A history of global reserve currencies

Michael Pettis in The FT

The US dollar, analysts often propose, is the latest in a 600-year history of global reserve currencies. Each of its predecessor currencies was eventually replaced by another, and in the same way the dollar will eventually be replaced by one or more currencies.  

The problem with this argument, however, is that there is no such history. The role of the US dollar in the global system of trade and capital flows is unprecedented, mainly because of the unprecedented role the US economy plays in global trade and capital imbalances. The fact that so many analysts base their claims on this putative history only shows just how confused the discussion has been.  

It’s not that there haven’t been other important currencies before the dollar. The history of the world is replete with famous currencies, but these played a very different role in the flow of capital and goods across international borders. Trade before the days of dollar dominance was ultimately settled in gold or silver. A country’s currency could only be a “major” trade currency to the extent that its gold and silver coins were widely accepted as unadulterated or, by the 19th century, if the convertibility of its paper claims into gold or silver was highly credible.  

This is not just a technical difference. A world in which trade is denominated in gold or silver, or in claims that are easily and quickly convertible into gold and silver, creates very different conditions from those today. Consider the widely-held belief that sterling once ruled the world in much the same way the dollar does today.  

It simply isn’t true. While sterling was indeed used more than other currencies in Europe to settle trade, and the credibility of its conversion into gold was hard-earned by the Bank of England after the Napoleonic wars, whenever sterling claims rose relative to the amount of gold held by the Bank of England, its credibility was undermined. In that case foreigners tended to reverse their use of sterling, forcing the Bank of England to raise interest rates and adjust demand to regain gold reserves.¹ 

This does not happen to the US dollar. Trade conditions under gold- or silver-standards are dramatically different from those in a dollar world in at least three important ways. First, trade imbalances in the former must be consistent with the ability of economies to absorb gold and silver inflows and outflows. This means that while small imbalances were possible to the extent that they allowed wealthier economies to fund productive investment in developing economies, this was not the case for large, persistent trade imbalances — except under extraordinary circumstances.²  

Second, and much more importantly, as trade imbalances reverse, the contraction in demand required in deficit countries is matched by an expansion in demand in surplus countries. That is because while monetary outflows in deficit countries force them to curtail domestic demand to stem the outflows, the corresponding inflows into the surplus countries cause an automatic expansion of domestic money and credit that, in turn, boosts domestic demand. Under the gold- and silver-standards, in other words, trade imbalances did not put downward pressure on global demand, and so global trade expansion typically led to global demand expansion. 

And third, under gold and silver standards it was trade that drove the capital account, not vice versa as it is today. While traders chose which currency it was most convenient in which to trade, shifting from the use of one currency to another had barely any impact on the underlying structure of trade. 

None of these conditions hold in our dollar-based global trading system because of the transformational role played by the US economy. Because of its deep and flexible financial system, and its well-governed asset markets, the US — and other anglophone economies with similar conditions, eg the UK, Canada, and Australia — are the preferred location into which surplus countries dump their excess savings. 

Contrary to traditional trade theory, in which a well-functioning trading system might involve small, manageable capital flows from advanced, capital-intensive economies to capital-poor developing economies with high investment needs, nearly 70-80 per cent of all the excess savings — from both advanced and developing economies — is directed into the wealthy anglophone economies. These in turn have to run the corresponding deficits of which the US alone typically absorbs more than half. As I have discussed elsewhere, this creates major economic distortions for the US and the other anglophone economies, whose financial sectors benefit especially at the expense of their manufacturing sectors. 

It is only because the US and, to a lesser extent, the anglophone economies, are willing to export unlimited claims on their domestic assets — in the form of stocks, bonds, factories, urban real estate, agricultural property, etc — that the surplus economies of the world are able to implement the mercantilist policies that systematically suppress domestic demand to subsidise their manufacturing competitiveness. This is precisely what John Maynard Keynes warned about, unsuccessfully, in 1944. He argued that a dollar standard would lead to a world in which surplus and deficit countries would adjust asymmetrically, as the former suppressed domestic demand and exported the resulting demand deficiency. 

The point is that dollar dominance isn’t simply about choosing to denominate trading activities in dollars the way one might have chosen, in the 19th century, between gold-backed franc, gold-backed sterling, or Mexican silver pesos. It is about the role the US economy plays in absorbing global savings imbalances. This doesn’t mean, by the way, that the US must run permanent deficits, as many seem to believe. It just means that it must accommodate whatever imbalances the rest of the world creates. 

In the fifty years characterised by the two world wars, for example, the US ran persistent surpluses as it exported savings. Because Europe and Asia at the time urgently needed foreign savings to help rebuild their war-torn economies, it was the huge US surpluses that put the dollar at the centre of the global trading system during that period. 

By the 1960s and 1970s, however, Europe and Asia had largely rebuilt their economies and, rather than continue to absorb foreign savings, they wanted to absorb foreign demand to propel domestic growth further. Absorbing foreign demand means exporting domestic savings, and because of its huge domestic consumer markets and safe, profitable and liquid asset markets, the obvious choice was the US. Probably because of the exigencies of the cold war, Washington encouraged them to do so. Only later did this choice congeal into an economic ideology that saw unfettered capital flows as a way to strengthen the power of American finance. 

This is why the end of dollar dominance doesn’t mean a global trading system that simply and non-disruptively shifts from denominating trade in dollars to denominating it in some other currency. It means instead the end of the current global trading system — Ie the end of the willingness and ability of the anglophone economies to absorb up to 70-80 per cent of global trade surpluses, the end of large, persistent trade and capital flow imbalances, and, above all, the end of mercantilist policies that allow surplus countries to become competitive at the expense of foreign manufacturers and domestic demand. 

The end of dollar dominance would be a good thing for the global economy, and especially for the US economy (albeit not, perhaps, for US geopolitical power), but it can’t happen without a transformation of the structure of global trade, and it probably won’t happen until the US refuses to continue absorbing global imbalances as it has for the past several decades. However it happens, a world in which trade isn’t structured around the dollar will require a massive transformation of the structure of global trade — and for surplus countries like Brazil, Germany, Saudi Arabi, and China, this is likely to be a very disruptive transformation. 

1. Nor was sterling even the leading trade currency in the 18th and 19th centuries. More widely used in much of Asia and the Americas were Mexican silver pesos, whose purity and standardisation were much valued by traders and so formed the bulk of trade settlements. 

2. One can argue that the closest comparison to today was 17th century Spain, when Spain ran large, persistent trade deficits, but of course these were the automatic consequences of huge inflows of American silver, and Spain didn’t accommodate foreign imbalances so much as create them, to the benefit especially of England and the Netherlands. In a recent conversation George Magnus also noted how the famous sterling balances of the 1940s illustrated another — very different — example in which the structure of trade could not be separated from the use of its underlying currency.  

Sree Iyer on Kerala Gold Smuggling & Vijayan's involvement and whether he will resign

 

The white swan harbingers of global economic crisis are already here

Seismic risks for the global system are growing, not least worsening US geopolitical rivalries, climate change and now the coronavirus outbreak writes Nouriel Roubini in The Guardian
 

 

A swan fighting with crows on a beach. Photograph: Kamila Koziol/Alamy Stock Photo/Alamy Stock Photo


In my 2010 book, Crisis Economics, I defined financial crises not as the “black swan” events that Nassim Nicholas Taleb described in his eponymous bestseller but as “white swans”. According to Taleb, black swans are events that emerge unpredictably, like a tornado, from a fat-tailed statistical distribution. But I argued that financial crises, at least, are more like hurricanes: they are the predictable result of builtup economic and financial vulnerabilities and policy mistakes.

There are times when we should expect the system to reach a tipping point – the “Minsky Moment” – when a boom and a bubble turn into a crash and a bust. Such events are not about the “unknown unknowns” but rather the “known unknowns”.
Beyond the usual economic and policy risks that most financial analysts worry about, a number of potentially seismic white swans are visible on the horizon this year. Any of them could trigger severe economic, financial, political and geopolitical disturbances unlike anything since the 2008 crisis.

For starters, the US is locked in an escalating strategic rivalry with at least four implicitly aligned revisionist powers: China, Russia, Iran and North Korea. These countries all have an interest in challenging the US-led global order and 2020 could be a critical year for them, owing to the US presidential election and the potential change in US global policies that could follow.

Under Donald Trump, the US is trying to contain or even trigger regime change in these four countries through economic sanctions and other means. Similarly, the four revisionists want to undercut American hard and soft power abroad by destabilising the US from within through asymmetric warfare. If the US election descends into partisan rancour, chaos, disputed vote tallies and accusations of “rigged” elections, so much the better for rivals of the US. A breakdown of the US political system would weaken American power abroad.

Moreover, some countries have a particular interest in removing Trump. The acute threat that he poses to the Iranian regime gives it every reason to escalate the conflict with the US in the coming months – even if it means risking a full-scale war – on the chance that the ensuing spike in oil prices would crash the US stock market, trigger a recession, and sink Trump’s re-election prospects. Yes, the consensus view is that the targeted killing of Qassem Suleimani has deterred Iran but that argument misunderstands the regime’s perverse incentives. War between US and Iran is likely this year; the current calm is the one before the proverbial storm.

As for US-China relations, the recent phase one deal is a temporary Band-Aid. The bilateral cold war over technology, data, investment, currency and finance is already escalating sharply. The Covid-19 outbreak has reinforced the position of those in the US arguing for containment and lent further momentum to the broader trend of Sino-American “decoupling”. More immediately, the epidemic is likely to be more severe than currently expected and the disruption to the Chinese economy will have spillover effects on global supply chains – including pharma inputs, of which China is a critical supplier – and business confidence, all of which will likely be more severe than financial markets’ current complacency suggests.

Although the Sino-American cold war is by definition a low-intensity conflict, a sharp escalation is likely this year. To some Chinese leaders, it cannot be a coincidence that their country is simultaneously experiencing a massive swine flu outbreak, severe bird flu, a coronavirus outbreak, political unrest in Hong Kong, the re-election of Taiwan’s pro-independence president, and stepped-up US naval operations in the East and South China Seas. Regardless of whether China has only itself to blame for some of these crises, the view in Beijing is veering toward the conspiratorial.

But open aggression is not really an option at this point, given the asymmetry of conventional power. China’s immediate response to US containment efforts will likely take the form of cyberwarfare. There are several obvious targets. Chinese hackers (and their Russian, North Korean, and Iranian counterparts) could interfere in the US election by flooding Americans with misinformation and deep fakes. With the US electorate already so polarised, it is not difficult to imagine armed partisans taking to the streets to challenge the results, leading to serious violence and chaos.

Revisionist powers could also attack the US and western financial systems – including the Society for Worldwide Interbank Financial Telecommunication (Swift) platform. Already, the European Central Bank president, Christine Lagarde, has warned that a cyber-attack on European financial markets could cost $645bn (£496.2bn). And security officials have expressed similar concerns about the US, where an even wider range of telecommunication infrastructure is potentially vulnerable.

By next year, the US-China conflict could have escalated from a cold war to a near hot one. A Chinese regime and economy severely damaged by the Covid-19 crisis and facing restless masses will need an external scapegoat, and will likely set its sights on Taiwan, Hong Kong, Vietnam and US naval positions in the East and South China Seas; confrontation could creep into escalating military accidents. It could also pursue the financial “nuclear option” of dumping its holdings of US Treasury bonds if escalation does take place. Because US assets comprise such a large share of China’s (and, to a lesser extent, Russia’s) foreign reserves, the Chinese are increasingly worried that such assets could be frozen through US sanctions (like those already used against Iran and North Korea).

Of course, dumping US Treasuries would impede China’s economic growth if dollar assets were sold and converted back into renminbi (which would appreciate). But China could diversify its reserves by converting them into another liquid asset that is less vulnerable to US primary or secondary sanctions, namely gold. Indeed, China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019.

In a sell-off scenario, the capital gains on gold would compensate for any loss incurred from dumping US Treasuries, whose yields would spike as their market price and value fell. So far, China and Russia’s shift into gold has occurred slowly, leaving Treasury yields unaffected. But if this diversification strategy accelerates, as is likely, it could trigger a shock in the US Treasuries market, possibly leading to a sharp economic slowdown in the US.

The US, of course, will not sit idly by while coming under asymmetric attack. It has already been increasing the pressure on these countries with sanctions and other forms of trade and financial warfare, not to mention its own world-beating cyberwarfare capabilities. US cyber-attacks against the four rivals will continue to intensify this year, raising the risk of the first-ever cyber world war and massive economic, financial and political disorder.

Looking beyond the risk of severe geopolitical escalations in 2020, there are additional medium-term risks associated with climate change, which could trigger costly environmental disasters. Climate change is not just a lumbering giant that will cause economic and financial havoc decades from now. It is a threat in the here and now, as demonstrated by the growing frequency and severity of extreme weather events. 

In addition to climate change, there is evidence that separate, deeper seismic events are under way, leading to rapid global movements in magnetic polarity and accelerating ocean currents. Any one of these developments could augur an environmental white swan event, as could climatic “tipping points” such as the collapse of major ice sheets in Antarctica or Greenland in the next few years. We already know that underwater volcanic activity is increasing; what if that trend translates into rapid marine acidification and the depletion of global fish stocks upon which billions of people rely?

As of early 2020, this is where we stand: the US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating; and the real-world costs of climate change and other environmental trends are mounting.

This list is hardly exhaustive but it points to what one can reasonably expect for 2020. Financial markets, meanwhile, remain blissfully in denial of the risks, convinced that a calm if not happy year awaits major economies and global markets.

Why do we value gold?

 By Justin Rowlatt

Presenter, Business Daily, BBC World Service

Mankind's attitude to gold is bizarre. Chemically, it is uninteresting - it barely reacts with any other element. Yet, of all the 118 elements in the periodic table, gold is the one we humans have always tended to choose to use as currency. Why?

Why not osmium or chromium, or helium, say - or maybe seaborgium?

I'm not the first to ask the question, but I like to think I'm asking it in one of the most compelling locations possible - the extraordinary exhibition of pre-Columbian gold artefacts at the British Museum?

That's where I meet Andrea Sella, a professor of chemistry at University College London, beside an exquisite breastplate of pure beaten gold.

He pulls out a copy of the periodic table.

"Some elements are pretty easy to dismiss," he tells me, gesturing to the right-hand side of the table.

"Here you've got the noble gases and the halogens. A gas is never going to be much good as a currency. It isn't really going to be practical to carry around little phials of gas is it?

"And then there's the fact that they are colourless. How on earth would you know what it is?"

The two liquid elements (at everyday temperature and pressure) - mercury and bromine - would be impractical too. Both are also poisonous - not a good quality in something you plan to use as money. Similarly, we can cross out arsenic and several others.

Sella now turns his attention to the left-hand side of the table.

"We can rule out most of the elements here as well," he says confidently.

"The alkaline metals and earths are just too reactive. Many people will remember from school dropping sodium or potassium into a dish of water. It fizzes around and goes pop - an explosive currency just isn't a good idea."

A similar argument applies to another whole class of elements, the radioactive ones: you don't want your cash to give you cancer.

Out go thorium, uranium and plutonium, along with a whole bestiary of synthetically-created elements - rutherfordium, seaborgium, ununpentium, einsteinium - which only ever exist momentarily as part of a lab experiment, before radioactively decomposing.

Then there's the group called "rare earths", most of which are actually less rare than gold.

Unfortunately, they are chemically hard to distinguish from each other, so you would never know what you had in your pocket.

This leaves us with the middle area of the periodic table, the "transition" and "post-transition" metals.

This group of 49 elements includes some familiar names - iron, aluminium, copper, lead, silver.

But examine them in detail and you realise almost all have serious drawbacks.

We've got some very tough and durable elements on the left-hand side - titanium and zirconium, for example.

The problem is they are very hard to smelt. You need to get your furnace up into the region of 1,000C before you can begin to extract these metals from their ores. That kind of specialist equipment wasn't available to ancient man.

Aluminium is also hard to extract, and it's just too flimsy for coinage. Most of the others in the group aren't stable - they corrode if exposed to water or oxidise in the air.

Take iron. In theory it looks quite a good prospect for currency. It is attractive and polishes up to a lovely sheen. The problem is rust: unless you keep it completely dry it is liable to corrode away.

"A self-debasing currency is clearly not a good idea," says Sella.

We can rule out lead and copper on the same basis. Both are liable to corrosion. Societies have made both into money but the currencies did not last, literally.

So, what's left?

Of the 118 elements we are now down to just eight contenders: platinum, palladium, rhodium, iridium, osmium and ruthenium, along with the old familiars, gold and silver.

These are known as the noble metals, "noble" because they stand apart, barely reacting with the other elements.

They are also all pretty rare, another important criterion for a currency.

Even if iron didn't rust, it wouldn't make a good basis for money because there's just too much of it around. You would end up having to carry some very big coins about.

With all the noble metals except silver and gold, you have the opposite problem. They are so rare that you would have to cast some very tiny coins, which you might easily lose.

They are also very hard to extract. The melting point of platinum is 1,768C.

That leaves just two elements - silver and gold.

Both are scarce but not impossibly rare. Both also have a relatively low melting point, and are therefore easy to turn into coins, ingots or jewellery.

Silver tarnishes - it reacts with minute amounts of sulphur in the air. That's why we place particular value on gold.

It turns out then, that the reason gold is precious is precisely that it is so chemically uninteresting.

Gold's relative inertness means you can create an elaborate golden jaguar and be confident that 1,000 years later it can be found in a museum display case in central London, still in pristine condition.

So what does this process of elemental elimination tell us about what makes a good currency?

First off, it doesn't have to have any intrinsic value. A currency only has value because we, as a society, decide that it does.

As we've seen, it also needs to be stable, portable and non-toxic. And it needs to be fairly rare - you might be surprised just how little gold there is in the world.

If you were to collect together every earring, every gold sovereign, the tiny traces gold in every computer chip, every pre-Columbian statuette, every wedding ring and melt it down, it's guesstimated that you'd be left with just one 20-metre cube, or thereabouts.

But scarcity and stability aren't the whole story. Gold has one other quality that makes it the stand-out contender for currency in the periodic table. Gold is... golden.

All the other metals in the periodic table are silvery-coloured except for copper - and as we've already seen, copper corrodes, turning green when exposed to moist air. That makes gold very distinctive.

"That's the other secret of gold's success as a currency," says Sella. "Gold is unbelievably beautiful."

But how come no-one actually uses gold as a currency any more?

The seminal moment came in 1973, when Richard Nixon decided to sever the US dollar's tie to gold.

Since then, every major currency has been backed by no more than legal "fiat" - the law of the land says you must accept it as payment.

Nixon made his decision for the simple reason that the US was running out of the necessary gold to back all the dollars it had printed.

And here lies the problem with gold. Its supply bear no relation to the needs of the economy. The supply of gold depends on what can be mined.

In the 16th Century, the discovery of South America and its vast gold deposits led to an enormous fall in the value of gold - and therefore an enormous increase in the price of everything else.

Since then, the problem has typically been the opposite - the supply of gold has been too rigid. For example, many countries escaped the Great Depression in the 1930s by unhitching their currencies from the Gold Standard. Doing so freed them up to print more money and reflate their economies.

The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price.

Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently.

That is hardly the behaviour of a stable store of value.

So, to paraphrase Churchill, out of all the elements, gold makes the worst possible currency.

JP Morgan et al - Not a decent banker around

By Martin Hutchinson in Asia Times Online

In the past week, the detailed revelations from JP Morgan's grilling in the US Senate have combined with the Cyprus rescue blunder to generate one inescapable conclusion: public or private sector, European or American, there isn't a decent, competent banker among them. Truly almost 20 years of funny money and 30-40 years of misguided deregulation have drained the financial sector of the quiet competence it used to exhibit. 

I wrote about JP Morgan's "London Whale" derivatives insanities of early 2012 a few weeks ago. It demonstrated two failings that appear to me unforgivable. First, in spite of the experience of 2007-08 Morgan was still using value-at-risk as a major element of its risk management. 

Kevin Dowd and I pointed out the irretrievable flaws in this methodology in Alchemists of Loss, published in June 2010 - and we were by no means alone in doing so, though we may have had a "better mousetrap" than others in terms of an alternative risk management approach. A bank of Morgan's stature has a duty to keep up with the literature; it's as simple as that. 

The second failing is even more fundamental, because it rests on what Morgan thinks a bank should be doing. Bruno Iksil, the London Whale, was attempting to "corner the market" in an obscure and artificial credit default swap (CDS) contract. 

First, credit default swaps are not solidly based, because their settlement procedure can very easily be "gamed" - rather than the current procedure it would make more sense to select a random number between 1 and 100 as the percentage of the contract that was paid out on default. Second, index CDS contracts are doubly artificial, because the index itself is constructed as a basket of credit default swaps, none of which themselves trade with any liquidity; thus the index itself can be "gamed." Third, Iksil was trading in an "off the run" index, constructed five years previously, whose liquidity was even more restricted and whose relationship to any underlying reality was even more attenuated. 

JP Morgan would have done better to put their capital on red in Las Vegas. The CDS index Iksil was trading was so far removed from reality it was a mere gambling chip, with no underlying economic meaning. His trading volumes were so large that he controlled the market, which enabled him to report spurious profits until the beginnings of responsible risk management forced him to begin unwinding the position. His activity bore no relationship to true banking; it served no legitimate financial purpose, nor did it serve the financing or risk management needs of any client. 

This is the real problem of derivatives markets in general; the genuine client service they provide is minor, in some cases infinitesimal, compared with the gambling and manipulation activities they enable. If you are JP Morgan, and privy to a great deal of information about market movements to which less exalted institutions do not have access, you can make good money by exploiting others' ignorance. But make no mistake, the immense profits made in these markets are not secured by providing genuine service to clients, any more than Las Vegas casinos make money by providing investment opportunities to their foolish punters. In the final analysis, both activities are almost purely parasitic, and should be severely discouraged if not prohibited altogether. 

The only problem with prohibiting these activities is that the prohibition would have to be designed and enforced by public sector regulators. Public choice theory suggests that they are not capable of performing this function adequately and the Cyprus imbroglio shows just how inept and conflicted they are in reality. 

Legally, if US$7.2 billion was required for the Cyprus bailout beyond the European Union loan (the accuracy of that calculation is of course unverifiable), then the Cypriot banks' subordinated loans should have been wiped out, and the necessary amount taken from the banks' senior debt and uninsured depositors. (Any amount taken from insured depositors would have had to be made up by the Cyprus government, so would have added to the bailout need.) 

Instead, the proposed bailout took a 9.9% tax from depositors above 100,000 euros (the deposit insurance limit) and a 6.7% tax from deposits below 100,000 euros, which were theoretically insured, while leaving the modest amount of senior debt untouched. 

The Cyprus government rejected these terms, not because of the taxes' effect on small Cypriot depositors or on the Cypriot deposit insurance system, but because of their effect on the Russian mafia thugs who contribute about a third of the Cypriot banking system's deposits. One can only guess what inducements, positive and negative, the big depositors gave to the Cyprus legislature to take that position. 

Legality seems to have been utterly irrelevant to those arranging the bailout. Instead, by arranging a "tax" that fell so heavily on small depositors, they blew a hole in deposit insurance schemes worldwide. Depositors in banks elsewhere in the EU, or indeed the United States, can no longer believe that the first $100,000 (or whatever figure is "insured") of their savings is secure. 

Inevitably, calls upon the deposit insurance scheme will be made in times of financial stress, and at those times governments can use the depositors' funds to recapitalize the banks or indeed themselves. In 2008, depositors in Western Europe and the US could be reasonably confident that their governments were in decent financial shape, so would have no need to raid their citizens' piggy banks. In the next financial crisis, thanks to years of foolish, indeed evil, monetary and fiscal "stimulus" there will be no such assurance. 

I wrote some months ago about the problems involved in going back to a world in which government bonds are no longer a reliable store of value, and suggested that such a change would reverse 350 years of financial history, taking us back to the time before the establishment of the Bank of England in 1694. 

A world in which neither government bonds nor banks are to be trusted takes us back about 400 years further. After all, Samuel Pepys only occasionally buried his money in the back garden; most of the time he entrusted it to a reliable goldsmith, the precursors to the London merchant banks. The goldsmith-bankers were new in Restoration England, but as Edward, Earl of Clarendon wrote in his memoirs around 1670, before their time, the scriveners had been available for "money business''. A world without banks takes us back before the scriveners, before the first Italian banks (Monti dei Paschi di Siena, 1472) and even before the Lombard moneylenders of the fourteenth century. 

Needless to say, pushing our financial system back close to the Dark Ages will do nothing whatever for global economic well-being. A world without banks is a world in which all trade must be financed by merchants themselves, in which investments must be financed entirely out of equity or ad hoc loans from those with money. 

While much of Silicon Valley currently finances itself on close to this basis, it is unimaginable that business as a whole can do so; the needs of fixed assets, inventory and receivables are simply too great. A world with 13th century finance is more a less a world with 13th century living standards - and for only a 13th century world population. 

We thus live in a world in which neither the managers of JP Morgan nor the financial wizards of the European Union have the slightest awareness of the basic needs of a sound financial system. 

Admittedly the two problems cancel each other out: provided governments remain solvent both the need for deposit insurance and the speculative games of the trading desks can be eliminated by going back, not to the Dark Ages, but only to 1914. At that time, banks did not have deposit insurance, so depositors were forced to assure themselves that deposit institutions were soundly managed. 

This pretty well put paid to speculative games: the Knickerbocker Trust of New York went bankrupt in 1907 through speculation in the copper market, and for at least the next two decades it was accepted that speculation had no place in a soundly run deposit-taking bank. (Investment banks existed, but they were separately capitalized and did not rely on the bank's depositors for funding.) 

Without deposit insurance, banks would have to be properly capitalized, with a tangible capital base of no less than 20% of assets - calculated not on a "Basel" formula in which some assets are defined as "low risk" and discounted accordingly, but in which all assets and liabilities are fully reflected in the balance sheet. Only with such a heavy capitalization could depositors be sure the banks would stay in business. 

What's more, derivatives, securitization and other off-balance sheet risks would have to be undertaken by separate companies that did not themselves take deposits; bank depositors would insist that all such risks be taken onto the bank's balance sheet, which would make them impossibly costly. 

In order to discourage speculative activity further, it would also be necessary to return to a strict gold standard (or other commodity standard). The 1920s gold exchange standard, with the Federal Reserve able to increase credit at will, proved impossibly dangerous to the banking system after 1929, so a banking system with an active Fed would over time prove unable to attract depositors because of its risk. 

I'm quite certain that both the management of JP Morgan and the EU bureaucracy would regard such an alternative as wholly unacceptable - it would, for one thing, restrict sharply the ability for self-remuneration of both bankers and bureaucracies (which would have to finance themselves in a bond market without bank lenders, strong intermediaries or fiat money). 

However, by their ineffable folly, they have brought such a world (or the much worse dystopia where we lose 750 years of financial progress altogether) very much closer. 

Martin Hutchinson is the author of Great Conservatives(Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). 

Hockey - The untold story of how India lost world supremacy

by Minhaz Merchant in the Times of India

Pakistan’s hockey stars have been forced out of the lucrative new Hockey India League, patterned on the cash-rich IPL. I will leave debate on the rights and wrongs of this to a later post as a sequel to Make Pakistan pay. For the moment, let’s stick to hockey – how India lost its global supremacy and how we can regain it.

One afternoon, as I watched the late Tiger Pataudi, India’s former Test cricket captain, playing a hockey match at Bombay Gymkhana, I realized that few were aware how good a hockey player Tiger was. He had long retired from Test cricket but played a brilliant game for the club that afternoon.

Later, chatting casually, he remarked, pointing to the lush green field: “The tragedy of Indian hockey is that we no longer play on grass like this.” Tiger was appalled that the international game had switched to astroturf, putting Indian players at such a disadvantage.

Between 1928 and 1980, India won 8 Olympic gold medals in hockey. After 1980, we have not won a single hockey gold. At the 2012 London Olympics, India’s hockey team finished last in a field of 12.

The reasons for this are complex. But a principal cause is the betrayal of the country’s national sport by those elected to guard it and the ruthless duplicity of European and Australasian hockey authorities.

Till the early-1970s, hockey globally was played on grass. Indian players, bred on the fields of Punjab, Kerala and Goa, were unbeatable. Only Pakistan, with a similar lineage, offered competition.

All that changed in the mid-1970s. The International Hockey Federation (FIH) altered the rules to make synthetic astroturf the mandatory playing surface for international hockey tournaments.

The 1976 Olympics in Montreal was the first Games in which astroturf was used in hockey. For the first time since it began playing hockey in the 1928 Games in Amsterdam, India did not win even a bronze medal. The Indian Hockey Federation (IHF) should have objected. Whether through collusion or apathy, it did not. All Olympic Games henceforth were played on hard astroturf.

India has few astroturf grounds. They are expensive to lay (over Rs. 8 crore) and difficult to play on. While grass, on which hockey had been played internationally for nearly a century, allowed skilled Indian and Pakistani players to trap the ball, dribble and pass, astroturf suits the physicality of European and Australian hockey players based on raw power rather than technical skill.

Affluent Western countries like Holland, Germany and Australia have hundreds of astroturf grounds. The advantage is palpable. Not surprisingly, since 1980, Europe and Australia have dominated world hockey. India and Pakistan have slipped out of the world’s top five hockey-playing nations.

Indian sports administrators must share the blame. Not only were they complicit in allowing the change in playing surface from grass to synthetic astroturf, they were slow to adapt to it once the rules had been changed. Astroturf grounds were not laid. Local tournaments continued to be played on grass. When India played abroad, it started with a huge handicap.

As Sardara Singh, currently India’s best hockey international, said in a television interview, “Hockey players in India play on astroturf for the first time at the age of 19 or 20 and find it hard to adapt.”

What is the way forward? While astroturf cannot now be wished away, India can use its growing commercial influence to host a separate annual field hockey tournament. The game would be transformed. Just as tennis is played on different surfaces (grass at Wimbledon, clay at the French Open and hard courts at the US and Australian Opens), there is no reason why hockey can’t have two optional surfaces: astroturf and grass.

Like tennis players adapt to grass, clay and hard courts within a span of months (between the French Open in May, Wimbledon in July and the US Open in September), so can professional hockey players. Grass is hockey’s natural surface. It tests skill not just strength.

India’s hockey authorities, fractured by internecine rivalries, have little global clout. It is India’s corporate sector, with an interest in future Olympic gold medals, which must lead the campaign to restore natural turf as one of two alternative playing surfaces of choice in future international hockey tournaments. The new Hockey India League could set the example in its next edition. Sponsorships for field hockey tournaments would follow.

India has begun winning Olympic medals in individual sports since the Beijing Games but none in team sports like hockey. That must change. In India less than 0.1% of the population (around one million) has access to the facilities, nutrition and training athletes from Western countries and China do. In “sports-access” terms, our population is equivalent to New Zealand’s. It is no shame to win fewer medals than smaller, richer countries. But it is a shame not to give our national sport, hockey, a level playing field.

Needed: An exit policy for bad businessmen

S A Aiyer

Vijay Mallya has not paid employees of Kingfisher Airlines for months, and has defaulted on thousands of crores due to suppliers and creditors. Yet he has just donated three kilos of gold, worth almost one crore, to the Tirupathi temple. In August, he offered 80-kilo gold plated doors to the Kukke Subramanya temple in Karnataka. Possibly he believes that the gods can be bought off in ways that employees and creditors cannot.

How can a man who owes enormous sums to employees and creditors be free to throw gold around like small change? If there were any justice, surely the gold and golden doors should be seized from the temples and handed over to the employees and creditors. Surely they should have first right to Mallya’s assets.

After two decades of economic reform , we have not yet evolved rules that facilitate the exit of poor managements before they ruin a company beyond redemption. Kingfisher Airlines has been ground to the dust by Mallya, a liquor baron who should never have entered this space.

A free-market economy is not just a device giving owners the freedom to sack employees. It is one where creditors and employees have the right to seize a company defaulting on dues, and sack the management. The managing shareholder or promoter is only one of many stakeholders. If he cannot meet his obligations to other stakeholders , they should oust him in a true free market economy. In India, alas, our unreformed regulations and procedures leave promoters in control no matter how big a mess they make.

In the US, creditors can quickly seize a company that defaults on dues, and reorganize or sell it to a new owner . The owner can get temporary protection from creditors through Chapter 11 proceedings. In this, a judge determines whether the company is so far gone that it must be liquidated, or whether it can be saved through mutual sacrifices by creditors, employees and owners. In the process, the judge can change the owner. So, often workers survive bankruptcy proceedings , but the owner does not. That is what we should aim for in India too: an exit policy for incompetent, defaulting owners.

Kingfisher Airlines never made a profit, not even in the boom years when its rival airlines were profitable. Creditors should have moved in years ago when it became clear that the skills of a liquor baron were irrelevant for an airline. But in India creditors cannot quickly seize a company, least of all when the owner has political clout (as in Mallya’s case).

In the old licence permit raj, banks and financial institutions had to support existing managements and keep rescuing them. This has not changed despite the 1991 reforms. Banks have to keep throwing good money after bad.

Today Kingfisher is so worthless that it no longer makes sense to seize it and find a buyer. SBI Chairman Pratip Chaudhuri estimates that rehabilitating Kingfisher will cost a billion dollars. Nobody will do so — a new airline can be started for maybe just $100 million. Kingfisher has just lost its flying licence. Mallya’s hopes of being rescued by Etihad Airways of Abu Dhabi look like pure fantasy.

Even if it makes no sense to seize the airline today, why not seize his liquor business? Why not seize his prize luxury possessions, ranging from paintings to yachts or jets? Why not take over his cricket team, Royal Challengers ? Why not take over his football team Mohun Bagan, and his Formula 1 racing team Force India? Why is he allowed to keep all these, along with gold that he donates to temples, when he says he doesn’t have enough to pay employees or suppliers? He has given personal guarantees to banks: why are these not being enforced?

Mallya can be congratulated on one thing. Service was top-class in Kingfisher , and the airline gained a good reputation for quality. Had the airline been seized early on, it could definitely have been sold to a new owner. However , its reputation has steadily fallen with its continuing financial crisis, leading to cancelled flights and official grounding.

I constantly hear that India has gone in for neo-liberal policies. That’s pure rubbish. Neo-liberalism would have given employees and creditors the right to quickly seize and sell a company that cannot meet its obligations. The problem is not liberalism but the continuing old illiberalism that keeps promoters in charge, forcing other stakeholders to take a hit. Temples and religious trusts can keep enormous donations from defaulters instead of handing them over to others who, in all justice, should have the first right to such money or gold. This area desperately needs reform.

IMF's epic plan to conjure away debt and dethrone bankers

So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan.

The IMF reports says the conjuring trick is to replace our system of private bank-created money. Photo: Reuters

By Ambrose Evans-Pritchard

2:31PM BST 21 Oct 2012

210 Comments

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world. 

Entitled "The Chicago Plan Revisited", it revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression.

Irving Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw it with his own eyes in the early 1930s as creditors foreclosed on destitute farmers, seizing their land or buying it for a pittance at the bottom of the cycle.

The farmers found a way of defending themselves in the end. They muscled together at "one dollar auctions", buying each other's property back for almost nothing. Any carpet-bagger who tried to bid higher was beaten to a pulp.

Benes and Kumhof argue that credit-cycle trauma - caused by private money creation - dates deep into history and lies at the root of debt jubilees in the ancient religions of Mesopotamian and the Middle East.

Harvest cycles led to systemic defaults thousands of years ago, with forfeiture of collateral, and concentration of wealth in the hands of lenders. These episodes were not just caused by weather, as long thought. They were amplified by the effects of credit.

The Athenian leader Solon implemented the first known Chicago Plan/New Deal in 599 BC to relieve farmers in hock to oligarchs enjoying private coinage. He cancelled debts, restituted lands seized by creditors, set floor-prices for commodities (much like Franklin Roosevelt), and consciously flooded the money supply with state-issued "debt-free" coinage.

The Romans sent a delegation to study Solon's reforms 150 years later and copied the ideas, setting up their own fiat money system under Lex Aternia in 454 BC.

It is a myth - innocently propagated by the great Adam Smith - that money developed as a commodity-based or gold-linked means of exchange. Gold was always highly valued, but that is another story. Metal-lovers often conflate the two issues.

Anthropological studies show that social fiat currencies began with the dawn of time. The Spartans banned gold coins, replacing them with iron disks of little intrinsic value. The early Romans used bronze tablets. Their worth was entirely determined by law - a doctrine made explicit by Aristotle in his Ethics - like the dollar, the euro, or sterling today.

Some argue that Rome began to lose its solidarity spirit when it allowed an oligarchy to develop a private silver-based coinage during the Punic Wars. Money slipped control of the Senate. You could call it Rome's shadow banking system. Evidence suggests that it became a machine for elite wealth accumulation.

Unchallenged sovereign or Papal control over currencies persisted through the Middle Ages until England broke the mould in 1666. Benes and Kumhof say this was the start of the boom-bust era.

One might equally say that this opened the way to England's agricultural revolution in the early 18th Century, the industrial revolution soon after, and the greatest economic and technological leap ever seen. But let us not quibble.

The original authors of the Chicago Plan were responding to the Great Depression. They believed it was possible to prevent the social havoc caused by wild swings from boom to bust, and to do so without crimping economic dynamism.

The benign side-effect of their proposals would be a switch from national debt to national surplus, as if by magic. "Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back liabilities, the government acquires a very large asset vis-à-vis banks. Our analysis finds that the government is left with a much lower, in fact negative, net debt burden."

The IMF paper says total liabilities of the US financial system - including shadow banking - are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a "potentially a very large, buy-back of private debt", perhaps 100pc of GDP.

While Washington would issue much more fiat money, this would not be redeemable. It would be an equity of the commonwealth, not debt.

The key of the Chicago Plan was to separate the "monetary and credit functions" of the banking system. "The quantity of money and the quantity of credit would become completely independent of each other."

Private lenders would no longer be able to create new deposits "ex nihilo". New bank credit would have to be financed by retained earnings.

"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.

"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."

The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.

The switch would engender a 10pc boost to long-arm economic output. "None of these benefits come at the expense of diminishing the core useful functions of a private financial system."

Simons and Fisher were flying blind in the 1930s. They lacked the modern instruments needed to crunch the numbers, so the IMF team has now done it for them -- using the `DSGE' stochastic model now de rigueur in high economics, loved and hated in equal measure.

The finding is startling. Simons and Fisher understated their claims. It is perhaps possible to confront the banking plutocracy head without endangering the economy.

Benes and Kumhof make large claims. They leave me baffled, to be honest. Readers who want the technical details can make their own judgement by studying the text here.

The IMF duo have supporters. Professor Richard Werner from Southampton University - who coined the term quantitative easing (QE) in the 1990s -- testified to Britain's Vickers Commission that a switch to state-money would have major welfare gains. He was backed by the campaign group Positive Money and the New Economics Foundation.

The theory also has strong critics. Tim Congdon from International Monetary Research says banks are in a sense already being forced to increase reserves by EU rules, Basel III rules, and gold-plated variants in the UK. The effect has been to choke lending to the private sector.

He argues that is the chief reason why the world economy remains stuck in near-slump, and why central banks are having to cushion the shock with QE.

"If you enacted this plan, it would devastate bank profits and cause a massive deflationary disaster. There would have to do `QE squared' to offset it," he said.

The result would be a huge shift in bank balance sheets from private lending to government securities. This happened during World War Two, but that was the anomalous cost of defeating Fascism.

To do this on a permanent basis in peace-time would be to change in the nature of western capitalism. "People wouldn't be able to get money from banks. There would be huge damage to the efficiency of the economy," he said.

Arguably, it would smother freedom and enthrone a Leviathan state. It might be even more irksome in the long run than rule by bankers.

Personally, I am a long way from reaching an conclusion in this extraordinary debate. Let it run, and let us all fight until we flush out the arguments.

One thing is sure. The City of London will have great trouble earning its keep if any variant of the Chicago Plan ever gains wide support.

Warren Buffet - a Jaded Sage?

The jaded sage
By Chan Akya in Asia Times Online

Warren Buffett, besides being the Sage of Omaha and one of the wealthiest men to ever walk this planet, is also an American hero. A man who popularized the notion of investing your savings prudently, taking a knife to Wall Street excesses and more recently, the architect of an effective minimum tax for rich Americans. All in all, your regular billionaire next door.

Of course I can also recount all the reasons why anyone who bothered to print this article and read the first paragraph got disgusted, crumpled the paper into a little ball and threw it into the nearest waste bin.

You know, stuff like his holdings in major American scams like Moody's which he purchased due to the massive profits they were making from selling fake triple-A ratings all around. Or his rescue of such amazing firms as Goldman Sachs in the midst of the financial crisis, in effect protecting them not so much from aggressive market speculators but perhaps the major regulatory bodies as well (Mr Buffett is a known supporter of and donor to President Barack Obama).

Even that supposed act of folksy good humor ("my secretary pays a higher tax rate than I do") hides an ugly word: "legacy". Mr Buffett is old and if he had wanted to pay higher taxes, well he had the last 60 years in which to do it.

But I don't care about any of Mr Buffett's flaws any more than I lose sleep over that stupid woman who unfailingly puts mayonnaise on my sandwich despite being told not to every day. My getting upset doesn't change a thing, and just ends up spoiling my day: it's easier for me to just buy my sandwiches somewhere else. That's where I left Mr Buffett - that is, until his latest investment letter hit the web and through acts of generosity by my friends, made it into my inbox. Ten times over.

Cold on gold
I don't know why so many of them did that - but it may have something to do with his statements about irrational choices that investor make about assets. He writes:

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth - for a while.

Okay, so if I understand this right, Mr Buffett objects to the fact that gold cannot be manipulated, conjured up out of thin air and that it draws a bunch of people weary of Keynesian money printing into its fold. I am not going to suggest that Mr Buffett is thick or something, but isn't all of the above the very point about owning a store of value in the first place?

I don't know about you, but if I could travel through the centuries I would sure as hell like to have in my pocket something that would still be worth something in purchasing power that approaches its current value.

Imagine the following scenario: your grandfather leaves us some wealth but you only get it 50 years later. Now, what would you have liked that "wealth" to have been: cash in US dollars or gold coins? Of course other assets would have worked better - "shares in Apple" for example. Then again, if your grandfather had given you shares in Apple and you got them in 1998, your general feelings of gratitude towards him would have been a somewhat dimmer.

Then Mr Buffett goes on with his diatribe:

Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce - gold's price as I write this - its value would be $9.6 trillion. Call this cube pile A. Let's now create a pile B costing an equal amount. For that, we could buy all US cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

... A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops - and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Yup, valid points there. Then, again Mr Buffett, I wonder how those farmers would pay for the oil to use in their harvesters and how those oil workers would pay for all the grains they would need to eat. Would they own shares in each other and pay the other party dividends in kind? Or would they transact with a common currency, like gold?

And all the analysis misses the point about corporate fraud, that uniquely American preoccupation that has seen many a top firm go completely bust because of financial and accounting shenanigans. If Mr Buffett had mentioned BP instead of Exxon (and written this article two years ago rather than now) he would have had egg on his face. (See also "BP, Bhopal and Karma", Asia Times Online, June 19, 2010, one of my past articles on the subject of corporate responsibility.

Mr Buffett misses the point entirely about what gold is and what it is supposed to do. In a world where investors have ample reason to lose faith in governments and the financial system, the position of a common store of value that is recognizable and usable across all humanity and is itself beyond religion and politics in terms of being manipulated around (besides being no mean feat by itself) is made stronger, not weaker.

That is not to say that I am recommending you folks to buy gold and nothing else; my view has always been that a building up a little hedge for your financial assets with physical gold is no bad thing. I don't speculate in gold nor do I believe you should.

Of course, he clarifies similar points later on his spiel as follows:

My own preference - and you knew this was coming - is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See's Candy meet that double-barreled test. Certain other companies - think of our regulated utilities, for example - fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets. Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See's peanut brittle. In the future the US population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

Really? The best that Mr Buffett can conjure up as stores of "productive" assets are those that generate software consulting services, sugared water with noxious chemicals and over-sweet artificially flavored foodstuffs? Is it possible that all of these companies will even exist 200 years from now, or will a bunch of lawsuits or corporate fraud take one or more of them down as they have many an American corporation?

This is neither about questioning his investment choices nor indeed to taunt a proud American on that country's potential failings. The investor letter though is emblematic of the core ill plaguing the West now; namely a failure to question the current logic of organization underpinning the economy.

On the other end of the scale, it is not immediately apparent that a deleveraging America would need as many cans of sugared water with noxious chemicals as it does now; nor indeed that the current system of savings through stocks could survive a Japan-style lost decade when the locus of the economy shifts from consumption to production.

In a different way of thinking, it is a good thing that Mr Buffett writes his letters the way he does now. Two decades from now, economists and students of finance may ponder the madness of our times that made a man like him the foremost investing genius in the world.