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Sunday, January 25, 2009

Niall Ferguson on Fareed Zakaria GPS / "The Ascent of Money"

Historian Niall Ferguson was interviewed by Fareed Zakaria for Zakaria's GPS show on CNN..I believe it was for the Jan 18 episode. The clip is below, pulled from the CNN website for GPS; it's only 8 1/2 mins, so give it a viewing:

Ferguson discusses the current financial crisis (the clip is titled "Is it bad"? on the GPS website), and segues into a discussion of his recently published book, The Ascent of Money: A Financial History of the World, by arguing that we need to put the current crisis into historical contect--that leads into a a discussion of the Great Depression and Japan in the 1990s. Ferguson identifies the prior as a worst-case scenario, the key difference being that governments and central banks are using very different monetary and fiscal policies to "repress" a depression scenario (and hence coins a nice phrase: "the Great Repression"). More interestingly, Ferguson points to the latter, Japan's "lost decade" of essentially zero economic growth, as not only a distinct possibility, but as a relativey good scenario! "We'd be getting off lightly if we can get by with a decade of 1% per annum growth," say Ferguson.

He continues: "At the moment, I'm really quite apprehensive that the process of deleveraging has far from run its course; there's no floor in sight in the real estate market. And these things have a self-perpetuating quality--one of the lessons of history is that depressions tend to feed on themselves. There is after all a pychological dimension to this: once people get really spooked, it's very hard for the market to find its bottom. And remember, stocks sold off between '29 and '33 by nearly 87%. So you have to have a sense of orders of magnitude here. Financial crises happen infrequently on this kind of scale, and that's why we need to have historical knowledge, to have an understanding of their dynamics."

(Ferguson touches on a lot of interesting topics here: the great deleveraging, still not completed after 18 months (I posted this re deleveraging in October, after hearing Sanford Grossman speak on the crisis); the pyschological dimensions of depressions, i.e., the busts that follow bubbles, and how markets can go into a freefall in such situations; the need for "a sense of orders of magnitude"--I take that to mean that the current crisis is not on the same order of magnitude as the Great Depression--stocks have sold off merely 40-45% from their peak. That peak occurred in Oct 2007, by the way; with a remarkably large portion of the drop occurring in the first half of October 2008.)

The clip ends with Ferguson's response to Zakaria's question about how people will look back on this period in history: "I think they will look back and say, you know what, there was actually one country at the heart of the global economy in the early 21st century, and it was called Chinamerica: China plus America, and these two economies were symbiotically linked, they were intertwined with one other. China did the saving, America did the spending. China made its funds available through currency interventions, and the United States took the money and piled on the debt. This worked pretty well for nearly a decade. It took us from the Asian crisis in '97-'98, right up to the American crisis that began in 2007. The question that historians will grapple with--and this is the thing that fascinates me now--is whether or not Chinamerica was able to survive this crisis. If China and America continue to interact economically, then it seems to me we're in with quite a good chance of avoiding another Great Depression."

I could continue transcribing, because it's quite fascinating--Ferguson sees two possibilities: China continues to support its export-based economy by continuing to buy "10-year Treasuries and other dollar-denominated securities" (i.e., those aforementioned currency interventions), and thus propping up the globabl market for those exports--by enabling further borrowing (bailouts) by the American government and consumer . Or, and this is what's truly fascinating, Ferguson says that China could turn inwards; China could say "we're going to focus on our own resources, our own consumption, we're going to say goodbye to the world market, and revert to being an introverted Middle Kingdom." This, Ferguson says, is the end of globalization, and is the scenario which Ferguson believes could take us back to the '30-style Depression: he argues that it was a breakdown of global trade which led to the protracted depth of the Great Depression.

For background on Ferguson, see his personal website and/or Wikipedia. His personal page is a much more extensive (and flashier) version of his faculty page at Harvard (where he has appointments in both History and the Business School).

I'd come across a few of his books on the history of empires, perhaps just while surfing through Amazon:
I bought a copy of the latter last year, as a gift for my father-in-law, since the British Empire is one of his favorite conversation topics. I just borrowed it back from him, with the intention of reading it soon..

It was only after the books above sparked my interest in Ferguson that I discovered he is also an expert in the history of finance: prior to his new "The Ascent of Money" book, he published a 2-volume history of the Rothschilds and also a book titled "The Cash Nexus":

So he's written enough to keep a student of history and finance busy for years. Apparently he's quite a teacher too. A friend took an intro undergrad course with him at Harvard; if I recall correctly, he said it was the best course he took at Harvard.

If you want to view more of Ferguson and get a better sense of the contents of his new book, turns out he did a documentary for PBS, also titled "Acsent of Money." It seems that it aired on most PBS stations just a couple weeks ago..but it also seems you can stream the whole thing through the PBS website.

It doesn't seem that I can embed the video from the PBS site; you'll have to go to the PBS site, which you can do by clicking thru on the following photo of lower Manhattan, which is what the documentary begins by showing:

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