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ascent of $ by harvard b-school prof

Wednesday 27 May, 2009

Niall Ferguson of Harvard gave a talk centered around his new book The Ascent of Money which was sponsored by the Chicago Council on Global Affairs.  Here’s what he had to say:

The descent of money hasn’t hit depression levels like the 1930’s yet-it may just be a slight depression of the same length.  The depression of 1873 may be a more similar paralell.

Why the descent/is this a failure of capitalism?  (it’s a good headline, but dangerous when simplistic narratives take over) Recent years have shown enormous imbalances, deficits, & errors in monetary policy.  Bank’s balance sheets showed 20% debt in the 1970’s.  Now debt is almost 100% of GDP.(?).  In Jan, 2008, only 12 banks had AAA ratings, but many more financial instruments did.  Did that make sense?  The balance sheet of the Fed is 2.2X what it was 1 year ago.  The US deficit is 12.9% of GDP, which is a symptom of a war without the war.

The US government forecasts growth of 3%, 4%, & 4 1/2% the next 3 fiscal years, but the fiscal stimulus has peaked already.  Banks are focused on raising capital & not making loans.  Foreclosures will accelerate from 2M/month to 6M/month in the next 10 months.  There are rising conflicts between fiscal & monetary policy.  The government can’t sell more bonds without interest rates going up.

The rest of the world has been dragged down with the US & even hurts them more.  Southeast Asian export economies are down 20%, which is a depression.  Eastern Europe is going through economic hell & western Europe is even worse off because their banks were even more highly leveraged.  China is bucking the trend with slower growth (for them), but their fiscal stimulus is working.

Godzilla (the banks) vs. King Kong (deflation) is the allegory of the day.  It’s the people who end up getting trampled.  Similar circumstances in the 1870’s resulted in populism, rejection of the status quo, anti-finance, anti-immigration, & anti-globalization trends.  China will buy much less US debt & Asian money will ascend.

Q&A:

India is a bright spot from a long-term perspective, encouraged by recent elections which did not result in potential party dispersion.

The end game is all about timing, when inflation returns, etc.  Expectations could be deflationary.  We need to watch asset as well as consumer prices.  Watching gold prices might not be as valuable as watching copper prices, which the Chinese covet.

Focusing more on accounting issues (guards of the guardians) pale compared to bigger mistakes by politicians influenced by campaign contributions from AIG, Freddy Mac, etc.  There is not necessarily universal truth to owning a home.

The Fed gets an A grade for reacting more responsively, creatively, & faster then ever.

There is a danger of pulling back too quickly as premature interest rate tightening in 1936 in the US & more recently in Japan have choked off recoveries.  Again, timing is key.

Brazil is closer to China as an agricultural exporter, etc. than Russia with “state monopoly capitalism.”

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