when a crisis strikes complacent investors it causes much more disruption than when it strikes battle-scarred ones.

Three insights: First, poverty is not the result of rapacious financiers exploiting the poor. It has more to do with the lack of financial institutions, with the absence of banks, not their presence. Only when borrowers have access to efficient credit networks, when savers can deposit their money in reliable banks can it be channeled from the rich to the industrious poor. Second: if the financial system has a defect, it is that it reflects and magnifies what we humans are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility. Thirdly, few things are harder to predict than the timing and magnitude of financial crises, because the financial system is so genuinely complex and so many of the relationships are non-linear, even chaotic.

To read more about many more interesting topics, please be sure to check out the book. If interested, you can buy it directly from Amazon by clicking the link above.

Highly recommended.

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