“Paper Promises”

How did the world get from shells, to coins, to paper, and finally to numbers on a screen? What fuels an economy? Demand. Where does demand come from? Spending. However, what happens when spending exceeds income?

So, one should ask why was demand so high before? My thoughts are that past demand was fueled and leveraged by debt. Where did the extra money come from for additional demand (demand over and above what it is today)? From borrowing.

So when will economies grow? When that extra debt has been paid off and flushed from the system so that people then have the money to spend on today’s expenses (rather than pay for yesterday’s expenses they’ve accumulated in debt balances).

That’s why this book caught my attention … it was the subtitle “Debt, Money and the New World Order.”

The first 16 pages for the Introduction set the stage. “On the monetary side, a government that expands the money supply at a rate in excess of economic growth will eventually erode the real value of taxpayers’ wealth via inflation. … The gainers will be the poorest, who benefit from increased public expenditure or who pay little tax. Similarly, when a government decides to balance the budge by cutting public spending, or to eliminate inflation by raising interest rates, it is likely to penalize those employed by the public sector, those on benefits or those with debts. In short, one course of action tends to favour the creditor/rich class and the other favours the debtor/poor class.” “Conflict between creditors and debtors is almost as old as money itself.”

In truth, debtors believed they needed the money when they borrowed and creditors lent it to them with an expectation of repayment. Once trust is broken between either party, problems occur. Was it the fault of the debtor, or the greed of the creditor? When this happens on a national, or global scale, how it trust restored?

Rather than go into great detail in the form of a long book review, this work is an easy read that explains how the world went from using shells as a medium of exchange, to gold, to coins, to paper, to numbers on a screen. How money became a unit of account as well as a store of value as well as a medium of exchange. How the struggle between creditor (usually the minority) and the debtor (usually the majority) has evolved. “Historical records show debt agreements precede coins by around 2,000 years.” How debt and money creation may have lead to an asset boom. Why the gold standard came and went. What the exchange rate choices a country has.

Coggan builds a good case (pp 143) that cash and credit expansion may explain the asset price growth experienced over the past 50 years. The questions remain: can that continue? What happens if that slows or stalls. Demographic trends as well as pension funding issues are put into great perspective. Here’s the problem with pensions (and possibly annuities): The size of the benefits promised is not directly connected to the size of the assets on hand to support those promises; in other words, lots of assumptions connect the two.

Finally, the current economic bust around the world developed is discussed in terms of money and debt. Essentially, an economy needs to grow faster than its cost of debt to be able to afford that debt. Cost of debt can rise if confidence of the debt holders for repayment goes down.

Our modern society depends on confidence in the system … the store takes our money and the bank will give us our deposits, etc. When that confidence erodes, the system falters. People begin to panic and that panic leads to further erosion of confidence. The problem feeds on itself.

This is a rare work on the bigger picture that is well written. The world depends on functioning monetary systems. Assets are expressed in terms on monetary value (i.e., in Euros, Dollars, etc). The total value of money is an expression of economic output. If that output is required to repay yesterday’s consumption (credit), then the money used for repayment is not available for today’s consumption (without more credit). Default on debt sounds good, but the effect is to lower the standard of living for everybody, not only creditors, but debtors as well.

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  1. Endgame – the book | Better Financial Education Blog - August 15, 2012

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