Review: Fulfilling paper promises

May 25, 2012

By Robert Cole
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Do you want to know how global financial system came to be and what it has become? Do you want to re-examine what you think you know? Paper Promises, by journalist Philip Coggan, is a good place to look for answers to those questions.

Coggan’s concise and lucid book will leave readers deeply doubtful about the system’s reliability and durability. At the centre of his portrait is the unending tussle between lenders and borrowers. Economies of all sorts have been undermined, says Coggan, because lenders have so frequently come off second best. Coggan charts the disappointments – from Dionysus to Kim Jong Il, via John Law’s France, Weimar Germany and the ongoing post-2008 crisis – with analysis that is as comprehensive as it is sobering.

Coggan also leaves readers in no doubt about his view that the Western world has been better at creating debts than wealth over the last 40 years. “Clearing the mess will be a long, slow process,” he says. “The debts may be repaid in inflated money, or devalued currency; they may be passed on to other governments with a greater capacity to pay; or they may result in outright default.”

It is hard to argue with Coggan’s contention that developed world growth over the last forty years has been fuelled by reckless borrowing. He’s right to express concern that Western economies, now tied in knots of debt with dwindling energy and growing welfare obligations, will struggle to find genuine growth. Yet he is also right to assert that lenders join borrowers in the mire if loans turn sour. As he points out, Chinese prosperity depends, at least in part, on lending to Western export markets.

Looking to the future, Coggan says that global economy is changing and suggests that a new world order will emerge. Noting that China, a massive holder of US Treasuries, is the world’s most powerful creditor, he also says that the new order will be “made in China”.

That means the Middle Kingdom will take a tougher stance on enforcing its contracts. Good for China, certainly. But will, as Coggan suggests, the West really suffer as a result of the change?

Boatloads of historical precedent will be overturned if the new order leaves lenders with paper promises they can depend on, and borrowers borrowing only what they can truly afford. But the benefits of such change, and the dependable money systems it would foster, would accrue in all corners of the globe.

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