24 of 24 people found the following review helpful:
5.0 out of 5 stars
Book Review from the Aleph Blog, January 23, 2010
This review is from: The Volatility Machine: Emerging Economics and the Threat of Financial Collapse (Hardcover)
There are some books that were important to forming the way I think about economic problems, but if I write about it, I feel that I can't do justice to the quality of the book. The Volatility Machine, by Michael Pettis, is one of those books. Michael Pettis was a managing director at Bear Stearns, and an adjunct professor at Columbia University when he wrote it.
The book was written in 1999-2000, and published in 2001. It explains how economic activity in the developed world travels into the smaller markets of the developing world, amplifying booms and busts. Coming off the Asian/Russian crises of 1997-1998, it was a timely book. During boom periods, capital flows from the developed countries to the developing countries; during bust periods, capital gets withdrawn. There is a kind of "crack the whip" effect, where the tail feels the change in direction the most.
Borrowing short is a weak position to be in, as the Mexican crisis in 1994 showed us, as the Fed raised rates and the tightening spilled into Mexico, which was financing with short-term debt, cetes. The same is true of corporations that finance with short debt; they are ordinarily less stable than firms that finance long. The Volatility Machine explains why the same forces apply to both situations.
Buffett has said, "It's only when the tide goes out that you learn who's been swimming naked." Rising volatility is that tide going out, and it reveals weak funding structures and bad business/government plans. Booms set up the overconfidence that leads some economic parties to presume on future prosperity, and choose financing terms that are less than secure if the market turns.
Countries that are small and reliant on continued capital inflows are vulnerable to volatility. In the 1970s-1990s, that was the developing countries. Today, the developing countries vary considerably. Some have funded themselves conservatively, some have not, and a number are net capital providers. The US is the one reliant on capital inflows. So what would Michael Pettis have to say in this situation?
You don't have to look far. Today, Michael Pettis is a professor at Peking University's Guanghua School of Management. He is studying China from the inside, and writes about it at his blog (I read it every day, and will add it to my blogroll the next time I update it), China financial markets. Among his most interesting recent posts:
China's latest batch of numbers aren't good
Chinese pro-cyclicality makes predictions so difficult
More on why high share prices don't mean Chinese banks are in good shape
The new China-Europe-US world order
Things have gotten grimmer in China
His views are complex and nuanced, and reflect the sometimes asymmetric incentives that politicians and policymakers face. When I read his writings on China, I am simultaneously impressed with the rapid growth, and with the potential fragility of the situation.
So, enjoy his blog if that is your cup of tea. If you want to learn how international finance affects developing economies, buy his book.
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11 of 11 people found the following review helpful:
5.0 out of 5 stars
Engrossing Review of Financial Crises, November 3, 2009
This review is from: The Volatility Machine: Emerging Economics and the Threat of Financial Collapse (Hardcover)
I am over halfway through the book right now, but having read Pettis' work before, I know where it is heading, but I still cannot put it down.
I have an econ/finance background, so much of this comes naturally. But his explanations are so clear that almost no background would be required. I have flown through the book, rarely re-reading anything, which says a lot about the author's writing ability. Most economics is dull, boring, and a difficult slog. This book is crisp, on point, and I always just want to finish one more page.
Having experience trading options, his thesis rings remarkably true. This is really an eye-opening book as he does a great job explaining the theoretical underpinnings of his thesis. This book was far ahead of its time. Pettis saw the gaping holes in the financial system a decade ago. It really was only a matter of time before the shaky facade came crashing down.
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8 of 10 people found the following review helpful:
5.0 out of 5 stars
Understand What's Happening In Emerging Markets, May 4, 2001
By A Customer
This review is from: The Volatility Machine: Emerging Economics and the Threat of Financial Collapse (Hardcover)
This is a MUST READ for institutional investors worldwide! For the first time I have a confident sense of what is at the core of emerging market instability. Now if only some government policy makers would read this (even they would understand it!), the causal conditions might start to improve.
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