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on February 6, 2012
Philip Coggan explores with much clarity the different cycles in which money and debt have expanded. Mr. Coggan reminds his audience that money is concomitantly a medium of exchange, a unit of account, and a store of value. Two of these monetary roles - the means of exchange and store of value - lie at the heart of the ongoing struggle between creditors and debtors.

Starting in the United Kingdom in the late eighteenth century, the Industrial Revolution resulted into accelerated economic growth, significant population increase, and more trade across the developed world and its colonies. This burst of activity required more official money that remained based on precious metals until WWI. The United Kingdom led the way once again with the adoption of the gold standard among developed economies in the first half of the nineteenth century. The absence of universal suffrage allowed the upper or creditor classes to whom central bankers usually belonged, to favor a policy of sound currency backed by gold, regardless of the pain inflicted to the lower social classes. WWI resulted into the suspension of the gold standard and the massive increase in paper money.

Power shifted to debtors during the inter-war period due to the widespread adoption of democracy and the impossibility to restore the gold standard because of the burden of international debts, especially war reparations. During this period, the global money supply expanded, resulting in more paper money relative to gold. The crisis of 1931 resulted into a deflationary trap and the shift toward the modern welfare state to try to mitigate the effects of persistent mass unemployment in the 1930s. Widespread trade protectionism compounded the difficulty for governments of advanced economies to manage the economic cycle during this period.

Under the leadership of the U.S., the Bretton Woods system of fixed exchange rates was introduced in 1944 and remained in place until 1971. This system was built on the control of capital flows and the confidence of international investors in the U.S. economic policy. Currencies were linked to the U.S. dollar, which was itself linked to gold. Only central banks were able to convert paper money into the gold that the U.S. owned. During this period, economic activity far outstripped the supply of precious metals.

Confidence in the U.S. economic policy broke down in 1971. The final link with gold was removed by the U.S. The combination of paper money and the adoption of floating exchange rates, in the developed world at least, resulted into a massive increase in the volume of debt. Governments, mainly in the developed world, further fueled this debt bonfire by making more and more unfunded promises to their (ageing) electorates. The past decades witnessed first runaway inflation, then a series of bursting asset bubbles from the 1980s onwards. During the same period, the increase in consumer prices was constrained thanks to globalization, technological advances, and the greater role of women in the workforce.

The current global debt crisis, which started in 2007-2008, has witnessed the return of the problems associated with the 1930s, i.e., debt/deflation spiral and the paradox of thrift. Central banks have not hesitated to sacrifice the value of their currencies to protect the financial system.

To his credit, Mr. Coggan clearly articulates the likely long-term consequences of this debt crisis, i.e., inflation, stagnation, and default.

1. High inflation is very tempting to the central banks of heavily indebted countries. However, creditors will push back by asking for the same real rate of interest, regardless of the level of inflation. Furthermore, quantitative easing (QE), which also sacrifices creditors' interests to the benefit of those of debtors, is an unproven tactic that is unlikely to work. As Mr. Coggan learns from Lee Quaintance and Paul Brodsky, two hedge fund managers, printing money and extending credit do not create wealth. QE at best redistributes wealth; at worst may temper its creation.
2. Low interest rates, which reward debtors at the expense of creditors, and low growth, go hand in hand. The cost of capital and the return of capital tend to be at the same level. Therefore, if this is the case, the Western world is following a deeply flawed strategy. Electorates will push sooner or later their representatives to erode the debt, in real or nominal terms, to try to escape from stagnation. Nonetheless, creditors will push back as it was noted previously.
3. The temptation to default is also high. The political unpopularity involved in paying "greedy" (foreign) creditors will overwhelm any other issue associated with a default. The best that creditors can do is to cut off (temporarily) the defaulting debtors from access to further borrowing.

It does not matter which of these three scenarios ultimately gets the upper hand, writes Mr. Coggan. Debt is unlikely to be repaid in the form of money with the same purchasing power as when it was lent. Breaking these paper promises will damage the interests of both debtors and creditors.

Many developed Western economies are unlikely to escape from this crisis by achieving high growth due to population and productivity constraints as well as higher energy prices. Some developed countries will be able to muddle through; others will be ensnared into a debt trap. The developing countries will have to review their options under these circumstances.

Mr. Coggan concludes his examination of the history of money and debt by looking at the outlines of a new international currency system resulting from a world economy in crisis. The U.S. and China are at odds with each other about the outlines of this new system. China prefers a system of fixed exchange rates, the U.S. a system of floating exchange rates.

In summary, Mr. Coggan does a great job in making a complex subject accessible to a wider audience.
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on September 29, 2013
Paper Promises (2011) by Phillip Coggan is a masterful study of money and debt. Coggan worked at the Financial Times for 20 years and now writes at The Economist. He has written a number of books on finance that are all highly regarded. The book looks at the history of money and credit and concentrates on the post industrial revolution world where credit and fiat currency rapidly expanded.
The book starts with a brief look at money in history before moving the C19 and then C20 and most of the book looks at the period from the depression onwards. The impact of tight money in the depression is carefully examined. Beyond that the Bretton Woods settlement that was in place during the rapid economic growth after WWII and the post Bretton Woods era of freely traded rapidly inflating currencies and the GFC is studied.
The book has a lot of well chosen quotes including the observation the Alan Greenspan displayed asymmetric ignorance in that he knew when a downturn was happening but did not detect bubbles. Coggan also points out how gold was trading at $35 an ounce in 1971 at the end of the Bretton Woods agreement and now trades at $1900, so the modern world has devalued in 40 years as much as Rome did in 200.
The last chapters of the book are fascinating. Coggan looks at how the build up of debt in the latter half of the C20 for Social Spending has been managed by substantial population growth as well as productivity growth and that at least the first, and possibly the second is reducing and that the debts accumulated today cannot be paid off. There will have to be reductions in the debt burden either explicitly or through currency devaluation. Coggan does miss however, that budgets can be balanced as was done by Germany, Singapore, Australia's last competent government and various Scandinavian countries.
The book doesn't give firm recommendations and fairly describes various positions on monetary and fiscal policy. The final chapters don't give a recommendation but rather a description of the serious problems that many countries around the world are now facing. The books tone and insight are very much like The Economist magazine for which Coggan now writes for. The clear, succinct style is a great strength in looking at a complex issue like money. The book is very much worth reading for anyone interested in finance and economics.
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on August 7, 2014
Great summary of past market turmoil with the credit crunch. He does a great job of bringing together opposing views, so that a reader can hear BOTH sides of an argument and gain some perspective on why the markets got so out of tune. (I don't enjoy the "I'm right and I saw it coming" type of books. Instead, the author has a perspective, but importantly gives opposing views and quotes, developing an understanding of why otherwise rational people and investors go off-track in a significant way). The chapters are clear, and the examples are good. The author notes his sources well, so interested readers have great additional books to read. (Again, if someone writes a "this is what happened book," and don't note their sources, what's the point? Fortunately, this book uses excellent sources throughout the story line.)
Lastly, the target audience is probably general investor type. It is not laden with industry jargon, so it's well written for someone with familiarity with investments and with an interest in the financial market operations.
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on January 20, 2014
The book is open-minded, well structured and quite riveting. It outlines a great set of facts relating to the history of currency and why it is important today. I had many "aha" moments and feel my understanding of these macro matters much better. Highly recommend.

Only reason for 4 star is that I haven't read enough on the subject yet to know what a 5 star would be.
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on September 10, 2013
The aspect I liked the most in this book is its focus on the different interests of creditors and debtors and the strategies how they try to influence the monetary policy according to their interests. It became clear to me that there is no "good" monetary policy, only a monetary policy that strikes a balance between the interests of the creditors and the debtors and those creditors and debtors depend on each other at the end of the day. The book is really refreshing that instead of promoting a certain policy, it tries to explain, why that policy is used by specific countries, e.g. why China still imposes strict capital controls.
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on April 8, 2012
A sobering look into the forthcoming fiascos induced by a debt-ridden, manipulated and compromised government guilty of recklessly printing money and pushing problems forward for the next generation to deal with. While no economic book is perfect in prophecy, this is a good read to help navigate the complicated waters ahead, especially since history has a habit of repeating itself, and this book uses history as its primary guide.
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on January 3, 2014
When I read The Economist, Buttonwood's (Phillip Coggan) column is always my favorite part. This book captures the spirit of his column, focused and insightful. Coggan does an excellent job of presenting the various facets and potential consequences of what debt and money has become in today's global economy. He also doesn't proclaim to have all the answers and his humility is refreshing. Very enjoyable read.
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on April 6, 2013
As the housing bubble was a parallel world to the stock market crash, the author points to perception as the force driving the value of fiat currency, financial instruments, commodities, and how homes became the latest percieved "can't lose bet". What's next is the question that will determine the security of your retirement and investments, as the return on saving alone never has been a good performer, but with the skill to watch the bubbles, and stay out of them.
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on December 1, 2012
i was researching books to use for a seminar that i was giving to my clients in which my segment related to the debt of the western world and how (if) it was ever going to be extinguished. this book answered that question. in essence it will be extinguished through a mixture of inflation stagnation and default.the key issue being that it really doesn't matter which one - lenders/investors/prospective social welfare recipients will not get back what they lent/invested/hoped for. a brilliant read.
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on January 9, 2013
I've read a lot of books about economics and the current monetary weirdness our governments engage in. This is the first one that explains it all comprehensively, along with a lot of entertaining monetary history. Unlike many books on the subject there's not a lot of ideology and the author isn't trying to sell you gold coins on the side. Everyone who wants to be educated on current events should read this book.
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