Paper Promises: Money, Debt and the New World Order by Philip Coggan
As the COVID-19 pandemic wreaks havoc on the global economy, counties like the UK register record debt. The EU’s statistics office published data last month showing the 19 governments’ combined debt reached 97.3 percent of GDP as of the end of September 2020, and that is expected to increase considering new containment measures across the single-currency bloc to curb rising infection rates. In the US, debt recently hit a peak not reached since World War II, and in emerging markets, public debt has surged to levels not seen in 50 years. Yet, a funny thing is happening. The governments, and the public, does not seem to mind. Still, after Covid-19, the world economies will have to find a way to avoid the consequences of the coming debt tsunami.
The inability of countries to sort their debts out is nothing new. In the 4th century BC, Dionysius the Elder, the Greek tyrant of Syracuse, had a lot of debts. His bright idea to cover the expenses of the state was to recall in the existing coinage, by imposing death penalty for noncompliance and then re-stamp each one drachma coin as two drachmas, thereby doubling its original value. With that trick, Dionysius could return the face value of all the money he has seized and use the remained to pay his debt. Problem solved.
Money is a promise. A promise to value to something that is real. A cup of coffee, a house, a service, an experience. This promise is based on trust. The trust that the government can stand behind the money supply and give it value. Basically, money is a statement of faith in our economy and in our government that the economy will keep on going so the government will be able to meet their bills.
Money as a means of exchange. But it is also a store of value, so we need to be sure that our money will be still worth something next year, or the next decade, or when we retire. If you think a bit more about that, these two values are in conflict. People who believe in the means of exchange function want more money to be creating - that what quantitative easing (QE) is about, creating more money, so people will have more money to spend, so there will be more jobs, so the economy will grow out of the crisis. On the other hand, people who believe that money is a store of value, think that this will lead to inflation. Inflation causes the value of the currency to drop, but the value of assets like real estate and stocks to increase. So it benefits the wealthy. In the long-term, implementing high inflation could widen the wealth gap, create instability in the financial markets, and the economy will get into even more trouble than before.
Over history we see these two arguments clash, says Philip Coggan. They represent the interests of the debtors on one side and the interests of the creditors on the other. As these two functions came into conflict, the governments have set up various systems to try to manage them. The Gold Standard was one of these systems.
But in 1971 everything changed. Richard Nixon laid the gold standard to rest for good, and exchange rates have floated ever since. In the last 50 years we have had a huge explosion of debt, we basically moved from a world with no credit cards to a world where people were being offered credits card on TV. Our attitude to debt has also changed not only in the consumer sector but also in the corporate and of course in the financial sector. And for a long period, we were in this circle where banks were lending people money to people to buy assets; the assets rose in price; the banks were feeling more confident, so they were lending more money, which meant prices were going up further and so on, and so on. Then it came the 2008 financial crisis, the worst economic disaster since the Great Depression of 1929. And the rest is history.
In Paper Promises, Philip Coggan examines the flawed structure of the global finance system after the 2008 financial crisis. Today, because of the Covid-19 pandemic, we are facing another financial crisis. Governments around the globe are on the cusp of becoming more indebted that at any point in modern history. Where will the world go next?