Pragmatic Capitalism. This is a great summary of many difficult topics to get your arms around normally. Roche does a good job summarizing many complex interrelations such as what is money, what you really do with your money in the economy, what the banks do and how the Federal Reserve, our central bank works in the macroeconomic scheme of things.
I read the book while on a trip from northern California to Washington DC for an advanced investing conference in early November. You’re reading my blog post on it now according to my normal scheduling process for posts … and nothing Roche wrote will need to be ignored just because the markets and/or the economy may have changed between November and now. In other words, a timeless work.
I do have some disagreement with Roche’s approach to investing as described in the book. This disagreement probably reflects more on our beliefs about the benefits of different investment approaches – passive versus active basically. The academic literature finds no evidence of skill advantages of managers and those identified are short lived as would be expected statistically as “luck.” The passive approach – or what may be called evidence based approach – has a bit more to it than he leads one to believe. However, this said, the investment application is always the riskiest and most controversial part of any book. His list of suggested books to read in Chapter 11 is good for those wanting to learn more.
The book is one of the first to tackle and blends the topics of money, markets, the economy, and the interconnections between these, to give the individual an idea how all may fit together in one understandable paradigm. The big picture matters if you wish to understand the workings of a global economy, global interconnections, and how money works and flows through today’s modern macroeconomic system.
I won’t go into great detail and try to rewrite his work – simply give you a taste for you to consider for further reading of the book yourself.
You may consider reading chapter 9 first – 20 Essential Principles – to gain a broad perspective on his main points he goes through in detail in the first 8 chapters.
He defines what money is. He explains that “one person’s spending is another person’s income.” He explains the difference between investments and saving as well as pointing out that the most important investment is probably in yourself first. From that investment comes the potential income from your value in the economy, which you’d want to maximize, that goes mostly towards your consumption (someone else’s income), and some to saving and investing. Roche’s saving definition is interesting in that this is basically what supports future consumption – what most people think of as investing.
The main theme is to consider BOTH sides of transactions to fully understand the system you’re looking at. Most of the time, only one side is being discussed which leads to erroneous conclusions. In fact, he doesn’t specifically say so, but the statement that one person’s spending is another’s income is also an application of understanding BOTH sides of transactions.
His chapters explain briefly and simply the macro economy, understanding behavioral finance, the monetary system, the role of private banks and the central banks, and a few myths along the way. For example, he discusses the myth the US Government will run out of money trying to pay its debt. He correctly points out that as long as productivity grows, debt interest can be repaid. However, he doesn’t mention the implication that if productivity stays the same or declines, the paying interest especially in high interest rate environments, may be a problem. He too, does not mention how to repay (paydown) principal – so another implication is a perpetual debt that is the responsibility of the young (future generation) to service interest and principal payments. Money going from paychecks to do that means less money for personal consumption which may slow the economic growth. He is correct that the government balance sheet is not completely comparable to personal balance sheets. However, that doesn’t mean lots of debt is not without problems.
Money, your spending and saving interaction in the economy, and how banks move money to keep economic flows going are all important topics to understand how you fit into an ever growing interconnected global economy.