“Paper Promises- Debt, Money, and the new world order” by Philip Coggan

Contents: Reading Philip Coggan’s new book is not only well timed given the Quantitative Easing (“financial repression”) in progress in many countries and Euro/PIIGS/Greece/Cyprus crisis, but it is time well spent in general on looking at the history of money and debt, and where we might be heading next given the current mess that the world is in. By the way it’s a great educational background on money and its creation whether it’s gold backed, fiat, government created/endorsed (legal tender), banking created (or just a pure software creation like ‘bitcoin’ with a disappeared creator).


Coggan explains some very complex topics as simply as possible:

-the nature of money and what it’s good for: media of exchange, unit of account and store of value

-forms of money: precious metals, government created banknotes and banking created credit

-Warning: “any system (democracy) that allows net debtors (normally the majority) to outvote net creditors (usually the minority) has its potential weaknesses”

-the ‘trilema’ of exchange rate systems is that you can only choose two of the three options: fixed exchange rates, free capital movements and control over interest rates (i.e. monetary policy)

-the “gold standard” defines currency convertibility to gold…a return to the gold standard is a victory of creditors over debtors…not a likely scenario unless we enter a more serious crisis than we currently have

-covers the historical landscape and explains the creation of the Breton Woods agreement, the IMF, the replacement of gold with the US dollar as it became a reserve currency, the ‘seignorage’ benefit of the US in being able to print dollars at zero cost to buy goods overseas, the end of Breton Woods in 1971 with the end of convertibility of the dollar to gold, the move to floating exchange rates

-relationship of currency exchange rates, inflation and interest rates, the “carry trade” of borrowing money in low interest countries and lending in high interest ones,

-the Euro: its drivers and its flaws

-the creation of bubbles: rising stock prices due to an instantaneously “small preponderance of willing buyers to push prices higher. And this can happen for quite a while, provided they don’t want to realize their gains”…i.e. a lot of people can have paper profits so long as they don’t try to cash them in, so in a bubble the money was never there…furthermore a bubble changes behaviour in a lasting way

-asset prices are closely tied to debt (e.g. in housing bubble there were three stages: hedge borrowers (can meet interest and capital repayment), speculative borrowers (can meet only interest payments) and Ponzi borrowers (can meet neither interest nor capital repayments, i.e. they just want to ‘flip’)

-the “Greenspan put” protected those who gambled with other people’s money…some accuse him of “asymmetric ignorance” because “he would intervene if market fell sharply but not if it rose quickly”

-“savings glut” in China and Mid-East had to be invested in US Treasuries so forced prices up (interest rates down)

-banks/financial industry are like croupiers in casino making money on every transaction…many banks became “too big to fail” exposing economies to “systemic risk” and all is lubricated by government, bankers and light touch regulatory environment…financial sector rent seeking resulted in a transfer of wealth from the rest of the community

-explains how in 2008 banks failed, the inadequacy of Value-at-Risk measurement, unknown unknowns and Black Swans…first LTCM bailout, then Bear Stearns bailout but not Lehman…subprime mortgages Credit Default Swaps and their collateral problems…and the bailout which transformed private debt to government debt

-how sovereign debt is not “risk free” and how the hidden debt public pension and healthcare for retirees and invisible public sector employees pension deficits and healthcare costs are enormous compared to visible debt which governments incur in the open market (e.g. effective total government debt in the EU is 434%!) and demographics just aggravates an already serious situation

-some mechanisms for reducing pension cost: later retirement, career average vs. final salary pensions, shift from DB to DC plans, reduce/eliminate pension indexing

-retirees hoping to sell their houses to generate income in retirement will drive prices lower (excess of seller relative to buyers due to demographics) as well as financial repression (low interest rates) will drive income down in retirement

-explains the “debt trap” as debt-to-GDP approaches 100%; when government debt hits about 100% of GDP and interest rates are 5% and growth is 4% one can’t reduce debt without a “primary surplus” of revenues over expenditures (excluding interest payments) but that may drive the economy into recession, reducing GDP and thus increasing Debt/GDP ratio!

-consequences of debt crisis in the long term: inflation, stagnation and default…QE is the triumph of debtors over creditors and expanding money supply is merely a form of redistribution of wealth…when one of these three will happen there will be a crisis of similar or greater magnitude than 2008…the first symptom was the European crisis and the next one will be the China/America relationship…

-looking ahead Coggan sees: the USD continuing as a reserve currency even as it continues to depreciate against the Renminbi at about 10%/year with US (unable to stop buying/importing/borrowing) and China (unable to stop manufacturing/exporting/buying US Treasuries) locked into this (deadly) embrace, continuing financial repression for decades to allow debt burdened governments not to sink in face of the accompanying interest payments, return of capital controls forcing local saving into government bonds, and ultimately creditors will be disappointed because of the wealth transfer from them to debtors.

Bottom Line

This is an educational book but a pretty dismal story for retirees whose public (and private) pensions and healthcare benefits will continue to be eroded, while their retirement assets earn minimal or negative real returns.


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